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Say Goodbye To Net Effective Rents? Posted by Noah Rosenblatt in Uncategorized

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.
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.

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.
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.