Investors and Developers Focus on Outer Boroughs Amid Tight New York Rental Market

Rollover in supply pressures keeps vacancy extraordinarily tight. Nearly a decade into the current expansion, New York City rental demand remains on strong foundations. Unemployment has fallen below 4 percent, prompting steady household formation throughout the five boroughs. Amid high prices for single-family homes, the vast majority of the new households have opted for rental housing, pushing the overall vacancy rate to nearly 2 percent. Tight conditions have spurred significant supply growth over the past few years, mainly aimed toward transforming neighborhoods along the East River in Brooklyn and Queens. Renters have enthusiastically pursued the new offerings, particularly given the discounts compared with similar options in Manhattan. Supply growth peaked in 2017, indicating tight vacancy will persist throughout the year, with periodic upticks in select sub-markets as newly built projects lease up. The slowdown in the pace of construction offers the potential for reacceleration in rent growth as pressure to provide incentives subsides, particularly in high-demand neighborhoods along commuter routes.

Rezoning, transformational neighborhoods offer investors opportunity in New York City. Seeking assets for appreciation and slightly higher yields than core submarkets in Manhattan, investors are deploying capital primarily in the outer boroughs along the East River in Brooklyn and Long Island City in Queens. Cap rates in these locations can be 50 to 100 basis points above similar product in Manhattan, removing some concern regarding the coming L-Train shutdown in 2019 that will affect Williamsburg and neighborhoods to the east. Recent zoning changes are also opening new opportunities for redevelopment in Manhattan, as expanding air rights offer the potential for greater density. First-year returns average in the low-4 percent band for prime assets and locations, while deal flow remains contingent on listings amid rising property level incomes.