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Manhattan rents plunge as pandemic hits real estate

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Jonathan Miller, CEO of Miller Samuel, about the ways COVID-19 is impacting NYC real estate.

Video Transcript

ALEXIS CHRISTOFOROUS: If you are looking for a home in the Big Apple, now may be the best time in years. The latest reports from the firm Miller Samuel show rents in Manhattan have plunged and fewer people are signing on to buy homes. Here to talk about it is Jonathan Miller, president and CEO of Miller Samuel. Jonathan, good to see you again.

I want to start first with people who are looking to rent. So it looks like landlords are sort of ramping up incentives to get people in the door. Is this because this pandemic has essentially stopped people from moving?

JONATHAN MILLER: Well, that's absolutely true. What we've seen is a real-- we saw real-- in the beginning of March, April, we saw a tremendous outbound migration. About over 400,000 people left Manhattan, 40% of the occupants, essentially.

And they became first-time buyers. They lived with relatives. They rented. They did anything but come into the city. And that's sort of where we're looking right now.

So what we're seeing is lots of softness in the rental market. And one of the big reasons for the softness is unemployment has skewed heavily to lower-wage earners, which tend to be more renters than purchasers. So on the purchase side, we're clearly seeing an uptick. But Manhattan is still about-- in terms of contract-level activity, is 57% below this time last year, which is quite a drop.

BRIAN SOZZI: Jonathan, is Manhattan going to have to start offering up some pretty sizable discounts to get people back into the city?

JONATHAN MILLER: Yes, that's already happening. And it sure looks like there's going to have to be more of it. Right now, the amount of the actual incentives being offered to tenants is up over 50% year-over-year, the equivalent of about 1.7 months' worth of rent. Last year it was 1.1.

And we're also seeing a significant vacancy rate, which is driving the need to offer incentives. Right now, we have the highest amount of vacancy in at least the 14 years of history I have on this metric in the city. And the prior two months were also record. So every month is a new record of vacancy, as there is clearly a problem with filling the apartments.

One point about that is when you're reading about all the surge in activity in the suburbs, because the suburbs didn't have a spring market, and now there's this release of pent-up demand, many of those buyers are first-time buyers that were renters in the city and have moved out and are testing the waters.

ALEXIS CHRISTOFOROUS: Jonathan, I don't have to tell you that real estate is very cyclical. And we've seen New York City, and particularly Manhattan, fall out of favor in the past. I'm thinking during the Great Recession, and then, of course, during 9/11. But it always bounces back and comes back even stronger.

You've been doing this a long time. What do you think about the real estate market in Manhattan particularly over the next five years or so? Does it bounce back?

JONATHAN MILLER: So the answer is yes, that after the financial crisis, the suburbs were largely skipped over. And it was all about new urbanism and walkability and the creative class going to the city. And there was a tremendous boom that the suburbs, especially in Westchester and Fairfield counties to the north of the city, did not experience. They were passed over. So they're having their day right now.

What we've learned from past periods, like particularly after 9/11, is that the outbound migration pattern really lasted about three years, and then it completely reversed. I think what's a little bit different this time is that while I think there is-- there's a limit to the outbound migration, and I'm very-- I'm very much a believer in a reversal at some point. The thing that's a little bit different is less about the pandemic and more about technology and Zoom, because I do think that the tether between work and home just got a lot longer, that people have more flexibility about where they can live in relationship to where they work.

BRIAN SOZZI: And Jonathan, what about-- what about commercial real estate? We talked a lot of retailers here. They're exiting the city. Is there another shoe to drop in commercial real estate heading into 2021?

JONATHAN MILLER: The way I look at it is that there-- so for example, in the retail, a tremendous amount of businesses aren't going to return, simply because they're no more. They're out of business. And this is a national issue as well.

But they really need the residential occup-- the vacancy to reduce. They need more people to be able to sustain, or there's just an oversupply. So I think there's a lot more coming in that regard.

And then also, I think on the commercial office side, is that there's can be a lot of rethinking about the use of commercial space and downsizing and that sort of thing. So I think we have a number of years ahead of us. However, the way you would look at it yourself right now in this context of commercial real estate is we're at sort of peak remote work, peak sort of Zoom. And where we end up, we're going to be not the way we were before, but somewhere in between. And right now, we're at the extreme end of the situation, as it-- as it were.