The onset of the pandemic in early 2020 had a particularly chilling effect on Manhattan’s residential rental market, with median rents declining precipitously as vacancy rates spiked. And while the market in sales was slightly more resilient based on prices and sales figures, residential purchases were also far from immune to the pandemic’s impacts.
Now, after a frenzied recovery that began in 2021, the residential markets in the Big Apple may finally be entering a period of equilibrium, with tapering leasing and sales, and steadying levels of vacancy and rental concessions.
With a tip of the cap to the Eagles and their 1976 hit “Life in the Fast Lane,” Manhattan realtors are preparing for a still spirited, if less torrid, pace in 2023.
Outrageous parties, heavenly bills: Growth comes in larger and luxury units
Both the rental and purchase markets have been buoyed in their recovery by a shift in demand toward larger unit sizes, which have significantly higher price points on both an absolute and per-square-foot basis.
The trend towards flexible or hybrid work schedules for many workers has resulted in increased demand for larger units, particularly three-bedroom units, and although rents for all three-bedroom configurations declined sharply during the early days of the pandemic, the lower supply of three-bedroom units relative to that of one- and two-bedroom units has resulted in more durable rent growth for larger units.
Indeed, rents for three-bedroom apartments continue to grow on both a year-over-year and month-over- month basis, while rent growth for one- and two-bedroom apartments has flattened out.
Meanwhile, significantly higher prices in the for-sale luxury and new-development markets, which increased markedly as a percentage of total sales as the market began its recovery in April 2021, are likely skewing the overall purchase market higher.
We’ve been up and down this highway: Putting it all together
The UBS Chief Investment Office (CIO) believes the aforementioned new-development capacity is likely not an issue. Manhattan has new construction of just 1.3% of current inventory in progress, the bulk of which is in the for-rent market. The combination of very high land and construction costs; nonrenewal of the 421-a, 421-g, and J-51 tax abatement programs; and a more challenging political environment is likely to keep new capacity limited—something that should help keep the market reasonably balanced.
Barring a major negative liquidity or geopolitical event, CIO does not expect a severe reversal in Manhattan sales prices. That said, both the sales and rental markets are showing signs of softening, in light of macroeconomic uncertainties, high interest rates, and elevated unaffordability.
Read the original report, Manhattan residential real estate: Life in the (less) fast lane, 1 December 2022.
Main contributor: Jonathan Woloshin
This content is a product of the Chief Investment Office (CIO).