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Declining Rental Income May Ease Vacancy Rates - NYC Real Estate Market Part 1

Article by Caleb Whymark

Vacancy is a nightmare to be avoided. It's a trinity of loss. Loss of income, leasing expenditures and the likelihood of releasing at a lower rent haunt property owners in this market. Let us examine the decline in rental income, including vacancy and collection losses from the micro level then proceed to assess the broader impact of market statistics in a follow up article. An Upper Eastside apartment, in the 80's, rented at $2,525 per month. The unit was vacated July 31, 2009 and rerented as of September 1 2009 at $1,800.

Calculating the annual losses:

  • Vacancy: Two months at $2,525 or $5,050.
  • Rent Loss: Four months at $725 per month equals $2,900. ($2,525 - $1,800 = $725)
  • Uncollected Rent: $7,000.
  • Legal fees: $6,500
  • Advertising & Commission: $3,700
Revenue losses and expenses from this single apartment reduced net income by $25,150 in 2009. The impact on property value can be calculated by dividing the reduction in net income by an overall capitalization rate which includes an effective tax rate. The tax rate for Tax Class 2 properties in New York City for 2009/10 is 13.241%. Multiply the tax rate by the level of assessed value to obtain the Effective Tax Rate.

Effective Tax Rate for Tax Class 2 Properties = 0.13241 x 0.45 = 0.05958 or 5.95%

For the purpose of providing an example we will assume that investors seek a return of 9.75% on this type of property. The overall capitalization rate is the sum of the investor rate and effective tax rate. The sum is 15.7%. Investment value loss due to this single apartment is $25,150 divided by 0.157 equals $160,191. Now the loss would not be applicable in a strong market. Vacancy losses are assumed in investment analysis. The underlying issue is the quantity of losses in the building and the community. The subject building had six similar apartments with losses in 2009. The building is a 5 story walk-up apartment building with twenty apartments. Approximately one third of the units were vacant for over two months and were relet at a lower rent. On the micro level this property has suffered significantly.

The broader market is similarly shocking. Data processed and analyzed daily indicates that this property is not unique. Some communities in Manhattan reflect a $10.00 per square foot drop in income since 2008. Other communities have retained reasonable apartment income yet commercial losses are impacting the operating statistics. Reports by community and property type are available by request for a modest fee. Raw data in database and spreadsheet formats may be purchased.

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