Why are rental concessions so high in New York City right now?

As the new reports for the end of 2016 in New York are revealed, the most startling figures are in the concessions column. Just this December, more than a third of signed new leases in New York City rentals granted concessions from the landlord to the renter.

The increase of rental rates for the NYC rental market has landlords placating prospective renters who question the pricing for these supposedly overpriced units. As the increase of concessions since 2015 has shown, it is now a renter’s market, and landlords continue to have to sweeten the pot.

Concessions are currently the bridge between extravagant landlord desires and skeptical renter dispositions.

What types of concessions?

From older buildings to newer developments, landlords across the building spectrum feel the need to use concessions to lure hesitant renters.

In order to increase appeal for their high-priced apartments, landlords in older buildings install upgraded fixtures with shiny, modern contours to capitalize on the desire for contemporary design. Refrigerators, ovens and even microwaves are updated to stainless steel products.

Modernized public spaces within older buildings allow easy access to amenities for residents. They no longer have to leave the building for fitness facilities and can enjoy luxurious entryways.

All developments, however, concentrate on lowering the net rent price without modifying the displayed rent price. Landlords compensate high displayed rent prices with free months of rent or included broker fees to sweeten the deal for dissatisfied renters.

In the current real estate market, renters hold the reins as landlords attempt to appease them by circumventing the high listed prices with in-deal accommodations.

Why landlords offer concessions

To compete with the 20-percent influx of listings since December 2015, landlords creatively fix, change or refurbish their units to create more appeal. With moer than 7,090 listings available this month (including a 32.5 percent jump in Brooklyn), landlords stubbornly refuse to lower displayed rental prices, but instead use concessions to motivate renters.

Landlords have multiple motivations for implementing concessions rather than simply reducing rental rates and attracting responsive renters.

Although landlords do receive more money from a higher rental price, they also profit from a return on their investment if they have a high cap rate.

A “cap rate” (or capitalization rate) determines the rate of return the landlord will receive from the apartment. The cap rate is contingent on varying components of the property, from age to rent price — if the displayed rent price is higher, the cap rate will be higher and the landlord will gain a higher rate of return on his or her investment.

Therefore, even if the landlord collects the equivalent amount of money from the renter with concessions (as they would with a lowered rent price), the cap rate incentivizes the landlord to keep the high displayed rent price. A high cap rate benefits not only the landlord of the apartment, but also the landlord who sells the building.

NYC real estate is cyclical in nature

The NYC real estate market has a cyclical nature, with standard dips in the winter and peaks in the summer.

During the valleys of rent prices in the winter, most landlords compensate for the decrease in demand by offering incentives that are not usually available in the summer.

Most NYC residential leases are synced to the summer cycle that lease and renew in the summer– which creates a natural increased demand during the summer months. To combat the lower prices during the winter, most landlords push for longer leases (14 to 16 months) that will expire in the summer and allow landlords to charge higher rates without having to incentivize with concessions.

Although concessions during the winter might be normal for the landlord, the rise to 25 percent in November from only 13 percent in December of 2015 shows an overall increase in concessions.

Yet this winter, renters are not simply getting a few offers from landlords to sweeten the deal but are actively searching out apartments with concessions. The determined search for concessions by renters demonstrates a growing divide between renter desire and overpriced rental prices from landlords.

Luxury rentals also struggling

With the 6-percent luxury median rental price decline from December of 2015 to November of 2016, luxury landlords find themselves competing against non-doorman apartments that have recently gained interest.

To combat high rental prices, luxury landlords offer incredible incentives in the form of free rent, free broker fees, free gym memberships and even iPads for brokers.

Luxury landlords can often afford to wait for the perfect renter and tolerate an empty apartment in lieu of a lowered rental price. Luxury apartments can stay on the market longer while landlords persistently keep rental prices exceeding renter desire.

Bridging the gap

Rental demand is still high in NYC, but as renters continue to search for ideal homes in the city they push against the escalating rents from landlords.

Added concessions continue in an attempt to bridge the landlord prices and renter rejections, but that bridge thins with every new building added to the NYC apartment supply.

Concessions will remain a market tool until a tipping point is reached and concession incentives no longer satisfy the empowered renter in this market.

Brian McFadden is TripleMint’s Rentals Manager, serving as a mentor to new agents as well as helping our team members build and expand their respective businesses. Find him on LinkedIn.

Email Brian McFadden