The new switcheroo
Some NYC developers are converting their newly built condos to rentals. Does that mean low-budget coveters of the high-end finally have a way in?
Wed Apr 23 2008
At first glance, a place that comes tricked out with Andres Escobar–designed interiors, Bosch appliances, a doorman, an in-house fitness center and a rooftop lounge would seem unobtainable—those are condo perks, aren’t they? Yes, as a matter of fact, they are. Yet they’re available for $3,400 a month—the cost to rent a one-bedroom at 99 Gold Street in Dumbo, Brooklyn. By no means cheap, that’s still better than the $1,000 per square foot the building’s developers were asking for before they threw in the towel—or, as some might put it, altered their business plan—and decided to go rental. Thanks to the subprime-mortgage meltdown, overbuilding and fear of a sinking real-estate market, condo developers have hit a roadblock.
“It’s lower your prices or do a rental,” explains Howard Klaus, 99 Gold Street’s developer. When only a third of the building’s 88 units sold, Klaus was forced to refund deposits and offer the perks of condo life (the above amenities plus a basketball court and large layouts) to early renters—not to mention spot them one month free. Perhaps the building was too swanky for its location near the Brooklyn Navy Yard and the Farragut Houses project. For some potential residents, it appears, a million bucks was too much for an area that still seemed…dicey.
Call it development hubris: too much, too fast in neighborhoods not quite gentrified enough to justify the boom. “There was a philosophy of ‘Put the condos up, sell them fast and get rich quick,’ ” says David Maundrell, president of aptsandlofts.com, a Brooklyn brokerage and marketing firm handling 99 Gold and a number of other rental buildings once intended as condos. Maundrell currently oversees four other full “rental reversions”: 756 Myrtle Avenue in Bedford-Stuyvesant; 133 Water Street in Dumbo; and, brand-new to the scene, 924 Metropolitan Avenue and 185 South 4th Street in Williamsburg. Some buildings, like Dumbo’s J Condo or 189 Bridge Street (the latter another aptsandlofts.com property), began offering rentals after sales reached 50 percent; others, like 756 Myrtle, turned rental before even hitting the market. The phenomenon is more visible in burgeoning neighborhoods than established ones—don’t look for the trend on Park Avenue—although it does happen in Manhattan. The Related company’s undulating Astor Place tower (the “Sculpture for Living” building) took some condos off the market to present them as (very, very expensive) rentals, which have all been snatched up—it seems the fancier they are, the quicker they go.
Most rental reversions, outfitted with upscale touches and amenities intended for buyers, are pricey indeed. Several people who were slated to be buyers at 99 Gold now rent one-bedrooms there for between $2,800 and $3,500. But not everyone in the building belongs to the same tax bracket as those who could afford to buy. One couple took advantage of the free month’s rent, moving into an 856-square-foot, $3,500-a-month one-bedroom. Although the apartment initially seemed well out of their price range, they factored in cost-saving advantages like the gym, the doorman (they no longer need to rent a P.O. box) and parking. “We’re actually paying less than we were when we lived in a slummy South Williamsburg place,” says the woman, who asked not to be named. Then there’s the bonus of the floor-to-ceiling windows, appliances that actually work and doors that really lock. “Even $2,700 places we saw in Park Slope had some major issues,” she says. Now the two get to live the condo life, even though they could never afford to purchase one.
Alas, few such deals are left to be had. One exception is 756 Myrtle, which boasts many of the same frills as 99 Gold—interiors designed by Escobar, rooftop terrace, concierge—and comps a month’s rent to anyone willing to shell out $1,950 for a one-bedroom or $3,000 for a two-bedroom in a transitioning neighborhood.
Not all developers see rental reversion as a sign of defeat. Jed Walentas, principal of Two Trees Management, says he always hoped some units at 110 Livingston Street in Downtown Brooklyn would remain rental. That might sound like bullshit, but it was indeed a deliberate financial decision in order to make money up front and keep a revenue stream coming in the future. “From the beginning, we always wanted to do it as a rental, but the numbers never made sense,” Walentas says. “So we made a big decision that we were going to sell a certain number of dollars’ worth.” After selling 240 of the 300 apartments, they put the rest up for rent; currently, they have no vacancies. Aptsandlofts.com’s Maundrell notes that he’s seen this strategy before. Developers like to hold on to some property, he explains, claiming a stake in the neighborhood. “Our mission and our objective is to build rentals,” Walentas says (though his company does own three other condo properties, in Dumbo). “We like to own our real estate and invest in areas we really believe in.”
But the strategy isn’t all benevolence and neighborhood spirit—it’s good business. Many developers believe the dip in the market and lethargic sales are but a blip, and they’re betting on a rebound—so it’s better to have steady rents than be weighted down with unsold units, and retain the chance to sell them later. “We’d rather go long-term income stream and see where the market goes five, six years down the line,” Walentas says.
Although hundreds of rental units are trickling onto the market, it’s not as if low- or middle-income renters who are usually relegated to the outer reaches of New York City will suddenly be able to migrate inland. Most of these apartments were built to be luxury condos and they retain the “luxury” qualifier (and price) even as rentals. And don’t bank on our dismally low vacancy rate to increase, making rents cheaper for all—in the most recent citywide census, taken in 2005, it was 3.09 percent, and about 1 percent for Manhattan according to a 2007 Citi Habitats report. New York City retains its cachet and thus its allure; we’re expecting another million folks by 2030, but not another million housing units.
In spite of the economy, however, the high-end rental remains an expanding market. Even many of those who can afford a $2 million condo would rather sign a lease for $6,000 a month these days, since real estate is no longer the safe bet it once was. “You have a much more established person looking to rent,” says Clifford Finn, managing director of Citi Habitats Marketing Group. Europeans flush from the weak dollar, young professionals unharmed by Wall Street’s volatility and old-fashioned rich folk are in the market for rentals now, and “they want something that goes beyond parquet floors and white GE appliances,” Finn says. Many new luxury rental-only buildings, including Philippe Starck’s Dwell on Wall Street and Forest City Ratner’s Beekman Tower in Tribeca, will add rentals to the pool, and Finn predicts they’ll be snatched up fast.
So don’t feel sorry for the developers or snicker in satisfaction at their fall. And keep striving for that new condo apartment, though they’re still out of range for most New Yorkers, even with creative financing. Meanwhile, developers, marketers and brokers are not admitting defeat. “It’s not a failure,” Maundrell notes. “They still own the property. They still own the apartments.”
What’s the deal?
Why don’t developers build structures for rental?
New residential developments sprout up around this city faster than banks, but they always seem to sport units that are for sale, not rent. Why? “It’s simple math,” says Dan Fasulo, managing director of research at Real Capital Analytics. “Developers can generate a better return on their money for the condo versus a rental.” The problem is the high cost of land, which makes renting a more challenging option, says Kenneth Horn, president of Alchemy Properties, a company that develops condos exclusively. In the end, the decision comes down to the builder’s goal. Some prefer to maintain ownership of the property for the benefit of long-term profit—although rental units also require long-term responsibilities. Others just want to finish a project, recoup their money and be done with it.