Despite Gloomy Rental News, NYC Developers Aren’t Spooked
Dipping residential rents across the city was the theme of 2017, and the situation is not likely to change anytime soon. But some firms are still banking on rental properties as a safe bet.
Last month, Manhattan’s median residential rent hit $3,295, nearly a 3% decline from a year earlier, according to Douglas Elliman’s monthly rental report. Meanwhile, the number of new leases signed with some form of tenant incentive — a tactic landlords have been relying on to fill apartments — reached a new record high of 36%.
A glut of units on the market means landlords have been forced to cover broker fees, offer months of free rent and waive amenity fees in order to get tenants to sign up. And rental supply certainly is not drying up.
More than 13,000 apartments hit the market last year, the Wall Street Journal reported, citing data from Nancy Packes Data Services. In 2018, at least another 10,500 could become available.
However, developers told Bisnow that, while there is no denying prices have taken a beating and rental competition is fierce, it is now just a matter of buying strategically and holding out longer for a profit.
“In today’s market, you have to be thinking little bit more longer term …. our perspective at this point is, let’s look at transactions over a five- to 10-year hold, not a two- to three-year hold,” Slate Property Group principal Martin Nussbaum said. “We’ve just adjusted our underwriting accordingly, and we’ve underwritten all of our deals based on today’s market conditions.”
Slate bought at least five Manhattan rental buildings in the last six months, including a 32-unit building in the West Village for $21M in August. The firm is also developing a 170-unit rental in Forest Hills, Queens, and is planning more than 200 units at a development in East Williamsburg.
In total, Nussbaum said, the company will finish construction on close to 1,000 rental apartments over the next 12 months.
“We’re still plugging away,” he said. “If you have conservative debt — and the key to a transaction is putting debt levels to live through some ups and downs in the cycle — you will be just fine.”
Others said flatlining rental prices, along with soaring land prices, construction costs and uncertainty over interest rates, are reasons to be careful about investing.
“Given the fact that pricing could take a dip or interest rates may go up, we are being cautious to pick the right location and not pay a big number,” Tsilo Group principal Demetri Tsilogiannis said.
Tsilogiannis, whose firm is specifically looking in parts of Queens to develop into a rental, said the market has changed significantly since the launch of the company’s last project, a 62-unit building on 21st Street in Astoria called The Grove.
“We think Astoria, Sunnyside and Woodside are still good value, even though Astoria [land] is also priced high, there’s not as many units as in, let’s say, Long Island City,” he said, adding he is banking on those parts of the city continuing to see significant demand from renters priced out of Brooklyn. “There is definitely demand. You are seeing it from all over the place, really.”
Still, Queens has not been immune to lagging prices. In the neighborhoods of Long Island City, Astoria, Sunnyside and Woodside, more than half the rentals signed last month had some form of concession, a record rate that pushed rents down nearly 6% from the year before to $2,649. For new construction rentals, 86% of leases included an incentive.
“Our competition is incredible buildings on Manhattan’s Far West Side, amazing buildings with incredible rental packages,” said JDS Development principal David Juracich, whose firm developed the 761-unit American Copper Buildings on 626 First Ave.
Several of the units there are being advertised as “no-fee” rentals, but according to Juracich, the building is wearing the market dip well because of its location close to the United Nations, where there has been little development in over a decade.
“The absorption rate is definitely slower than it was in 2014 and 2015," he said. "But we are still hitting great rates.”