The Rental Market Is Crazy

While my team and I largely focus on the sales market in Manhattan, there is a robust rental world out there, and right here too; New York City has more tenants in it than almost any other rental market in the United States.

And we’ve done more rentals this year than in recent memory. With any property we’ve brought to market, almost everything rents instantly. Bidding wars, lines out the door, etc. The press has noticed, people on TikTok have noticed, too.

So let’s talk about the rental market in New York, because there is a showdown coming. And it’s worth knowing who will emerge as the winner- the Landlords, or the tenants. Let’s discuss.

The Tenants

Some words on rents. By some opinions, the rents are too damn high! At least that’s what presidential candidate Jimmy McMillan shared a few years ago. Putting that guy to the side, it is true: Rents have never been higher, and that’s true across the US. Private Equity has been buying up single family houses, and specifically starter houses. Meanwhile, over the last 12 months, mortgage rates have kept many out of the sales market.

So the most basic supply vs demand economics come into play. More people competing for homes to rent. And so prices go up.

But what isn’t being said?

• Well, first, that during COVID, in New York City at least, you couldn’t give away an apartment. Rents were down 30-40% for a while. And no one complained about it. Not a peep! Tenants had it great from 2021 to even the earlier half of this year, when their low 2-year leases were coming due.

• The rents, while high, aren’t THAT high, relative to where they were prior to COVID in New York City, anyway.

• Lastly, it’s a market- the most efficient one. If there were less demand, pricing would go down. And quickly. It’s just that right now, there’s a lot of demand.

Let’s not forget a few possible regulatory changes floating out there, too. Right now, tenants are paying between a month and two months’ rent (8-15% of the annual rent) in commission when they find new apartments in New York. The New York City Council wants to make tenant-paid brokerage commissions illegal. If that happens, there will be a shudder through the rental market, until asking rents finds their new level. Because landlords will start having to pay that commission. Perhaps rents will go up further, or perhaps they won’t. We would have to wait and see how it all shakes out.

Really, the only way to guarantee that rents stay at a certain level is to legislate the rates. And that brings us to the other side of things- the regulations currently on the books- many of them newly minted- that are impacting Landlords’ returns on their investments.

Landlords

Okay, so rents are at all-time highs, and landlords are being vilified for it. Yet, at the same time, we are speaking to lots of landlords, big and small, who tell us a different story. In short, high rents doesn’t always equal higher returns for landlords.

I’ll explain.

Let’s take two new regulations that are impacting the returns of building owners, (1) New composting rules and (2) Later mandated times to put out trash.

Composting Rules

This seems so great! Composting! Who doesn’t want to do it? It’s fun! It’s helpful to the environment. And it’s required now for every building in New York City. In fact, the bigger the building, the bigger the fine.

It’s not only required, but costly. How has this impacted landlords’ returns? They have to hire more people to bring the composting bins to the curb for new pickups. More on this in a second.

Later Times To Bring Out The Trash

Forget about the Pizza Rat. We’re talking about a notorious rodent problems that people seem to have blamed on trash being out for too long before it’s picked up. So the city is responding- bring your trash out later. Makes sense, right? But what happens when you require buildings to do this? Putting aside the question of whether you’re creating pest problems within buildings instead of on the street, you have to hire more people. What do I mean?

Well, the typical shift in a smaller building might end at 6pm or so. If you can’t bring out trash until 8pm- and this includes the composting- you have to hire more people. Multiply this by EVERY building in the city- and we are back to simple supply vs demand. Too much demand for workers in buildings has meant that supers can raise their rates by upwards of 50% to do this extra work.

Call me crazy, but that doesn’t “seem fair.” But it is what it is. A market reacting to a new condition.

I spoke to a property manager who looks after more than 3000 units in 100 buildings, and what he’s told me is that the costs of running buildings have gone up for everyone. And returns on buildings have gone down even as rental prices have gone up. Single units may have a better go of it, but buildings are having to increase their monthly charges to keep up with the cost of this regulation- so there are headwinds for everyone trying to make money on their rental investments.

Who Is Winning?

If you ask me, I think both renters and landlords are annoyed right now. But both pay the price to either own or live in New York Cty. At the same time, I believe the tenant has the upper hand- as crazy as it may sound. Landlords may get a bad rap, but if mortgage rates go down at all, the sellers market will improve, and the rental market is likely to suffer- and tenants will pay lower prices. And even today, what seems like a landlord’s market is facing real pressure on the expense side. So the tenant has the flexibility to look around for the best deal, and certainly will do so. And landlords will have to muddle through.