Stalled Rents And Income Inequality

One of the missing elements in the discussion over rising urban rental costs is the role of income inequality. People will pay high prices to live somewhere–until they can’t (boldface mine):

David J. Maundrell III, the executive vice president of new developments in Brooklyn and Queens for Citi Habitats, thinks the market started flattening out almost three years ago, and since then “we’ve been Band-Aiding everything with concessions.” In September 2015, “the rental market went off a cliff. It just went crazy quiet. That’s where we turned on two months’ free rent,” he said. “That was, in my opinion, the beginning of the downturn.”

By November 2016, concessions in Manhattan and Brooklyn hit record levels, according to a report by Miller Samuel, an appraisal firm, published by Douglas Elliman. That month, a quarter of all leases signed in Manhattan included a concession, nearly double the amount offered in November 2015. Concessions in Brooklyn more than doubled, to 15.4 percent from 6.6 percent during the same period.

Ben Shaoul, a landlord with about 1,200 rentals in Manhattan, offered concessions all last year, both for new leases and for renewals, with rents ranging from $2,500 a month to $30,000 a month. He plans to offer deals this year, too, paying new tenants’ broker fees and offering one or two months’ free rent, depending on the length of the lease. When tenants renew leases, Mr. Shaoul offers two-year leases with no rent increase and sometimes a $500 American Express gift card, too….

There is a need for reasonably priced housing, yet developers are mostly building luxury apartments, which many renters cannot afford. “It’s not that too many rental units have been built,” Mr. Miller said. “It’s that too many rental units have been built at the high end.”

Landlords would rather offer a few months of free rent than lower the base rent, because when base rents fall, the building’s value falls too. But come March or April, when the rental season moves into high gear, landlords will be pressured to move apartments. “Rents have got to come down,” Mr. Maundrell said. “That’s the only way to get the absorption rates back.”

While rents skyrocketed over the last decade, salaries have stagnated. Couple that with rising student debt, and you have a population that is struggling to pay the rent. Half of all renters in New York City are what is known as cost burdened, meaning they spend more than a third of their income on rent and utilities. Tenants often barely meet the income requirements necessary to sign leases, according to many brokers and property managers. Renters with full-time jobs frequently have to enlist a wealthy relative — assuming there is one — to guarantee a lease. At some point, renters hit a wall.

I do remember one economist telling me a few years ago this sort of thing doesn’t happen, even though I’ve witnessed it several times–every time there’s a slowdown in wages, rents stall out, even if the nominal rent price doesn’t change:

Another issue that I don’t think Yglesias tackles is that rents never drop in nominal terms (though landlords might offer discounts), unless the economy craters Detroit-style. In many urban areas, large real-estate companies own a significant fraction of rental properties (and are also involved in the home purchase and construction markets). These companies use their rental properties as collateral for ongoing and future projects. While they might offer temporary discounts to effectively lower rents (e.g., something broke, so you get a discount for that month or paying a realtor’s finder fee, etc.), if they lower the ‘official’ rent, the value of their properties decreases, raising the interest on their ongoing loans. These companies drive the prices in the non-corporate rental market, making prices sticky. Simplistic economic models need not apply… (if you’re wondering how I know this, I have friends in Boston real estate–that, and the most important day in my building for the landlord is ‘Bank Walk-Through Day’).

At some point, we need to reorient markets towards the upper middle class and the middle class*. But as long as the gentry and wealthy have too much after-tax money, incentives will favor misallocating resources, including housing, and screw the middle class.

*Obviously, we should do this with the poor too.

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