The rental market is soft and getting softer. The Meier Team is seeing values 10% to 15% off their 2015 high-water mark. This is the worst pricing drop since 2008. But why is this happening now? The job market is strong, consumer confidence is high (98.1) and property prices are down. There are many trade articles writing about over supply and other market related causes (see some of them below) but one of the major factors in Manhattan is the ‘outer-borough effect.’
The neighborhoods in Brooklyn, Queens, Hoboken and Jersey City have been growing in popularity over the last three years. Developers have been building there heavily and have been all in since 2011. Many of these new projects are market rate rentals. Before the condominium and townhouse boom in these neighborhoods, rentals were the safest investment for a developer and that’s why they were on the forefront of the outer-borough build out.
Now as the outer-borough market has settled, even backtracked in some markets, prices have fallen. Many buyers of condos and townhouses are looking in specific areas and won’t traverse the rivers and bridges, even for a good deal. But renters are typically younger, more open to change and are driven by value. For the renter a move usually has a short-term time horizon, probably 2-3 years. Purchasing a property is often a longer-term decision, more in the five to ten-year time frame. For these reasons, we are seeing many more rental residents leave for Brooklyn to take advantage of its newer buildings and slightly lower prices.
Yes, over supply and over building is definitely part of the problem. But lower demand is the first-order issue in the Manhattan rental market. This coupled with the ‘coolness’ factor of Brooklyn and the other outer-borough companions will continue to weigh heavily on rental demand in the City.