New York City’s rental market defies traditional economic expectations, standing as a paradox where a declining population hasn’t translated into reduced rental costs. While the city’s population struggles to rebound to pre-pandemic levels and its economic recovery trails behind the national average, Manhattan and Brooklyn are witnessing record-breaking surges in rental prices. As of September 2023, the average monthly rent in these areas stands at a staggering $5,442, reflecting a steep $83.64 per square foot, according to the Elliman Report.
The U.S. Census reports a significant population decline in New York City, with approximately 400,000 individuals departing the Big Apple between June 2020 and June 2022. Many have relocated to states like Florida and Texas. In a standard supply-and-demand model, one might assume that a reduced population should ease housing demand, naturally leading to decreased rental prices. However, this oversimplified equation fails to account for the intricate interplay of various complex factors.
The Federal Reserve’s decision to increase interest rates to curb inflation triggered a ripple effect in the housing market. This move practically doubled mortgage rates, compelling potential buyers to retreat to the rental market, which is actually intensifying demand. Even with high rental prices, the decision to rent seems more practical than signing up for a near-eight-percent mortgage.
Moreover, the decline in the construction of new residential buildings, following the expiration of the 421-a tax abatement program in June 2022, has tightened the supply further. This abatement, which previously offset high taxes on developing NYC rentals, played a pivotal role in stabilizing the housing market.
A traditional supply-and-demand model struggles to explain the soaring rents in New York City.
The DiPasquale-Wheaton Model, a 1992 representation encompassing rental price, asset price, newly constructed stock, and total stock, excels at capturing the broader perspective. It can skillfully shine a light on this recent surge in rent and portray how prices are being influenced by heightened lender demands for higher rates, rising construction costs, and a slowly growing stock. The pandemic-led exodus from NYC didn’t assure lower rental rates. Yet, amidst this complexity, might the real estate market’s cyclical nature provide hope? Historical trends indicate that the current rise will likely transition to stabilization, if not a decline in rents, promising a more balanced future. However, there is no guarantee this will happen soon – if at all.
Discussion Question: What effect do you think the implementation of further ESG policies will have on rental prices in New York City? Will they help/hurt renters and/or developers?
Sources:
The City – Why Are NYC Rents So High?
I think the answer is very simple, and nothing to do with ESG policies. High interest rates are creating more renters and less Buyers. WHen interest rates drop, so will residential rents .