8.6% in NYC rent growth forever

Elected officials say it's okay and have put in a legal framework to defend such increases

According to a Zillow research study, rents in NYC increased by 7.4% more than wages in 2022. Since the salaries in NYC increased only 1.2% in 2022 and rents increased by 8.6%, a seven-fold increase in rents vs. wages makes for very clickbait-y headlines. Making sense of data is imperative, and appropriate context becomes essential when trying to understand which way the winds (the Fed and the NYS regulators.) will blow and what, if anything, that means for the overall market health (“Is now a great time to buy multifamily?”). 

Taking a step back from NYC

In the last few years, many municipalities saw their rents increase faster than wages. In particular, Boston, Cincinnati, Buffalo, NY, and Chicago saw +5% spreads between rents and wages in favor of wages in 2022.  Moreover, from 2019 to 2023, ten cities saw rents rise by 20% more than wages grew. The rents in the United States grew +10% more than wages during that period. It’s hard to qualify all the data and trace a narrative that fits the information. But it’s easy to see that rent growth outpaces salary growth, and it’s been doing so for some time.  

Is salary growth supposed to be outpacing the cost-of-living expenses?

Wages aren’t just growing slower than rent growth, they are growing more slowly than most conceivable expense metrics.

• Egg prices, a vital component of the Consumer Price Index (CPI), more than doubled from $1.93 (for a dozen) in January 2022 to $4.82 (for a dozen) in January 2023.

• The price of ground coffee in the U.S. increased from $5.89 (per lb.) in 2022 to $6.16 (per lb.) in 2023, representing a 4.6% increase.

• The cost of MTA subway rides increased by 5% from $2.75 to $2.90 last year. In 2015, costs went from $2.25 to $2.50, marking a 10% increase. Finally, in 2025, rides will increase by another 4%. That will take the cost from $2.25 in 2015 up to about $3.00 in 2025, which means the cost to ride the subway grew about 3.4% each year. 

• Let’s not even broach the change in health insurance costs.

The CPI index, which considers each of the above expense categories, was 6.4% for the trailing twelve months in January of 2023, or more than five times NYC wage growth during 2022. To submit headlines that suggest that big real estate interests are overwhelming wage earners is misguided. Living in the United States with static income levels is overwhelming of its own accord, thanks to inflationary pressures and the overhang of widespread supply chain issues from the pandemic. Rent has grown, but so has every other expense category – including the services and materials required to manage buildings. Some believe the problem is the landlord community – landlords ought to give renters a break and subsidize them. Based on the pace of expense growth, it seems that any subsidy discussion needs to address more than just rent increases and include all areas of living expenses that have outpaced income growth. This isn’t just about rent.

Legalized returns

On the other hand, for apartment building owners to obtain 8.6% in rent growth in NYC is a boon. This 8.6% is not a freebie. Getting such a rent increase is meaningful when finding ways to keep the inflationary pressure on other expenses down. Heating costs, electricity, taxes, and insurance prices have all risen considerably in the last few years. That’s not to mention the potential challenges of arrears and the ever-ascending tax bill. Part of the challenge for landlords is to keep these expenses buttoned up while delivering tenants excellent service and comfort. Though the 8.6% doesn’t come without work, it is fantastic. To obtain that kind of rent growth in perpetuity will offer owners a healthy compounding return that delivers to investors the promotes they need.

Landlords are in luck because the ability to raise rents by 8.6% (or more) has just been formally legalized. That means owners of fair market units who choose to raise rents by that level will be relatively immune from disruption to the administration of building rents and calls by officials to lower rent. The value of this pseudo-immunity cannot be overstated– that’s a sizeable political and social shield to wield when working with any tenant advocates. This development, combined with the supply and demand imbalances in New York will mean sustained rent growth for times to come.

Those skeptical about housing supply and demand imbalances in NY should consult the chart below, which illustrates the static supply of rental apartments in New York. In the last 65+ years, New York has produced only 100,000 new rental units while the population has increased by some 1,500,000 residents, or 15 times the rate of housing development. That’s a jaw dropping imbalance. Excluding rent stabilized tenants, residents in New York have two options: pay +$1m to buy apartments or get used to seeing their rents increase yearly. Landlords are the direct beneficiaries of this imbalance, no matter how regulated the industry is or becomes.

I am bullish on NYC multifamily. Call me at 212 658 1471

Source: Streeteasy data, U.S. Inflation Calculator