Manhattan Rents Peaking, Poised For Weakness, As Fed Policy Ready To Pivot To Sales

More And/Or Larger Rate Cuts This Fall Should Soften Rents And Stimulate Sales
Unexplainable Yen Carry Trade Had Significant Influence On Future Rate Direction
Manhattan Rents Seemed To Have Peaked As New Leasing Activity Surged

In January of 2023, I dubbed the year ahead as ‘The Year of Disappointment’ and even got a New York Times headline about it. In January 2024, I dubbed the year ahead as ‘The Year of Less Disappointment,’ which turned out a bit optimistic as interest rates did not come down as originally projected by the Fed (75 basis points). Then, the Japanese stock market blew up last week. A Yen Carry Trade thing happened, which I don’t profess to understand, but it got everyone worrying (too much) about potential recession and sentiment has shifted significantly towards expectations of a Fed 50-basis point cut in both September and November.

According to the VIX, with measures of financial market volatility, the recent events in Japan were among the top 3 most significant market events of our lives (and most of us don’t even understand the yen carry trade, self-included).

With Jamie Dimon, JPMorgan Chase CEO, a successful executive worth $2 billion, trying to morph into a television pundit, seems to be commenting on everything everyday, Fed cuts included, but often comes across as disconnected from everyday life or wrong, skewed by the interests of his employer. As I drilled into my Columbia MBA students this summer, understanding the source of information is almost as important as the information itself.

More or bigger rate cuts are expected for the fall. What an amazing pivot in rate expectations in less than a week. While 2x 50-basis point cuts this fall are not a sure thing and the FOMC meeting 6 weeks from now is an eternity in a volatile world, but the narrative has changed significantly from last week’s one-and-done 25-basis point cut in September.

Nick Timiraos is a great follow on X.

But I digress…

Beginning with the Manhattan rental research we pushed out today. Median rents appear to have peaked in July for the year, $100 shy of the year ago $4,400 record. This provides tenants no sense of relief with rents remaining quite elevated.

Small Is The New Big

The bigger point made in our research was that while rents remain quite elevated, apartments are skewing smaller, and there is more weakness in high-end rentals as those tenants move to high-end purchases.

Renters are getting less space for their money…shrinkflation. I’m not talking about a 1-bedroom tenant moving to a studio or a 2-bedroom tenant moving to a 1-bedroom apartment. The average size of a rental apartment has been falling year over year for the past 11 months within each size category. They began to try their luck elsewhere, causing a surge in new lease signings. Here are some overall raw numbers from our July 2024 rental report.

Mortgage Rates Fall, Rents Fall

As mortgage rates fall, rents should begin to fall as would-be buyers who temporarily parked in the already crowded rental market and created the price surge are incrementally shifting back towards the purchase market, relieving some of the rental price pressure. We saw the bump in newly signed Manhattan contracts for July after a dismal spring.

If you really want to understand how the financial markets work, this is the best explainer I’ve come across.