While the current boom in concessions creates some welcome bargains for New York City's beleaguered renters, one could be forgiven for asking the logical question: If landlords are so desperate that they're offering tenants two, even three months' free rent, why don't they just make their apartments cheaper? Since the vast majority of concessions are found in new developments, the answer to this question lies in the particular challenges of creating pricey new construction in NYC.
Pressure to keep gross rents
First, there's the issue of financing. Land costs in New York City are astronomical, making it tricky for developers to make their bottom line without charging astronomical prices. And with that in mind, the banks extending loans to finance these projects often require that the building maintain a certain "rent roll" (or baseline rental income), meaning it behooves the building owners to maintain a high, recorded rent on the lease, even if they're doling out freebies to make things cheaper for the tenant.
"Landlords are always going to try to get the gross rent high, because of rent stabilization and for their refinancing," explains David Maundrell, Citi Habitats' executive vice president of new developments for Brooklyn and Queens.
And about that rent-stabilization: the majority of new-development rentals were financed with help from the 421a tax abatement, which gave buildings significant tax breaks in exchange for creating a certain percentage of affordable units (in other words, the so-called "80/20" buildings), and required that even the market-rate apartments in the buildings fall under rent stabilization. And since rent stabilization dictates a 0 percent annual increase on year-long leases, and a 2 percent increase on two-year leases, landlords want to keep the legal rent (in other words, the number on the lease) as high as possible, even if it means giving away free rent to get a tenant in the door.
Put together, these two factors create a strong incentive for landlords of new developments to keep legal rents artificially inflated with concessions.
"Think of it this way: The purpose of a concession is that the landlord is trying to protect the base rent," explains Miller Samuel data guru Jonathan Miller. "It's 'aspirational' pricing, and at a certain point it starts to pollute the market, when so few people are really paying the base rent. It would be like judging a neighborhood's sales value based on listing prices, as opposed to the final sales price."
Keeping an eye on the actual rent on the lease, not the perks
But while inflated base rents can be a little misleading to the untrained eye, they don't seem to be throwing off the overall rental market in a significant way, since many renters are savvy enough (and have looked at enough other listings) to have a solid sense of what an apartment is really worth.
"I think ultimately the consumer's looking to what the publicly listed numers are, versus what something is actually worth," says Miller. "And we have to give the consumer more credit."
"The market is going to correct itself, wherever it might be, and the larger pool of renters dictate what the rents are," adds Heidi Burkhart, president of affordable housing developer Dane Real Estate. Especially since the expiration of the 421a tax abatement, says Burkhart, "It's hard to argue against developers pushing up rents. It's either that or have the building go condo, which would take away from housing stock for renters."
Negotiate, negotiate, negotiate
All of which means that until our rental market evens itself out (and our city and state governments can agree on an effective strategy for creating and managing affordable housing), it's up to renters to read between the lines of listings, and to negotiate.
"I think renters now are used to asking for concessions, and developers build that into the negotiations process," says Burkhart. "You're helping the owner to finance the building to make it viable or make repairs, and you're kind of playing a numbers game between each other, and coming to an understanding of what that is between the consumer and the owner."
Convoluted? Certainly. But then again, no one ever said New York's real estate market was simple. And as Miller puts it, "Ultimately, renters will only pay as much as they can really afford."
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