Say Goodbye To Net Effective Rents?
A: If 2009 was the year of net effective rents, then 2010 is shaping up to be the year where the concessions dissipate. For anyone using rental rates to gauge the strength of the Manhattan rental marketplace, I say good luck! Why? Because it was the concessions of 2009 that the hit to rental rates revealed itself through; NOT just the rates themselves.
In this marketplace its protocol for the renter to pay the brokers fees. So when the market does turn sour this is usually the first concession offered to consumers by the landlord. The way it works is simple. When demand is slow, the first concession kicks in as landlords call the big rental firms and tell them they are offering 1 MONTH's OP (Owner Pays) to the brokers who bring in a qualified tenant who agrees to the market rate. The end result is the brokers do not have to charge the consumer their fee, flooding the market with NO FEE and LOW FEE rental options.
The second concession tactic in tough times are offers of free months rent when signing a 12-month lease. Usually the offer is 1-month free when you agree to sign a 1-yr lease (effectively the 13th month is free) and 2-months free when you agree to sign a 2-yr lease. The final, and strongest yet less desired, tactic to move property is for landlords to lower the asking rents; 2009 saw all three of these tactics implemented. Therefore, the decline in rental rates were somewhat muted and did not accurately reflect the deals the tenants received in response to the market adjustment.
The WSJ reports, "Renters to Pay Fees Again":
At least three major Manhattan landlords have decided to stop paying broker's fees on some rental properties, signaling that many tenants need to brace themselves for extra expenses when apartment shopping.It's clear supply has come down as demand has picked up progressively with time; looking at the map below you can see that vacancy rates dropped about 105 basis points from 2.28% to 1.23% year over year; courtesy of Citi-Habitats via WSJ.com. Landlords usually don't cut back on these offered incentives unless they see broad market tick ups in demand sustained for a decent period of time.
This is a shift from last year, when landlords—desperate to fill empty units—would cover the broker's fee, typically a month's rent. In a recent email, Ogden CAP Properties LLC said it won't pay fees at several properties, including Normandie Court on East 95th Street and One Lincoln Plaza on West 64th Street. Pan Am Equities Inc., another large apartment owner, intends to stop paying the fee on June 1, according to brokers.
The rental unit of Related Cos., which has about 5,000 units across Manhattan, will stop paying the fee May 31. "There has been a serious uptick in the market. We have seen across-the-board a strengthening in the marketplace," said Daria Salusbury, a Related senior vice president. Related's vacancy of less than 1%—down from about 3.5% a year ago—"is better than projected," she said.
For those looking at the rental rate reports, you must use caution because 2009 saw net effective rents dramatically lower than actual rates signed. Take my lease renewal as an example with the prior history shown:
2006 Rate (signed Oct. 2006) ---> $2,900
2007 Rate (signed Oct. 2007) ---> $3,100
2008 Rate (signed Oct. 2008) ---> $3,300
2009 Rate (signed Oct. 2009) ---> $3,000 + 13th Month Free
So, my actual rental rate declined 9% from 2008 to 2009 reflecting the adjusted market but my net effective rent with the 13th Month Free results in a monthly rate of $2,769. The measured amount in the reports will be $3,000, the rate my lease was signed for, but the net effective rate with my negotiated incentive is about $240/month cheaper reflecting a 16% reduction from the prior year level. This is the reason why 2009 was the year of the net effective rent and why the data will under-report the dramatic adjustment our rental market experienced last year.
Today's rental market sees fewer 'no fee' and 'low fee' landlord OPs and less offers of free months rent. There are still some out there, but not near the levels of 2009. For rentals still offering no fee and free months incentives, I have to wonder if the asking rate is well above what the market can bear right now.
Posted by In Debt We Trust
Fri May 28th, 2010 11:08 AM
Noah, any thoughts on whether the bullish bond market is contributing to an increase in buyers interest because of lower benchmark interest rates?
This is amazing. I'm seeing 15, 20, and 30 year rates below 5% again. Thought that was over with Bernanke's final MBS purchases in March.
http://www.erate.com/refinance_rates/Idaho/conforming/30_year_fixed.html
Posted by Noah
Fri May 28th, 2010 11:15 AM
The Lutnick effect! One of my favorite debates of all time on CNBC back in June 2009
http://www.cnbc.com/id/15840232?video=1142030573&play=1
http://www.urbandigs.com/2009/06/rogers_currency_crisis_ahead.html
"Basically Kudlow agreed with Rogers that treasuries are a great short, and will rollover causing higher rates for all of us as a result of fed actions, policy, and government borrowings to stem this crisis. Lutnick argued that Rogers is about '4 years early' on that trade and that the commercial real estate problem and the leveraged buyout problem (2006 deals) is far worse than anyone right now is willing to admit. Lutnick believes this to be a 2011 and 2012 problem, causing major problems for banks and the economy - as a result the flight to safety will CONSTRAIN the treasury market from rolling over as the 'fear factor' kicks in again. When Rogers asked why investors would buy trillions of government bonds over the next few years, Lutnick responded...'because you get your money back'."
Except its NOT P/E LBO and Commercial MBS deals that are causing the constraining, its the sovereign worries in eurozone, tensions in asia, risks of double dip, and huge unwind of carry trade that magnifies these moves...etc..flight to safety into treasuries and us dollars...constraining yields, just as Lutnick said.
I think the end game that we all are looking for and talking about is likely years away. At some point, they will question our fiscal insanity and our debts. Even though we will never default, the markets can widen our sovereign CDS and treasury yields can blow out, especially at longer end of curve. I think this is much longer out than we first thought..
Posted by Thisson
Fri May 28th, 2010 01:30 PM
My theory: people feel "safer" because the market has had it's melt-up and they are not hearing much about salary cuts and layoffs, so they are more willing to meet asking prices than they were during the "panic."
*However* - as you know - we are about to have a huge wave of public sector cuts. I think that will lead to a new round of concessions from landlords, and a decline in asking rents (and sales valuations, too).
Posted by anon
Fri May 28th, 2010 01:49 PM
0.52% vacancy in Soho/Tribeca? Do we really believe these statistics from citihabitats?
Posted by Joe Renter
Fri May 28th, 2010 02:19 PM
Noah did you see Stoler's article in Real deal?
http://therealdeal.com/newyork/articles/the-bad-days-are-over
Pretty much says what you are saying except that landlords were offering "concessions of up to three months of free rent to entice tenants to sign a lease".
Any thoughts? Did you see 3 months of free rent being offered?
Posted by AvUWS
Fri May 28th, 2010 02:30 PM
Back to rents -
I always cared about the listed rent since that is the "anchor" against which someone will decide the lease renewal. I have lived in my past two rentals longer than most owners (8 years in the 1st and 10 years in the present). In both cases I paid the broker fee since what I was getting was worth it and I expected to be in the apartment for longer than 1 or 2 years. For the same reason free months weren't as important as the base rent price.
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
FYI - I am looking for an apartment now. 2BR on the UWS. But I will wait until the end of summer when things slow down. Maybe there will be excess inventory then. Hard to know until the market slows enough.
Posted by Noah
Fri May 28th, 2010 04:09 PM
AvUWS - "But I will wait until the end of summer when things slow down."
Just be careful...rentals are quite different than sales. The most active rental season is right around Sept 1st..I find the slow season in rentals, when I did them that is back in 2004-2005, was Dec-Feb or so..
Posted by Juanito
Fri May 28th, 2010 07:56 PM
It's weird, in some neighborhoods (Soho, Williamsburg, prime UES) it's so much cheaper to rent than buy. In other neighborhoods (East Village, LES) it's so much cheaper to buy than to rent. I don't get it.
So these kind of statistics are interesting as a general trend, but I'd like to see something like a neighborhood by neighborhood price-to-rent ratio. It'd be exciting since we're seeing both prices and rents falling (and maybe going up a bit after that).
Posted by Noah
Sat May 29th, 2010 07:05 AM
Juanito - well Im not an expert on E village, Williamsburgh rents, but I hear your point. Its proof that Manhattan is a highly segmented marketplace, not one market.
This is why my new data platform is being designed from the ground up with this in mind. Its another reason why launch is taking longer than expected. I could have released it months ago and then did a add on release, but we decided to wait and do it the right way off the bat. Soon you will have neighborhood by neighborhood data on much more than price-to-rent ratios.
I would like to offer you that, but honestly, I dont trust the rental data..not only for reasons said, but for the lack of aggregated data in general in Manhattan's rental markets. In other words, if we did have some aggregated hub platform to structurally record broad rental rates, I promise you the data would be different than what we use now.
However, you can make the case that the data is in fact off and wrong, but that the general trend is still the same. For trends its ok, but for price-to-rent ratios, the weak and lacking data will make that ratio far from useful and I for one would not be very confident in what I would be reporting. For the new system, I put thousands of hours in covering accuracy, scrubbing out embedded structural flaws..that is what will make our data so useful when its launched. It will never be 100%, but it will be considerably less-worse than what we currently use to measure the markets.
Cheers !
Posted by In Debt We Trust
Sat May 29th, 2010 09:22 AM
Slightly off topic here but I put together a post that shows how dramatically the big players have diverged from retail traders. Look at the latest COT report from the CFTC which compiles net trader positions among commercials, large speculators, and small speculators.
Note how the abrupt drop in open interest coincided with a weekly top in the RSI and how much further the bears believe we have to go down:
http://debtsofanation.blogspot.com/2010/05/debts-of-spenders-interesting-look-at_28.html
*Some of this is undoubtedly rolling positions over but such a large drop cannot be explained away than anything other than fear.
Posted by Juanito
Sat May 29th, 2010 09:44 PM
Thanks for the response Noah. Looking forward to the new data platform.
Posted by Fred
Mon May 31st, 2010 05:23 PM
Isn't the rebound in rentals telling us something about the depth of the buyers market? Given that we've had no employment growth but the vacancy rate has dropped by half, isn't that an indication that would-be buyers are capitulating and resigning to rent rather than to buy into a market where values are more than likely to hit a wall sooner than later? NY State can't even furlough public employees without getting dragged into court. Do you really think they aren't going to raise property taxes across the board on owners? And try getting your kid into one of the better public schools. They have wait lists.......
Posted by Radu Prisacaru, UK Internet Marketer & Web Developer
Tue Jun 1st, 2010 07:17 AM
I’ve just subscribed to your RSS feed. I love your content. I invite you to see my post, I hope you will find interesting too.
Posted by John
Tue Jun 1st, 2010 12:43 PM
Keep dreaming fred...keep dreaming....
Posted by k91
Tue Jun 1st, 2010 01:06 PM
As Noah says, the rental game in NY is all about supply and demand. NY rental supply significantly increased in 2009 - namely condos going rental which drove rents down and concessions up. Now, with the soaking up of that supply - faster in Manhattan than in Wburg/BK because Wburg/Bk was much more overbuilt than the former - rents will begin to stabilize - possibly even rise, and concessions will cease to exist.
Because the number of renters far outweighs the number of buyers, buy-side does little to predict the movement in rents - see 2005-2007 rents where in face of crazy buying, rents rose.
Generally speaking, NYC rental market is a fascinating, thing to watch. It moves and mutates so quickly. So many people, so little space.
Posted by Mbt
Wed Jun 2nd, 2010 10:28 PM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
Posted by Scotty
Mon Jun 7th, 2010 02:19 PM
As a manager in a rental firm that owns, manages, and has a brokerage side, I would say that the decreased rents is a small part of why the incentives are going down and quickly away.
The biggest reason is that the demand for apartments has in a very, very short amount of time gone through the roof. I have actually been involved in three bidding wars in the last two weeks, two of which the winning bid was the one that was willing to drop the incentive.
With multiple bids coming in on most units the landlords would be crazy not to try and eliminate the incentives.
Keep up the good work Noah.
Posted by Prague-Noah
Mon Jun 7th, 2010 06:06 PM
Scotty - thanks, and thanks especially for the reporting of what you are seeing. Landlords, like sellers, have way more information than individual buyers at any given point in time. That is why, its the landlord or seller that knows how their prodct is priced at any given time. They see the demand, plain and simple. Landlords are not stupid, when they see the broad tick up in demand after a very aggressive campaign of incentives, those incentives will go bye bye. Renters adjusted and did what buyers had to do in jan-march, bid up to get the deal. I think the mini euphoria will be short lived with current market action, but you cant deny it did occur for a decent period of time and reflated noticeablly from the trough of 2009 when fear was significantly higher..these markets are always fun to watch as there is never a dull moment
Posted by coach handbags
Fri Aug 13th, 2010 04:42 AM
This is the reason why 2009 was the year of the net effective rent and why the data will under-report the dramatic adjustment our rental market experienced last year.