Property Grunt

Monday, February 02, 2009

The Wackness: Why the rental market is going to hurt the sales market

Yeah we are getting there.

A Month Free? Rents Are Falling Fast

About frakking time.

Below are points of interest.

Although it is notoriously difficult to quantify the state of the rental market, rents fell in almost every sector of the Manhattan market last year, according to the Real Estate Group, a New York brokerage. The steepest drop was in one-bedrooms, down 5.7 percent in buildings with doormen and 6.53 percent in buildings without. The only category that rose: rents for two-bedroom apartments in doorman buildings, up just a bit, by 0.61 percent. But these numbers, like most available data, represent asking rents rather than the final price. Anecdotal evidence suggests that some people are negotiating rents as much as 20 percent lower than the original prices asked by landlords. These figures also leave out incentives, like a month of free rent or a landlord’s paying the broker fee, which can add up to real savings.

This is not a really big surprise to me considering there is a huge surplus of residential new development inventory, there are more opportunities for renters out there.

Tom Botts and his wife, Libbie Rice, found all kinds of deals from landlords when they went apartment hunting this winter, and they were able to negotiate a reduction in the rent on the Upper West Side three-bedroom that they finally chose. They also encountered a symptom of the market that was simply unheard of in recent years: their previous landlord offered to lower their rent if they renewed their lease.

“We had a truly un-New York experience with our old landlord begging us to stay,” Mr. Botts, 39, said in an e-mail message. The owner offered a rent reduction of more than 10 percent, but the couple had already found an apartment they preferred and were committed to moving.

It’s impossible to say how often owners are lowering rents to encourage tenants to stay put, but anecdotes are starting to surface. “It’s not a common occurrence,” said Mr. Circosta of Citi Habitats, “but it is happening.”

This is not the time for landlords to f**k around. They need to do their numbers and determine how low they can go in their comfort zone in order to keep their tenants.

While prices have started to slide in Manhattan, they are steadier in Brooklyn. Increasingly, however, there are deals to be found, especially in neighborhoods like Williamsburg that have seen a lot of new construction.

The rental market in Queens, meanwhile, is relatively stable.

“The prices are not going up,” said Donna Reardon, Queens divisional manager for Prudential Douglas Elliman. “They’re staying the same.” Concessions are still an exception rather than the rule in that borough.

It is understandable that Brooklyn and Manhattan are backsliding since they were the hot areas to live in. Despite the fact that Queens has a very high number of foreclosures, rental wise is still stable because it is Queens. Demand in that particular market did not start to heat up later in during the real estate bubble, so rents did not climb as high.

Some landlords hope that adjusting leases to expire in summer 2010 will get a better price next time around.

Amy Baglan, 26, and her boyfriend, Johnny Muñoz, 28, found a one-bedroom apartment in a prewar building on the Upper West Side at the end of last year. They negotiated a cut of $200 per month in the rent and received a free month. (They connected with the owner on Craigslist and did not use a broker.) But they signed a 16-month lease, which will expire at the end of April 2010.

Mr. Muñoz wondered why his landlady was not offering a standard one- or two-year lease. “Do you want to make sure this is open and available during the prime season of rentals?” he said he asked. She chuckled and said yes, Mr. Muñoz said.

Mr. Muñoz’s landlady may get a boost from the warm weather, but no one knows where the market will be in 2010.

It is understandable why landlords are doing this. They are hedging their bets for the next rental season and want to build some leverage in case of a rental rebound. There is a risk with this strategy

“My assumption would be over the next year that you’re going to see effective rents drop because of the increase in concessions,” said Andy Joynt, a real estate economist at Property and Portfolio Research, an independent research and advisory firm. “We’re forecasting that asking rents are also going to drop,” he added. “We’ll see if that ends up being reflected in the numbers.”

“My assumption would be over the next year that you’re going to see effective rents drop because of the increase in concessions,” said Andy Joynt, a real estate economist at Property and Portfolio Research, an independent research and advisory firm. “We’re forecasting that asking rents are also going to drop,” he added. “We’ll see if that ends up being reflected in the numbers.”

There more evidence to indicate that there will be more a downturn than a recovery. If that is the case, then renters will once again be playing a game of hopscotch looking for the better deals that are out there.

Marc Lewis, the president of Century 21 New York, has seen several recessions in his many years in the business, most recently after Sept. 11, 2001. “But in the past,” he said, “it always felt like it would be a few months and then it would be over. This one, we don’t have an answer yet.”

I remember after 9/11 I thought rents in Manhattan would drop and I would be able to find the same type of deal that I once had which was an $800 dollar month apartment. No dice. Rents stayed strong.

Many people — including President Barack Obama — are suggesting that the economy is likely to get worse before it gets better. And the rental market is unlikely to strengthen until the economy, and the job market in particular, turns around.

According to the Independent Budget Office of New York City, the outlook is bleak. The agency expects the city to lose 243,000 jobs from the peak of early 2008.

“Let’s hope this is a short-term problem,” said Vicki Been, the director of the Furman Center for Real Estate and Urban Policy of New York University. “You know, we prefer more affordable housing, until there’s a downturn. And then we panic.”

“People assume when sale slows down, rental will pick up, but that depends on what the source of this is,” said Gregory J. Heym, the chief economist at Terra Holdings, which owns Halstead and Brown Harris Stevens. “When you’re losing jobs, the rental market is also going to suffer.”

Back in 2005 there was a huge shortage of sales inventory which many brokers to believe that buyers would be come renters and would look to rent. They were correct. Buyers did become renters. But they did not look for rentals, they simply resigned their own leases.

This impacted the rental market because it led to a drought in rental inventory which made it extremely difficult for newcomers coming into Manhattan.

The irony now is that we are facing a surplus in rental and sales inventory. The people who are losing out are not the landlords. It is the sellers who are losing out. There is a tremendous amount of uncertainty in our world right now. Everyday we are getting pounded with more bad news about the economy and according to President Obama we are going to be living like this for quite awhile. Neil "Dr.Doom" Roubini has stated the following:

While the U.S. government is resisting nationalizing its biggest banks, Roubini says it will have no choice because they are now “effectively insolvent.” And the outcome may be even worse than even he anticipates if governments fail to take aggressive steps to recapitalize banks and revive their economies, he says: “The risk of a near-depression shouldn’t be underestimated.”

Roubini, who’s now working on a book about the crisis, says he takes no particular pleasure in his role as Dr. Doom or the attention it brings him.

“I’m not a permanent bear,” he says. “I’ll be the first to call a recovery, but I just don’t see it yet, and it’s getting uglier

There is a tremendous amount insecurity in New York City. People who have been laid off do not know what to do and people who still have jobs aren't sure how long they will have them. Along with this uncertainty, prices in the sales market have begun to drop and it is more and more expensive to get a mortgage these days.

When you buy an apartment in New York City or anywhere else you are making a commitment to live there for an extended period of time. In this environment that does not seem feasible because no one knows if they have the resources to stay for that long

It would make more sense to rent for now in order to have the option to stage a tactical retreat. Right now we are living in an age where people need to go where the jobs are. With landlords offering unheard of incentives and the rising levels of rental inventory, right now it makes more sense to rent.