In Manhattan, there is a surplus of units renting for $8,500 per month and up. Photo: Alexander Spatari/Getty Images
Eight months into the pandemic, both luxury sales and rentals in New York and San Francisco are suffering as former city dwellers seek out square footage and outdoor space in the suburbs.
“The rental market is weak because all the things that make Manhattan so cool—the cultural offerings, ease of transportation, walkability—ordinarily offset living in a smaller space for renters,” said Jonathan Miller, chief executive of real estate appraisal firm Miller Samuel and author of the Douglas Elliman market report. “Now there’s not as much to keep renters here until things are resolved.”
The situation is similar in San Francisco, which has seen the largest drop in rents in the country, according to a realtor.com report.
(Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.)
“Manhattan is the most densely populated country in the country, and San Francisco is the second, so we are seeing migration from density to places where people can get a lot more space for their money,” said Patrick Carlisle, chief market analyst with Compass. “It’s all down to the pandemic. The things people love most about their cities are unavailable to them now.”
Despite these parallels, experts caution against turning what’s happening in the luxury rental market into a harbinger of what’s to come for luxury sales.
“I would not use the rental market as a useful indicator for the luxury home market,” said John Walkup, COO of New York real estate data firm UrbanDigs. “The data on rentals is much more nebulous and difficult to find than it is for sales, because landlords don't report rentals to a central database, whereas data on sales are reported to MLS (Multiple Listing Service) databases and recorded by county offices.”
Better indicators as to the state of the luxury sales market are factors like the number of days units linger on markets, drops from asking price to sales price, and local fluctuations in supply and demand. And right now, those indicators are suggesting that investors in urban centers have a unique opportunity to negotiate and get discounts.
“If buyers want to live in the city, this is a time to look at not only the luxury resale market but also the new condo market,” Mr. Carlisle said. “Sellers are nervous. Those multi-million dollar units are not going out the door, and buyers have more power than they have for the last 8 to 10 years.”
Why the Luxury Rental Market is Not a Good Indicator for Sales
In Manhattan, there is a surplus of units renting for $8,500 per month and up. In addition, there is decreased demand from renters, according to an October report from Mr. Walkup. Nevertheless, high-end rentals are still faring better than lower-priced ones, which have seen median rents fall by 19% since January.
And signs of recovery in the luxury rental market would not necessarily indicate that luxury sales will also experience a turnaround. Would-be luxury buyers might instead opt to rent for the time being—especially given the fact that landlords and developers are offering concessions at record levels—rather than commit to a purchase amid the uncertainty of the pandemic and now, the presidential election.
However, some real estate analysts anticipate that those waiting out the pandemic will be back when a vaccine becomes available, which could mean an eventual shift away from luxury rentals and a recovery in luxury sales.
In Manhattan, meanwhile, many former renters are now becoming first-time buyers of properties in the suburbs.
“Covid made Zoom ubiquitous within 24 hours, and the ability to work remotely means you have renters who became buyers [in the suburbs] who aren’t coming back,” Mr. Miller said.
Remote working policies have had a major impact on the rental market in San Francisco, where renters of luxury units are often employees of the city’s big tech companies, which have told their workforce to stay home.
On the other hand, there could soon be an uptick in sales activity as buyers recognize opportunities for discounts.
“You have tech companies telling employees not to return [to their offices] until July 2021, and the rental market here has taken such a massive hit,” said Zhane Dikes, a broker with The Agency in San Francisco. “But on the sales side, rates are still extremely low, so this is a moment when buyers can really capitalize.”
Opportunities for Renters and Buyers
Both luxury and non-luxury renters in New York and San Francisco now have the upper hand, with landlords granting concessions to entice tenants to sign new leases. Particularly in Manhattan, landlords are offering deeper discounts on rents and waiving broker fees as vacancies rise.
This trend is unlikely to go away anytime soon, Mr. Walkup noted in his report: “As supply in the luxury sector continues to grow, a decline in leasing activity could pressure landlords to sweeten concessions and lower prices.”
Landlords losing money on vacant units are compelled to negotiate with renters, but this doesn’t mean sellers will follow suit, as many wealthy sellers of high-end properties have the luxury of waiting for the market to shift in their favor. And in San Francisco, buyer activity remains slow as a result.
Ms. Dikes said: “On the sales side, the question is, will buyers continue to stay out, and are sellers going to pull their listings or let them continue to sit? I’ve got more agents calling me asking how my listings are doing than buyers calling me at the moment.”
However, there are some indicators that now, more sellers are deciding to adjust their pricing to lure prospective buyers.
“Typically, after the active season from Labor Day to late November, you see more listings taken off the market, with sellers who didn’t get the price they wanted waiting until the spring,” Mr. Walkup said. “This time, units are staying on the market, which means sellers are getting more serious and offering price discounts.”
Buyers bucking the trend of migration to the suburbs have a rare opportunity, particularly when it comes to investing in new developments, where inventory is particularly high and developers are prepared to cut prices.
“If you’re interested in a new condo, go find the property you love most and be aggressive in your negotiations,” Mr. Carlisle said.
But there may be a new source of competition on the horizon, he said, from those buyers who fled to the suburbs and are having second thoughts.
“Some people who moved out of the city are buying pied-a-terres now,” he said. “I had one client who moved to Napa [in California] and is now saying he’s sick of it, and realized he’s a city person.”