The New York City skyline (Photo: Logan King, UNC Kenan-Flagler Business School)

A chill in the air: New York’s apartment market cooling off

Logan King (MBA '17) - UNC Kenan-Flagler Business School

Logan King (MBA ’17)

Numerous tower cranes rose high into the sky in New York City during the summer of 2016. As I walked through Brooklyn on my way to a work outing, I was struck by how much new construction was occurring.

“More luxury apartments?!” my coworker gasped as I gazed up at the evolving skyline.

The Brooklyn apartment boom was in full swing right in front of my eyes. My surroundings served as confirmation of the multifamily boom in this real estate cycle – but will the large supply of new apartments serve as a stern reminder of the threat of market timing and over saturation in development, even in a market with historically outsized demand?

Brooklyn will lead the U.S. in new apartments delivered in 2016, with more than 6,000 units expected. In certain submarkets of Brooklyn, nearly 25 percent of total inventory is set to deliver in 2016 or 2017. The recent supply of high rise condo and apartment buildings has leaned heavily towards the high end of the market.

The New York City skyline (Photo: Logan King, UNC Kenan-Flagler Business School)

The New York City skyline (Photo: Logan King)

This naturally begs the question: how many luxury Class-A apartment buildings with countless amenities can the New York City market absorb?

These deals were largely conceived and underwritten a few years prior and will be delivered in a softening market. While rental rates are not expected to plunge, they may remain stagnant or vastly lower that the recent run-up over the past few years. According to Axiometrics, New York City realized a 0.2 percent annual effective rent growth in June 2016 – down from 3.9 percent the previous year.

It will be interesting to see how the market reacts. With rent growth softening, owners have been forced to offer significant concessions in order to increase occupancy. Free rent in Manhattan and Brooklyn was almost unheard of in the past, yet many newly delivered luxury apartment complexes are offering up to two months of free rent. It’s clearly a great time to upgrade your apartment or move into the city.

While some developers remain hopeful knowing that there is little new construction planned after 2017, it is difficult to put together new development deals due to rising construction costs, hesitant lenders and lower forecasted rent growth. This trend was readily apparent during my summer internship. As new construction starts to slow, it will be interesting to see how the large supply of luxury apartments stabilizes in the New York City metro market over the next few years.

By Logan King (MBA ’17)