NYC apartment vacancy rates well-placed to recover - Capital Economics
US Housing

NYC apartment vacancy rates well-placed to recover

US Housing Market Update
Written by Matthew Pointon

As the country begins to return normal next year, the hardest hit apartment markets in the country will recover. New York City looks particularly well-placed to benefit from returning non-office-based workers. Combined with aggressive rent cuts, which have left the costs of renting in NYC compared to the rest of the country at its lowest since records began in 2000, we expect vacancy rates will quickly drop back from 4.4% in the third quarter to 4.0% by end-2021.

  • As the country begins to return normal next year, the hardest hit apartment markets in the country will recover. New York City looks particularly well-placed to benefit from returning non-office-based workers. Combined with aggressive rent cuts, which have left the costs of renting in NYC compared to the rest of the country at its lowest since records began in 2000, we expect vacancy rates will quickly drop back from 4.4% in the third quarter to 4.0% by end-2021.
  • It is no secret that COVID-19 has hit rental demand in large cities harder than the rest of the country. New York, San Francisco and Boston have seen particularly large increases in the stock of vacant apartments over the past year. (See Chart 1.) There are three main reasons why these cities have been hard hit. First, employment has seen a relatively large decline, both because of the higher share of office jobs which can be done remotely, and the fact that leisure and hospitality industries in cities were shut down. (See Chart 1 again.) Second, beyond work, lockdowns removed many of the reasons why people choose to live in large cities, for example restaurants and entertainment.
  • Linked to that, the removal of many of the benefits of living in cities meant some households could no longer justify the extra cost of living there. Prior to the arrival of COVID-19, effective apartment rents in NYC were 250% higher than the national average, and 220% higher in San Francisco. That provided a large incentive to move to a cheaper area, or back in with parents, at least temporarily.
  • The arrival of vaccines means life will begin to start to get back to normal next year, and that will help bring rental vacancy rates in cities back down. That said, we think the pandemic has triggered a permanent shift to working from home. (See Focus.) That will mean some households that left cities will see little point in returning. In that regard, San Francisco and Boston, with a higher share of office jobs suitable for remote work, may benefit less than New York from returning workers.
  • Lower rents should also encourage households to return, if only to enjoy the cultural benefits cities provide. Landlords have responded to rising vacancy rates by aggressively cutting rents. Indeed, in New York rents are now only 236% higher than the national average, the lowest since records began in 2000. (See Chart 2.) Relative San Francisco rents have also seen a sharp drop, but they remain higher compared to their level from 2001 to 2012. Set against that, rents relative to the national average in Boston have held steady.
  • The decline in rents, returning workers and the lure of revived entertainment and culture will lead to a decent drop in NYC vacancy rates, from 4.4% in the third quarter to around 4.0% by end-2021. Vacancy in San Francisco and Boston will also fall back but, with a higher share of office-based jobs, the recovery will be slower.

Chart 1: Change in Vacant Stock & Emp. (% q3/q3)

Chart 2: Effective Rents as Share National Average (%)

Sources: Refinitiv, REIS

Sources: REIS, Capital Economics


Matthew Pointon, Property Economist, matthew.pointon@capitaleconomics.com