Time to renegotiate, as apartment rents plunge in the world’s largest cities
It was inevitable that the global COVID-19 pandemic would eventually have an effect on the real estate rental markets of the world. Many of the world’s most prominent urban centers have attracted higher rents because of their proximity to business districts, universities, exclusive dining and premier entertainment. Not a lot of these drivers are in play now, in the months since the pandemic disrupted the lives people were accustomed to.
With social gatherings limited to small numbers, as well as the perception of high risk, many of the attractions that drew renters to city centers are no longer open for business. Online study has replaced classrooms, dampening demand from overseas and out of town students. And, with remote working increasingly the norm, and location close to work no longer a factor, the significantly higher rents of city centers are actually a hindrance to occupancy.
A glut in supply is deflating rents across the world’s metropolitan centers
Real estate agents in inner-west Sydney, previously in demand due to its proximity to the city’s thriving performance art venues and home to the University of Sydney, are reporting a 9% drop in rent due to a drop in international students and young renters(1). The year on year average rent for one-bedroom apartments plunged 17% in Toronto, this October, with a further deflation being predicted(2). Rents for prime central London properties were down 8.1% in September, compared to 2019(3), and the median rent for Manhattan fell 7.1%, over the same period(4).
Similar trends have been reported in the UAE. In Dubai, a rent depreciation of over nine 9%, year-on-year, has been recorded across all areas, and high-end apartments in Abu Dhabi are registering a drop of up to 15%, compared to 2019(5).
Both tenants and landlords are grappling with uncertain outcomes
Peculiar and unforeseen circumstances have caused this dramatic fall in rental rates, in the world’s most prominent cities. Given the sudden shift, a lot of tenants find themselves in arrangements that had been agreed to in the pre-pandemic market, which they can no longer afford. Demographic segments such as small business owners, casual workers and contractors are experiencing a sharp drop in their earnings, forcing them to reconsider where they live.
Taking the perspective of the property owners, a fall in their tenant’s earnings is not being made up by a waiting set of replacement prospects. On the contrary, with many of the advantages of sought after properties and locations becoming moot, the number of vacant properties is soaring as well. There is a clear convergence emerging, between the interests of tenants and landlords, which can only be resolved by renegotiation of rental rates.
Arriving at mutually beneficial terms
The Canadian newspaper, Calgary Sun, recently reported a 26.81% year on year increase in online traffic to real estate websites(6). This figure reflects an overall spike in interest across both rentals and outright purchase, among prospects. Nevertheless, it also registers the surge in tenants looking for rental properties which better fit their present circumstances. Although, at the beginning of the COVID-19 pandemic, the crisis may have seemed transient, market sentiment is starting to assume a long period of uncertainty. In fact, the widely used term ‘new normal’ indicates that circumstances will take a long time to return to pre-pandemic form, if they ever do.
For both tenants and landlords, this means securing their future with a new set of parameters and variables in mind. Renters are reprioritizing the facilities and locations that best fit into their new lifestyles, budgets and requirements. Landlords, on the other hand, are being forced to recalibrate their expectations, in line with the demand that their location or particular property is attracting. While, superficially, the current circumstances may seem skewed in favour of tenants, astute landlords also have the opportunity to offer flexible terms, which renters find attractive. Despite the all-encompassing and multi-faceted impact of the global pandemic, it will eventually be contained. Property owners that make the adjustments required, can expect to reap the benefits of the inevitable rebound, while ensuring that they don’t miss out on earnings entirely.
Accommodating a ‘black swan event’
As drastic as the changes due to COVID-19 have been, hope for solutions is also beginning to emerge. Onsite services associated with commercial real estate have responded admirably to the crisis, and new protocols and procedures are being put into practice. People around the world have generally begun to adapt to the challenge of an invisible threat, with changes in behaviours and adherence to recommended precautions. Perhaps most significantly, multiple vaccines with high efficacy rates are on the verge of being made available to the people all around the world. Despite these positives, the impact of the pandemic will continue to be significant, in the immediate future. A renegotiation of rental agreements will help both tenants and landlords make this transition, as painlessly as possible.