Development Overhang Weighs on Rent Growth; Positive Dynamics Remain in Place

Low unemployment, consistent job growth boosting apartment demand. A broad base of high-wage industries and more than 8.5 million residents are driving significant net absorption of apartments, particularly as single-family homes remain out of reach for many would-be buyers. As the pace of construction soared, net absorption outpaced new supply every year since 2012, fostering a metrowide vacancy rate that reached 2 percent by the end of 2017. This year, development will contract moderately following the cycle high reached in 2017, providing a tailwind to the overall market. However, the exceptional growth in supply has weighed on overall gains in the average effective rent as operators throughout the city opted to provide a heavier slate of incentives to draw renters and fill new buildings. As the year progresses and the market continues to tighten, the sentiment around incentives should moderate somewhat, providing a tailwind to NOIs.

East River neighborhoods in Brooklyn and Queens drive development. As rental rates have risen throughout the cycle, construction has expanded meaningfully throughout the city. Those efforts are now being focused on locations in Brooklyn and Queens along the East River, where quick commutes to employment centers in Manhattan offer convenience and value. As popularity has increased over the past several years, the valuation gap between these areas has moderated somewhat, yet it remains wide enough to draw additional renters to the area.