Brooklynite Olivia Do and her sister assumed there would be plenty of surprises when they began searching for a new apartment this spring. “Overall, [apartment searching] is a just a stressful experience,” says Do. “There’s always a pro and con when you’re considering things like location, building amenities, and brokers.”
Something they weren’t prepared for: how to deal with an onslaught of concessions from landlords eager to fill buildings. “We’re fairly new renters,” Do says. “Learning about the net vs. gross rent in the past two months has really surprised me.”
She’s referring to the practice of landlords who throw in a month of free rent to sway someone to sign a yearly lease. Since last September, Curbed has continually reported that in a crowded rental marketplace, landlords are luring new tenants with rental concessions—so much so that we declared the practice the “new normal” for 2017. In Do’s case, she and her sister looked at three newer developments in Williamsburg, Bed-Stuy, and Fort Greene where concessions were a standard part of the package.
This may seem like good news for apartment hunters—who doesn’t want to get what is, on the surface, a rent discount?—but the uptick in this particular offering leads to one big question: What happens when concessions run out?
Renters are typically offered a concession in the form of one month’s free rent. It may be amortized over a 12-month period; that’s called a net effective price, calculated by taking the total amount of concession, dividing it by the term of the lease, then deducting that amount from the monthly asking rent.
Alternatively, renters may pay the gross rent—the monthly rent before any deductions or concessions—for most of a year, and then no rent at all for a month specified by the landlord. Other freebies could include the landlord offering to pay the broker’s fee (sometimes this is tacked on with a free month’s rent), a discounted security deposit, a year’s free membership in the building's gym, or a waived amenity fee.
Traditionally, these perks have given developers a chance to “adjust the price a little bit to pull in a few more renters,” says real estate analyst Jonathan Miller, who has studied the rise in concessions in his market reports for Douglas Elliman. But as freebie offerings have become ubiquitous, it’s had a greater effect on the overall market. “When a lion’s share of the market is getting concessions, you start widening the bandwidth of who is attracted to the apartment,” he explains. “In widening the net, to keep vacancy low, you’ll attract a group fully dependent on the concessions.”
That’s not a particularly sustainable practice in the long-term. “Many [renters] will sign a lease under the impression of getting the same deal next year,” he explains. His warning to renters: don’t count on it.
Miller offers a cautionary tale for renters in terms of the mid-aughts housing bubble, “when homebuyers were offered a one-year teaser rate” with low mortgages, that then “in one year jumps to the market rate” for mortgages, leaving buyers shocked and stranded.
Landlords aren’t particularly interested in retaining tenants through concessions, and closely watch the market to pounce on demand—and increase prices accordingly. As Gary Malin, president of Citi Habitats puts it, “the concessions will stay only until the economy improves enough to handle these rents.” According to Malin, incentives have dramatically increased as renters show they’re willing to move to outer-borough neighborhoods, and developers try to court them with a rush of new, amenity-heavy development in neighborhoods like Downtown Brooklyn and Long Island City.
But as the marketplace offers more units from newer, pricier developments, cheap apartments become harder than ever to come by. With the affordable rental market tighter than ever—and showing no signs of slowing down—it’s easier for some renters to increase what they’re willing to pay, factoring in concessions, than to hold out for an apartment that’s truly affordable with their budget.
If demand for upper-end rentals dramatically increases in the next year and concessions disappear, that would be bad news for the whole market. “It’s possible there could be a sort of mass exodus from these buildings [offering concessions], says Miller, which would lead to more demand for rentals that aren’t in high-end buildings. (And, subsequently, landlords of those units could jack their prices up.)
That scenario isn’t likely in one year, however, given the amount of high-end apartments expected to hit the market in that time. (This January, Citi Habitats reported that 11,514 new rental units came on the market in Manhattan and Brooklyn in 2016, and 13,340 are expected this year.) If the market remains flat, landlords would possibly be willing to negotiate with existing tenants on rent—but there’s no guarantee they’d still offer the discounted price.
“Pricing and concessions are always subject to change,” explains Matthew Berenson, vice president of Gotham Organization. At Gotham West, the developer’s Hell's Kitchen rental that opened in 2013, the developer found success offering tenants a “pay-the-net” incentive, in which prospective renters can amortize a free month of rent over the course of their lease to bring the monthly payment down.
Berenson says at Gotham, they vet renters based on whether they can afford the gross rent, to ensure they can continue living in the building without concessions. “But the question that comes up at renewal is if owners are prepared to give that same deal again,” he says. “The conversation is bound to happen.” He thinks developers “need to be prepared to offer the same concessions again, if the market dictates it.”
Many developers declined to discuss their practices on rental concessions for this article. One, Brookfield Properties, offered a statement on a two-month concession for a 14-month lease at the Eugene, a new rental in the Manhattan West megaproject. A representative notes that the concession “will be lifted at some point, especially given that leasing is ahead of schedule and how positively the market has responded to the building.”
Still, for many renters, a great apartment is a great apartment—with the right concessions, finding the perfect place might just be enough to lure them in and push concerns of year two to the side.
Do and her sister, for example, are not against signing a lease with concessions if they fall in love with the apartment. “We don’t plan to be at our jobs for that long,” she says. “Our hope is by the next year or so, we would be making enough to keep living there.”