COVID-19 has impacted nearly every real estate market across the globe, but few have been hit as severely as New York City. Manhattan and the greater New York City area are suffering from record-high vacancy rates and rent delinquencies, leaving landlords, particularly smaller landlords owning 100 units or less, in a really tough position. Continued closures and the shift to working from home has motivated a number of residents to leave the city, seeking housing in more affordable suburban areas. This has led to a decrease in rental demand, not only in residential housing but also in office and retail space as well.
Savvy investors purchase investment properties knowing they will earn enough to pay their debt obligations and property expenses while taking things like the average rental rate and vacancy rate for the area into consideration. But right now, all of that is out the door. The Manhattan rental vacancy rate is hovering just below 6% and saw a 1.2% decrease in average rental rates from just one month prior.
Government support coming too little, too late
Hopes are high in the city for further governmental support, which would hopefully provide some type of financial relief to both tenants and landlords -- but there's no clear timeline as to when that would be enacted or what it might entail. Right now, it's a waiting game with high possibility that support will come too little, too late. Rather than sit on the sidelines struggling, landlords need to get creative and find a solution that will help them sustain this turbulent time.
Creativity now is key
Many tenants are out of a job, making paying rent tough, but many are finding ways to make ends meet. Discussing what they can pay and coming to a formal agreement with the adjusted terms can help offset some of the costs, even if it's not the full amount. Discuss with the tenant using some or all of their security deposit to offset any missed rent and adjusting the rental rate moving forward to something that can be maintained in the longer term.
Recently, several landlords have started offering move-in incentives, which could include the first few months free up to as much as one year rent free. As of September 2020, Manhattan is offering an average of two months free rent to new tenants, according to the recent Elliman Report. This can help fill vacancies, but it doesn't truly solve the underlying problem, which is being able to earn and collect rent. Charging a lower rent or partial rent is almost always better than no rent at all. If you do offer one or more months for free, make sure it's broken up over the entire term of the lease, lowering the overall rental rate but making it appear as if it's truly free because of the discount.
When it comes to filling vacancies, move-incentives can help, but pricing the unit appropriately in the given market is usually the best place to start. As of September 2020, the median rental rate was $3,250, a 3.4% decrease from August 2020, but studios and one-bedroom units seem to be disproportionately affected, particularly those that aren't considered "luxury" or high-end rental units. So knowing where you lie in the marketplace will also help with properly pricing units. Try offering other incentives, like giving a percentage discount if rent is paid early or flexible lease terms, like no lease fee if the lease is broken early. This may be enough of an incentive to bring in new tenants. See what the marketplace is demanding, and as tough as it may be, make your unit stand out when compared to others in the marketplace. Outdated, rundown apartments will have a hard time competing with updated units with special features priced accordingly to the marketplace.
Landlords with commercial properties, particularly those who own several different commercial assets, should utilize percentage rent lease structure whenever possible. This still establishes a base rental rate for the tenant, but it allows the landlord to benefit from any increased revenues beyond the breakpoint. The additional revenues could greatly help offset losses from forbearance plans, vacancies, or partial rent payments.
Get ahead of the curve
If you foresee being unable to maintain debt obligations, reach out to your lender sooner rather than later. While there are no required forbearance policies in place for investment properties, your lender may be willing to work with you. Their goal is to keep loans out of delinquency, especially long-term delinquencies. Being transparent about your current situation will allow you to get ahead of the game and hopefully determine a solution before it gets out of hand.
These solutions may work for some landlords, but every situation is unique. How much reserves you have on hand, how leveraged you are, and the number of tenants who are experiencing hardships or units vacant will all determine the best approach to solving the current challenges. Ultimately, creativity is your best ally until further support is provided and demand for rentals in the city returns.