Rental Rates Down as Demand Crippled by Economic Crisis

by Eric Eagan

Oct. 29, 2008

The apartment is tiny.  None of its three bedrooms holds a bed bigger than a twin.  But it’s renovated, clean, and it’s in the middle of the fast-moving Lower East Side – the perfect place for three newly-minted Yale graduates to make their first mark on the city. Apartment hunters Andrew Cedotal, Allison Guy and Danielle La Rocco are on the fence, however.  For almost $3,300 a month, they expect more space.

“It’s a great apartment, but it’s a little smaller than we’re looking for,” La Rocco says to the agent showing the place.

What happens next is something that would have been unheard of even a year ago, but that real estate experts say is becoming more common: the agent offers to broker a better deal if the three will take the apartment today.  Within minutes, the trio has reduced their rent by a few hundred dollars a month, and La Rocco is dispatched to get a money order while the other two fill out applications.  The deal is done.

Do episodes like this mean Manhattan’s notoriously bullish rental market is softening?  Daniel Baum, a broker who runs the Real Estate Group, an industry organization that puts out an analysis of Manhattan rental prices each month, says yes.

“This past year, 2008, is the first year we’ve seen rental prices come down from the year prior,” he said.  “There’s a lot more inventory on the market now.”

According to the group’s latest report, the average rent for a non-doorman, two-bedroom apartment in Manhattan (the report does not look at three-bedrooms) decreased 3.82 percent from 2007, from $4,151 to $3,992.  Last week, the brokerage Citi Habitats reported that Manhattan rents from July to September were down over rents from the same period a year ago, for every category except one-bedrooms.

The reason for the slight drop in rents, Baum believes, is the recent economic downturn and the resulting layoffs. City unemployment rose 12.2 percent from August 2007 to August 2008, according to the Bureau of Labor Statistics.  More recently, with the collapse of the financial sector, wealthy Wall streeters are leaving their apartments, and landlords are finding it hard to replace them without lowering their rents or offering deals, like one month free.  For the first time in a long time – at least since 2001, Baum said, when 9/11 caused a brief dip in home and rental prices – renters are learning what it’s like to be wooed.

A perusal of Craigslist listings shows the modest incentives landlords are offering potential renters.  At the high end, there’s an “ULTRA LUX” studio in Midtown for $3,550 a month, but you “DON’T PAY RENT UNTIL JANUARY!” if you sign today.  A two-bedroom on the Upper East Side is going for $2,400 a month, but you get two months free, and, as with the other listing, this one is advertised as no-fee.

No-fee listings are more common on Craigslist than they were even a year ago.  Landlords are paying fees to lure renters who would otherwise be scared off by the expense, Baum said.  Broker’s fees are typically 10 or 15 percent of a year’s rent.  Cedotal, Guy and La Rocco did not pay a fee for their three-bedroom in the Lower East Side, likely saving thousands of dollars.

Of course, even with the freebies, not everyone should expect a bargain in a popular area like the Lower East Side.  The softening trend is affecting neighborhoods to varying degrees.  Non-doorman two-bedrooms in the Lower East Side averaged $3,588 a month in September, actually a slight increase over the year before.

“Rents are still a good deal higher than they were a few years ago,” said Baum, so it’s best to be flexible.  The Upper East Side near First and York avenues, is a good place to look for deals, he said.  A non-doorman, two-bedroom that rented in that neighborhood  for $3,496 a year ago would go for $3,309 today.

As for where these rents will go, the forecast is not certain.  Baum believes a glut of empty apartments will send prices lower, and keep them there.

“It doesn’t appear that there’s enough demand to push rental prices up to where they were,” he said.

So, at least for now, renters are in the catbird seat, and landlords are sweating.

“They’re certainly concerned that they’re not getting the rents they used to,” Baum said.

That’s music to the ears of tenant advocate Sondra Rutherford, 76, who has been fighting landlords ever since she organized a rent strike in 1978 to force her landlord to make much-needed repairs to her East Village building.  She now assists rent-regulated tenants who believe they’re being overcharged.  Rutherford said she has not seen evidence that the market is softening, but she’d be happy if landlords were at the mercy of tenants for a change.

“The landlords are insatiable,” she said.  “They just go overboard with how much they can get.”

Just as high-flying investment bankers and hedge fund managers have had their wings clipped by a down market, Rutherford said, so should landlords who, she thinks, are driven by nothing but recklessness and greed.

“You have to see that kind of moderation come into play,” she said.

Baum said he could not predict how long the downward trend would continue, and that the Manhattan rental market usually defies neat analysis.

“This market never ceases to amaze me,” he said.

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4 responses to “Rental Rates Down as Demand Crippled by Economic Crisis

  1. Pingback: Article published on LES Free Press blog « Eric Eagan

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  3. Pingback: Neighborhood Watch: Renting on the LES in 2008: "The apartment is tiny. None of… | new-york-real-estate-stalker

  4. Pingback: Curbed picks up rents story « Eric Eagan

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