Low Rents Driving Investors Away From Condos

Condo sales are surging in New York City, Crain’s reports, but fewer of those buyers are tapping a once-popular investment strategy: leasing out their unit for income. One result is a rise in rates of owner occupancy, a welcome trend in many buildings.

The idea of renting out condo apartments fell out of favor as rents dropped during the COVID-19 pandemic amid a mounting pile of apartment vacancies. Another factor pushing investors to unload condo rentals was the tenant-friendly Tenant Protection Act of 2019. Of all New York City condos purchased last year, just 2.7% were listed for rent within six months of closing, according to data compiled by StreetEasy. In 2017 the share was a record 11%.

 “It’s a strategy that has a lot of risk right now,” says Nancy Wu, an economist at StreetEasy. “Renting it out is very notably not profitable because of how much rents have been dropping.”

Landlords have struggled to keep units filled since the pandemic shuttered offices and sent many New Yorkers scurrying to the suburbs for more work-at-home space. Owners spent the past year discounting rents and upping incentives, such as free months, to draw in tenants. Still, the number of empty units on the market has remained high. In June, despite a 38% drop from the previous month, there were 11,853 available apartments in Manhattan.

“No investor wants to go up against a landlord who has a hundred or 200 vacancies,” said Stephen Kliegerman, president of Brown Harris Stevens Development Marketing, who oversees sales in new condominiums. “They think, ‘Great, I have to give away six months free. Well then, why am I buying this now?’”

Some investors have started stepping back into the rental game as COVID-19 infections decline in the city and employers plot a return to the office, pushing some workers to once again seek out urban homes to avoid a long commute. About 5.6% of all condo sales through last month ended up being listed as rentals, StreetEasy said. They’re hitting the market in less-pricey locations that typically appeal to university students and young professionals.