New York City—This February, workers started building a 369-unit apartment tower overlooking the Hudson railyards here. The high-rise, 316 Eleventh Avenue, is one of only a few large apartment projects now under construction here.
The high cost of land, labor, and materials has kept many rental developers from starting new projects in the Big Apple, as the lack of new supply depressed vacancies and heightened rent growth. That picture's not likely to change anytime soon.
“Supply going forward will be constrained,” said Nancy Packes, president of project marketing for real estate firm Brown Harris Stevens.
After completing an estimated 2,487 new apartments this year, developers will add a projected 2,600 apartments annually to New York City's rental stock over the next three years. That kind of volume would blanket most markets with new units. For New York, it's an inventory gain of barely 1.6 percent, and it's far below the annual average production of 4,026 units over the last 10 years, according to New York City-based market analysis firm Reis, Inc.
The lack of new units should keep rents growing and the vacancy rate at 3.2 percent or less over the next four years, according to Reis, Inc.
A low vacancy rate helped push average effective rents up 9.1 percent in 2007 to $2,933 a month at the 151,000 institutional- quality apartments tracked by Reis.
Rents are expected to continue rising even in the downturn. One reason: Many buyers unable to finance a purchase have been forced to continue renting. “The rental market is the beneficiary of the slowdown in the for-sale market,” said Packes.
This year, rents are expected to rise by a relatively modest 5.3 percent. The market is expected to absorb 1,976 apartments. That's a few hundred less than Reis expects developers to open, sending the percentage of vacant apartments up to 2.5 percent by the end of the year from 2.1 percent the year before.
Reis bases its predictions on only slight net job losses for the city this year. Other economists ranging from the New York City Independent Budget Office to the Comptroller predict that the city will lose 60,000 or more jobs over the next 12 months, a decline of more than 1 percent. However, even with steep job losses like these, experts expect rents to grow robustly.
“The underlying shortage of rental housing in New York does provide a sort of floor,” said Fred Harris, senior vice president for development for AvalonBay Communities, Inc. “You have consistently very high rent growth.”
One big reason for the apartment supply squeeze: condos.
Multifamily developers took out more building permits in 2005 and 2006 than in any other two-year period since 1965, according to city officials. However, few were for rentals. In fact, the number of rental apartments finished in 2006 dropped below 2,000 for the first time since 1994.
That's because in recent years condo developers have dominated New York, bidding up prices for land, contractors, and construction materials beyond the ability of rental developers to pay. From 2003 until last year, condo developers even outbid apartment investors for whole apartment buildings, buying up 5,600 rental units to convert to condominiums, according to Reis.
And while the condo markets in many metro areas have collapsed, New York City is holding up comparatively well. Although in parts of the outer boroughs, average prices per square foot are falling, Manhattan's gains have balanced those declines. The average price for a co-op or condo in the city rose to $1 million, or $891 per square foot, in the second quarter, up from $831,000, or $803 per square foot, the year before, according to a report from the Real Estate Board of New York.
The domination of the market by condo developers also kept many rental developers from taking advantage of Mayor Michael Bloomberg's highly successful efforts to encourage development by rezoning more than a dozen large areas—such as 125th Street in Harlem and the Brooklyn waterfront—for dense new development. Most of the construction on these sites so far has been by condominium developers, who consistently outbid rental developers for the land.
One planned rezoning of Manhattan's Far West Side would open 360 acres between 30th and 42nd streets and Eighth Avenue and the Hudson River to new development. Plans call for building 12,600 new housing units in addition to millions of square feet of commercial and retail space. Real estate experts look on Douglaston's tower just south of the planned district as a bellwether for demand there.
Even if rental developers become more competitive in the bidding war for prime sites like these, they now face a new challenge: declining subsidy from the city. Over the last two years, the rules have changed for programs that used to benefit highrise luxury rental buildings, making it harder for these buildings to get either low-interest mortgages funded by tax-exempt bonds from the state or property tax abatements through the city's 421-A program.
Both the city and state are saving their subsidies to support housing developments where the income restrictions are stronger or at least cover more apartments.
EFFECTIVE RENT GROWTH
|Source: Reis, Inc.|
|Source: Reis, Inc.|