Rental costs are driven by supply and demand economic principles. When there’s a short supply of something desirable, the prices go up for everyone. In 2021, the prices surpassed those in California to become the highest in the country.
Discussing the cost of rent in NYC is a popular pastime, but it’s a legitimate complaint. You can pay $4,000 per month to get a space in Manhattan that might cost $2,500 in Chicago, $2,000 in Miami, or $1,500 in Denver.
Although rent controls and other policies work hard to keep costs affordable, there is only so much that can be done to limit this expense – especially when someone is willing to pay that price. However, if you know why the rent is so high, it’s a little easier to find places you can afford in the city.
What Are the Reasons Why NYC Rental Costs Are High?
1. Spatial Problems
The rent tends to be higher in Manhattan because space is limited and high demand. There are only so many square miles in the five boroughs for apartments, condos, and other rental spaces. So when people live in limited areas, land prices rise.
Zoning rules in NYC also inhibit supply. Although you could build tall buildings closer together to create more living space, that option isn’t always feasible. Like the East Village, some neighborhoods have R7A and R8B zones with a 4:1 Floor-Area ratio that creates an allowance for four- or five-story builds.
2. Rent Control
According to the median rental costs in NYC, the average renter in the city pays about one-third the published rate. So although the expensive spaces get lots of attention, you’ll find plenty of cheap apartments in the city. The only problem is that they’re not available because those great deals last for the lifetime of your residency.
If you move from a rent-controlled space, you no longer receive that protection. Most cities with rent controls (including NYC) have available housing stock that exceeds the published average.
In Manhattan, if you go below 96th Street, more than one-third of the regulated apartments there have tenants maintaining the same address for more than 20 years. If those households had to pay market rent, they’d probably move to a different city.
3. High Property Taxes
If you thought that buying a house in NYC was an expensive proposition, wait until you see the annual property tax requirements. New York State has the second-highest rates among large cities in the country. The only reason Detroit has a higher rate is the lower property values.
It’s not unusual for residents to pay more than $10,000 per year in property taxes. Although that expense gets tied into escrow accounts that you spend with your mortgage, it’s still a hefty cost you won’t find further west.
Homeowners aren’t the only ones impacted by high taxes. Building owners have the same issue, which means a portion of that expense gets passed along each year.
4. Construction Costs
The average construction expense for residential projects in Manhattan is almost 20% higher than in Chicago. When it costs more to create a building with apartments to rent, the owner or landlord charges more to recover those expenses.
Numerous reasons exist for these higher initial expenses, ranging from the city’s logistics to the cost of labor. For example, if you want a tall building, hiring a crane operator is essential – and some workers with that skill easily clear $500k per year.
5. New Programs
Many of the multifamily construction options in NYC get built under programs where tax abatements are given to developers in exchange for creating affordable housing units. If you can win one of the lotteries associated with that program, you can get a below-market rate.
Since those lottery units reduce the amount of actual stock available for market-rate renters, it just drives up the price for everyone else.
6. Parking Concerns
Below 96th Street in Manhattan, you won’t find much parking. In the outer boroughs and Upper Manhattan, building this resource is necessary. That requirement drives costs up, which ultimately discourages more construction. As a result, you don’t see much new stuff going up, even in desirable neighborhoods where development could occur.
NYC rental prices went down a little during the pandemic year, but they quickly rebounded as people looked for new or upgraded options. If you’re looking for an affordable space, be sure to give yourself enough time to find the right home so that you have something that works with your budget.