Observations:
- I have an apartment in New York.
- I don’t currently reside there and will move out when the lease ends (in about a month).
- Many people I know are in the same boat (and we know there’s been something of an exodus from the city).
This feels like it should be a major supply-demand readjustment. But prices don’t seem to reflect that.
Browsing rentals on StreetEasy, prices seem to have fallen slightly from where they were three months ago – despite New York’s being the epicenter of a pandemic, and therefore:
- the things that make it special (food, opera, whatever your cup of tea is) are basically in complete abeyance;
- the tradeoff you made to have a perfectly located apartment – no direct sunlight but there are three ramen shops and two mezcal bars on your block and you spend most of your day out and about anyway – suddenly sucks;
- everyday things like exiting and entering the building you share with elderly neighbors are much more fraught than they used to be;
- if people are the ultimate amenity, a lot of them are gone.
So what gives?
My theory is that rent stabilization laws put a floor on how much landlords are willing to let prices drop.
Example:
- About a million apartments in New York are rent-stabilized if not rent controlled.
- Let’s say you (the landlord) have a rent-stabilized apartment that, in normal times, rents for $2,000/month.
- The actual market-clearing price for the apartment right now is $1,500/month.
- You estimate that, over the next 10 years, you’ll only be able to raise the rent an average of 5% per year (you can’t get a perfect estimate of this because legislation is liable to change the rate).
- Two years from now, you expect the apartment to be worth $2,000/month again.
What would you do?
On the one hand, you could leave the apartment up on StreetEasy for $2,000/month, even though you think that it will stay vacant for two years. On paper, you’re going to lose $48,000 in that time – but remember, the true, market-clearing price for the aparmtent is $1,500/month, so you’re actually losing $36,000. Two years from now, you expect to rent it for $2,000/month and increase the rent by 5% every year for the following 8 years.
On the other, you could reduce the price to $1,500 and then aim to raise the price by 5% every year for the next ten years.
In the first scenario, your income for the 10 year period is:
rent_calc <- function(base_amount, increase_rate, years) {
rent <- (base_amount * 12)
appreciation <- 1 + increase_rate
for(i in 1:(years-1)){
rent <- rent + (base_amount * appreciation^i * 12)
}
print(noquote(paste0("$", format(x = rent, big.mark = ',',
trim = F, digits = 8))))
}
rent_calc(2000, 0.05, 8)
## [1] $229,178.61
Alternatively:
rent_calc(1500, 0.05, 10)
## [1] $226,402.07
So you’re a little better off leaving the apartment vacant for the next two years.
I’ve played it fast and loose with the details here – rent-stabilization is complicated, applies only to certain buildings, vacant units aren’t costless, etc. But if this story is basically right:
A prediction and a suggestion
A lot of apartments will come on the market this year with perks like “3 months free,” which effectively reduce rent by a lot, but, as far as I know, aren’t typically covered by rent stabilization laws;
If you’re renewing a lease, and you have a good relationship with your landlord, you could strike a sweet deal. For this hypothetical $2,000 apartment, tell them that you’re willing to pay $1,000 a month, with the first 6 month upfront in cash, and you’ll sign whatever deal they offer that puts the price of the apartment, on paper, at $2,000 a month. If you really want to tie your hands to the mast, how about suggesting binding arbitration in the case of a dispute about any rent increase in a year’s time?
That’s what I would do if I were renegotiating a lease.