A Pandemic Trough And A Remarkable Recovery: Why Manhattan Rents Seem So High

If there’s one area where recent inflation talk is going viral, it’s Manhattan rents.

For instance, a recent New York Times headline showed an eye-popping 30% increase in median asking rents in doorman buildings from December 2020 to December 2021, while the New York Post reported gains of 23% from January 2021 to January 2022.

To be sure, those are extraordinary, headline-worthy increases, but are they real? Has the bid for Manhattan apartments suddenly gone stratospheric? A look at the long-term trend suggests that while rents certainly are up year-over-year, these comparisons are mostly peak versus trough and that on a longer-term basis, rents are on-trend.

Long story short: Yes, rents have risen significantly since last year. No, rents have not shifted significantly higher. So what have they done? They simply reverted to their long-term trend. Below, let’s look at the short-term, year-over-year comparison and then zoom out to see the big picture.

The Pandemic Trough

The pandemic caught many landlords flat-footed. Their general strategy for years and years was to ensure leases started and ended during the summer months when the market was at its busiest, which was precisely the time when the pandemic took real estate offline and kept many renters either in place or off the market.

As a result, large numbers of leases expired at a period when few were renewing or renting, and talk grew of a ‘Manhattan exodus.’ This glut caused the number of available rental apartments to swell considerably. Landlords slashed prices and increased incentives, such as free rent or amenities, to help eradicate the supply glut and the general wariness of renters. Rental prices finally reached a nadir of nearly -20% compared to pre-pandemic levels in December 2020.

In hindsight, as rumors swirled of a permanent ‘exodus’ from the city, intrepid renters were striking great deals.

The Roaring Recovery

By early 2021 with rents down, tantalizing incentives on offer, and raw fear of COVID fading, renters began to make their way back to the market in search of deals.

As a result, the rental market began recovering. Rents started to climb back up, and incentives slowly evaporated, buoyed by an atypical rush of winter/spring leasing activity. By late summer 2021, market activity was back to pre-pandemic levels, but with new rental supply at multi-year lows, rents raced back to and began to surpass pre-pandemic levels.

Landlords’ Wild Card: Supply Shortage

A look at Manhattan rental supply since 2015 indicates a gentle uptrend, with seasonal drops and pops. Today, however, the number of units advertised for rent in Manhattan is running well below typical levels. January 2022 had the lowest number of new units for rent in at least eight years. The rental price trend slope tends to mimic the uptrend in supply. Hence, low supply is the wild card here. While previous bouts of low supply did not seem to affect the rents terribly, today’s low supply levels combined with higher demand may not be enough to backstop rising prices. In other words, if the post-pandemic supply glut pushed down prices, today’s current supply drought will most likely push prices up in the same way pandemic-related supply-line disruptions spiked prices for used cars, computer chips, and other commodities.

Big Picture: Back On Track

The immediate trend is clear: rents are up sharply. But this quick, over-the-shoulder look ignores the recent destruction they suffered from the pandemic. Zooming out, it is clear that rents have simply reverted to their long-term trend channel. So, while it is true rents are up 30% from last year, it should also be mentioned that they dropped 20% beforehand. A more accurate comparison would be to compare today’s rents to peak pre-pandemic rents. Through that lens, the increase is 9%. While this still seems high, it aligns with the long-term trend and suggests that the market is essentially returning to normal. In the background, however, today’s low supply situation will most likely keep prices at or above current levels as prospective renters get competitive. So, while Manhattan rents will most likely head higher in the short term, headline-grabbing -20% or +30% moves appear to be over for the time being. Rents are simply back on track.

Conclusion: The sky isn’t falling

In conclusion, where rentals are concerned, the sky is not falling. While rents certainly have increased since 2020 and 2021, the biggest complaint one can make is that they did not take advantage of the slump. In the end, rents have simply returned to within their long-term trend channel, and they are hugging the bottom of the channel at that. While low supply could push rents higher in the short term, going forward, renters should expect rents to moderate seasonally, not spike continually.