As a natural consequence of the Manhattan luxury real-estate slowdown that we've documented previously (here and here), REIT's that have exposure to the Big Apple are starting to feel the impact to their bottom line. According to reports, REIT Equity Residential, the U.S.’s biggest publicly traded multifamily landlord, fully intended to increase net effective rents in Manhattan during the first quarter, but a glut of new supply provided renters some leverage, and ultimately the company was forced to not only scrap the rent increases, but to give an estimated $600,000 in concessions in order to secure tenants, reducing growth in the area by 50 basis points. There is one word to describe the NY rental market right now: glut. 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. Bloomberg writes that 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. "New York City just turned very quickly and more deeply than we expected. We had to join the concession party to close deals." Chief Operating Officer David Santee said during the Q1 earnings call, also adding that with the city accounting for 20% of the firm's revenue "if you can't achieve 3 or 4 percent rate growth here, then it's going to impact your bottom line." And it certainly is impacting the bottom line, as the firm lowered full year guidance for funds from operations to $3.05-$3.15 a share, down from an earlier forecast that had an upper range of $3.20. A major culprit for the sudden cooling in the market appears to be the dropoff in well-paying, read banker, jobs and salaries: "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." Whatever the reason, EQR shares took a hit on the news. As CFO Mark Parrell added on the call, 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.” He added that 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 good news: “other than New York, demand is very robust,” Santee said. Alas, with rent inflation soaring at over 8% now, or 4 times higher than wage growth... ... we doubt demand will be "very robust" for a long time. Meanwhile, as more than 6,700 newly built apartments in Manhattan are listed for rent, with most of the units falling in the luxury, or top 10% tier of the market, where the median rent fell 3.5% in March from a year earlier, oversupply will continue to be an issue for developers and REIT's alike. 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" the COO concluded. We expect more "craziness" as the cooling of the entire US economy has finally entered the Tri-state area. More...
