Luxury Renters in New York Finally Have Leverage to NegotiateBy
`We had to join the concession party,' COO Santee says on call
Company's previous revenue forecast now deemed unattainable
A cool-down in Manhattan’s apartment-rental market is hitting the bottom line of Equity Residential as the landlord is forced to offer concessions to tenants who suddenly have a lot of competition to choose from.
“New York City just turned very quickly and more deeply than we expected,” Chief Operating Officer David Santee said on a conference call Wednesday to discuss first-quarter earnings. With the city accounting for about 20 percent of the firm’s revenue, “if you can’t achieve 3 or 4 percent rate growth there, then it’s going to impact your full-year growth.”
Equity Residential is among the landlords having to work harder to secure tenants in Manhattan as a glut of new apartments gives residents more bargaining power. In March, Manhattan tenants were offered sweeteners, such as a month’s free rent or payment of broker’s fees, on 14 percent of all new leases, up from 4.8 percent a year earlier, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. Property owners had to whittle an average of 2.2 percent from their asking rents to reach a deal, as the vacancy rate rose to 2.42 percent, the highest for March in nine years of record-keeping, the firms said.
Equity Residential began the quarter intending to stick to its strategy of increasing its net effective rents in Manhattan, but it was “to no avail” as pressure from new supply forced the firm to increase its tenant incentives in February and March, Santee said. The company estimates it offered $600,000 worth of concessions in New York in the quarter, which reduced its growth there by 50 basis points, or 0.5 percent.
“We had to join the concession party to close deals,” Santee said.
The weaker-than-expected performance of New York City properties means the high end of the company’s original revenue guidance for the year is “unattainable,” Chief Financial Officer Mark Parrell said on the call. The real estate investment trust said in its earnings report that it expects revenue growth from properties open at least a year to be no higher than 5 percent, compared with the 5.25 percent upper limit it projected previously.
The company also lowered its guidance for funds from operations, a cash-flow measure used by REITs, to $3.05 to $3.15 a share. The company had earlier forecast an upper end of $3.20.
“Other than New York, demand is very robust,” Santee said.
Equity Residential, the U.S.’s biggest publicly traded multifamily landlord, fell 2.5 percent to close at $68.75. The shares of UDR Inc. and AvalonBay Communities Inc., which own apartments in New York, also declined.
The options for well-to-do tenants across Manhattan are set to jump this year as more than 6,700 newly built apartments are listed for rent, the most since 2005, brokerage Citi Habitats said in December. Most of the units will be priced in the luxury tier, or top 10 percent of the market, where the median rent fell 3.5 percent in March from a year earlier, according to Miller Samuel and Douglas Elliman. The number of new apartments will swell even larger after accounting for new luxury condominiums whose owners take possession of their units and then list them for rent.
“The challenge in New York is the disparity between the luxury apartments that have been delivered and will be delivered” and the salaries paid in the city, Santee said. There are many jobs “in the $90,000 to $100,000 range, but it takes $130,000 a year in New York City to afford a one-bedroom apartment.”
At Equity Residential’s Prism building, a rental-and-condo tower near Madison Square Park built in partnership with Toll Brothers Inc. and completed last year, the new owner of a condo listed it for lease at $800 less than Equity Residential’s units there, Santee said.
“There’s some crazy stuff going on in New York,” he said.