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Does a Stronger Rental Market Imply a Stronger Near-Term Sales Market?

I began my real estate career working at Citi Habitats, focused on rentals.  It was trial by fire, and there couldn’t have been a better training ground for someone who had never worked in residential real estate.  I saw 80-100 apartments per week, whether previewing them, showing them to prospective renters, and managing the hustle of the rental world.  What a crazy world it was!

What I called my time as a Rental Agent

Moving into high-end real estate and sales required that I find different ways to work with landlords and tenants.  This includes having team members who spend their time looking at rentals more often than I do.  But our long-term relationships with landlords demands that we stay very much on top of the rental market.

We have witnessed a more complete sea change in the rental market, where at least half of the time, the landlord is paying a commission to a rental agent to find a tenant.  This is highly different from a time in 2002-2006, my first few years, when a landlord perhaps paid a rental agent 10-15% of the time.  The rental market of 2016-2018 had been as challenging as I ever remember seeing.  Tenants had been able to renegotiate leases and get real value from their lease terms.

Whether a stronger rental market translates to a renter-pay commission model again remains to be seen.  Technology has helped the rental market become more transparent, and has made landlord marketing much easier.  All of these factors have perhaps eliminated many of the friction costs tenants had been paying.  That is, if a tenant goes directly to a tenant, there is a chance no commission was paid at all.  This may work well for a landlord, but I would expect that a landlord would pay a rental agent commission today, to ensure that if the rental market turns south, that brokers will still be there.

The Corner, rentals soon to be condos on 72nd/Broadway

For today, we’re seeing a power shift away from the tenant again, and I’m curious about what this means for the broader NYC real estate market.  Rentals are renting much more quickly.  We’re seeing a brisker pace of units renting, faster than we’ve seen in many years.  Will this drive rental prices back up?  Certainly the combination of the rental season and tighter inventory will drive up pricing.  Some rental-to-condo conversions in prime locations, such as the Corner on 72nd and Broadway, will take away a lot of high-end rental properties from that location.

I’m hearing that nearby rental buildings are achieving incredibly high prices per square foot, either as a result of increased demand, more limited supply, or both.  New rentals on the West Side and East Side, coming to market at what would be considered aggressive prices will be a real test.  Think the Waterline Square rentals on the West Side, or the Alyn at 87th and Lexington.  Both appear to be pushing (or planning to push) record rental pricing out of the gate.

The leap from the rental market to the sales market could be this.  Does a stronger rental market imply a soon-to-be stronger sales market?  What is the tipping point to push renters back into the sales market?  Is the rental market strong enough at the high end to trigger buyer activity at the high end.

This trickle-up effect from rental-to-sales market will be hard to measure.  The calculus that a buyer endeavors to do to determine whether to keep renting or buying may or may not include some of these algorithms:

  • Expected future returns of money in the stock market as we head into an election year, with volatility on the rise
  • Increased cost of renting, while a 24-month softening sales market has allowed some real value to emerge
  • Somehow, reduced cost of borrowing – with mortgage rates dropping yet again this week
  • Risks of yet more softening in the sales market.  After 24 months of softening, do we really have further to go?  And on what time horizon is a purchase?
  • Future costs of living in Manhattan or Brooklyn
  • Strength of the NYC economy, and unemployment being at an all-time low

These are some of the items that I think buyers are working their way through.  I would argue that many buyer are sharpening their pencils and will continue to do so this summer.  We didn’t have a strong Spring market, but there are some green shoots that give me a lot of optimism for the rest of the year.  A landlord-friendly rental market will only help.  -Scott