Housing Notes: Manhattan & Brooklyn Rentals Rising

Manhattan rental takeaways

Prices continued to rise at double the rate of inflation.

• New leases continued to drop sharply year over year, inferring heavy renewal volume
• Median rent rose to the second-highest in history
• Listing inventory continued to plunge, falling at its fastest annual rate in more than three years
• Nearly 1 out of 5 rentals went for more than the asking price- Luxury median rent was the third highest on record and rose annually at triple the rate of the overall market

Brooklyn rental takeaways

Higher interest rates are shrinking the new development pipeline.

• New leases continued to drop sharply year over year, inferring heavy renewal volume
• All price metrics continued to push higher
• Listing inventory continued to drop at a high annual rate
• Nearly 1 out of 5 rentals went for more than the asking price
• Luxury median rent rose at a much higher rate than the overall market

Manhattan rental inventory, leases fall sharply as tenants renew

Median rent rose by twice the inflation rate year over year to $4,900, the second-highest on record, falling $100 short of last month’s all-time high of $5,000. The median rent fell by $100 during the same period last year and has averaged a $61 drop since 2022.

The easiest characterization of the Manhattan rental market has been rising prices over the past five years. But before we discuss that, the drop in new leasing is worth noting. Since the spring market began, annual leasing has been declining. Listing inventory has also been falling, so fewer listings convert to fewer lease signings. We could also point to the pied-à-terre tax pushing wealthier buyers into rentals, but I don’t think that is the reason since new leases have been falling since March and the pied-à-terre tax began in July. We could also discuss the market’s alarming anti-consumer pivot to private listings. More likely, it is all of these factors. However, I think the drop in transactions is more about the uptick in renewals, as inferred by the sharp drop in new leases. In NYC, landlords generally keep a 2/3-to-1/3 ratio of renewals to new leases. Landlords don’t share renewals with the public, as it is their secret sauce for managing vacancy levels. At times, uncertainty clouds the rental market, and tenants become less optimistic about trying their luck outside the building and just sit tight. That’s what’s been happening this year.

For the past several years, nearly every month has seen rents reach the top 3 in history. Much of this has been driven by rising mortgage rates since 2022, after the Fed pivot coming out of the pandemic era. Tenants who would have moved into the purchase market, or who have been camped out waiting for rates to fall, are just sitting tight.

Rent growth has been twice the inflation rate for nearly two years, and with mortgage rates expected to remain higher for longer, there doesn’t appear to be any obvious relief for renters anytime soon.

Average rents are rising a little faster than median rent, reflecting more activity at the higher end of the market. The pied-à-terre tax that launched in July is likely to put more upward pressure on the higher end of the market until consumers feel more comfortable with the plan’s administration after a rough start.

Bidding wars (my proxy for renters paying more than the asking price) bumped a little higher but are sitting at 19.6 percent, or one in five rentals. It’s not a record by any means, but it is slightly higher than the 5 year average of 18 percent.

Brooklyn leases, inventory drop as prices continue to rise

Like Manhattan, listing inventory and new lease signings have continued to fall, likely due to a significant uptick in renewals as tenants face an uncertain economic future. The Iran War is now driving oil above $100 per barrel, and a new round of tariffs toward Canada that literally serve no purpose other than as a tax on the US consumer. As a result, mortgage rates are expected to stay higher for longer, making the rental market more expensive as would-be buyers continue to camp out there and take up potential inventory.

The median rent spread between Manhattan and Brooklyn was $900, the second-largest margin since 2010. The widening spread reflects an active high-end Manhattan market, driven by uncertainty over the application of the pied-à-terre tax, on top of the macroeconomic issues consumers are currently facing.

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