Tailwind #3: National Drivers of Rent Growth in NYC
Will High Borrowing Costs and Abortion Rules Push Renters to NYC?
Though inflation has slowed in today's economy, high costs of homeownership may still encourage renters to rent. That's a good thing for those in the business of owning and renting out their housing.
In August 2023, the chart illustrates that renting a home would have cost a renter $852 (-31%) less per month than being a homeowner. Until then, August 2023 represented the highest mortgage interest rate period in the last 23 years. Not since the year 2000 had rates been that high. For the next two months, record-high interest rates would give way to even higher highs, culminating in October of last year when mortgage rates landed just below 8%, when the 10-year treasury yield, which many home mortgages are pegged to, momentarily stood north of 5.00%.
When the cost of borrowing money decreases, credit flows more freely, and enterprising businesses must move more quickly and can use borrowed money to achieve their goals more easily. Homebuyers do the same thing. They don’t need as much cash to buy their homes and they pay lower monthly costs to service their debt.
Some ratios are helpful here to understand the different drivers that impact rent/buy decisions.
Purchase Price / Yearly Rent (GRM, basically). The lower the monthly rent in relation to the home's purchase price, the better it is to rent because it means the homeowner needs an extended horizon before his or her equity grows enough to offset higher monthly operating/financing costs. Put differently, the higher the cost of homeownership is relative to the rent for a similar unit, the more incentive there is to rent.
Rent Growth / Expense Growth: How fast expenses are growing in proportion to rents. If rent grows modestly but costs increase rapidly, it encourages renters to keep renting. Note: uneven rent and expense growth is a significant problem for rent-stabilized building owners.
Investment returns / Home appreciation: related to the previous point, if the renter's available investment returns are rosy: the equity indexes are doing well, crypto's humming, etc. that tilts the scales in favor of renting. In bull markets, the growth in stock market values may far outpace home equity growth.
Renting in NYC is expensive, but the above indicators suggest that when home prices are high, when rent growth is slower than expense growth and healthy investment returns are available in other asset classes, there are compelling reasons to keep renting. All three of those conditions are the case today.
Though seven out of ten NYC residents rent, elevated borrowing costs may delay renter decisions to become homeowners and grow the size of the renter pool. Making the jump from renter to owner in Manhattan or Brooklyn is a big leap (see here for how big) and requires a lot of resources. Higher borrowing costs for mortgages won't help bridge that gap, but what it might do is delay decisions to purchase property outside of NYC. That couple's home purchase in Long Island / Hudson Valley might get pushed out a few years. In all purchasing decisions, a segment of consumers is price elastic and responds to price changes (sharply or modestly) by reeling in their purchases, doubling down, or not changing habits. Purchasing a home is usually the biggest non-business purchase of people's lives. The higher an item's price point, the easier it is to wince when that item's "price" (cost of debt service) sits at 46% above the cost of renting. Bloomberg also published a local NYC tool that explains how many years of homeownership it would take before owning a home would be more profitable than renting. In Greenwhich Village, it takes 30 years before the economics of owning exceed those of renting. See link here.
The argument for being an NYC landlord in today's environment can be challenging, but the case for renting apartments in NYC instead of buying them is straightforward. It will be up to 30% cheaper yearly and won't require six-figure cash outlays. For those who believe in the long-term growth of NYC, recent macroeconomic headwinds could eventually become tailwinds as the market share of NYC renters inches from 68% to 72%. Over time, that should translate to higher rent growth, higher tenant retention, and fewer vacancies.
But people’s behaviors aren’t driven 100% by economic indicators. How renters think of themselves, what they believe in, who they want to be, and how they want to feel can also drive decisions. Over six million people in Florida voted to extend abortion rights beyond the six-week window currently in place. Those six million in favor won a majority and plurality of the referendum vote, but that was not enough to win because the vote required 60% or more in favor. This isn't isolated to just Florida. Disgruntled residents whose beliefs and ideas put them in the minority (or close to it) in their communities exist in every state and city, in varying numbers.
How many of these millions of disgruntled people are renters? How many have remote jobs and living situations that allow them to pack up and move? How many of them will suck it up and get on with it? Abortion rights are not the only polarizing issue of the day, but they highlight a brand of problems that Americans feel strongly about. Investors and property owners in NYC should ask themselves whether the shifting social and political views in the United States might encourage or promote more demand to live and rent in NYC, the bastion of liberal values and protections for those in the minority. Young people are the perfect audience for this: they are more likely to rent than their older counterparts, and they tend to be more supportive of abortions than older adults. Florida's high cost of homeownership and inadequate social/medical policy (they also voted against a recreational marijuana bill) may turn some young folks back to NYC.
NYC is one of the most liberal, leftist hubs in the world, and that may specifically draw young renters here in the coming years as conservative. For this to result in a net increase in renters, NYC must also succeed in welcoming those who don't identify with those more left values. I think this is possible because the jobs are in NYC and are not leaving. Still, economics may push the needle more than politics and values. If current conditions are cemented and borrowing costs remain high, renting may evolve from just a phase people go through, to a more permanent lifestyle.
I am bullish on NYC Multifamily.
Call me if you would like to discuss 646 326 2220.
Best Regards,
Romain Sinclair
Sources: Visual Capitalist, Investing.com