Rental projects were long considered bulletproof, a safe backup for more profitable and risky condos. But with the precipitous drop in New York City rents — perhaps on the order of 30 percent from the top of the market once incentives are factored in — it’s clear that they are no longer a surefire bet.
“Nobody who’s got anything under construction is kidding anybody by not admitting that rents are less than where they were when we all underwrote these transactions,” said Veronica Hackett, cofounder and managing partner of the Clarett Group, a developer of condos and rentals that began leasing at the 490-unit Brooklyner at 111 Lawrence Street in Downtown Brooklyn a month ago.
The skyscraper, now the tallest building in Brooklyn at 51 stories, has experienced a plunge of almost 29 percent in its rental rates. (That’s on par with the 20 to 30 percent that other developers spoke of.) While initially the developer projected leasing studios for about $2,100 a month, studios are now achieving rents of about $1,500 a month, Hackett said.
In the month since the leasing office has been open, the Brooklyner — which is also meeting the market with generous incentives, including one month’s free rent on one-year leases and two months on two-year leases — has rented about 25 of its 490 apartments, said Hackett, who believes New York City apartment rents have finally hit bottom.
“I’m very pleased with the initial response, but there’s a very definite price-point issue in the marketplace, and all developers in this position are taking short-term hits,” she noted.
When asked how the Clarett Group could see projected rents shrink by almost 30 percent since the project was first planned and continue to service the Brooklyner’s debt, Hackett said the project has managed to “implement meaningful cost reductions” and that its scheduled occupancy in the middle of this month is actually four months earlier than originally planned.
“We’re delivering earlier, so we’re going to start getting rent earlier,” Hackett said, adding that she hasn’t had to dip much into the project’s contingency fund.
Making the financials work for projects that were originally envisioned as rentals is clearly easier than making them work for condos that failed and are opting to go rental as a backup.
Like the Clarett Group, Silverstein Properties expedited the delivery of Silver Towers at 600 West 42nd Street at 11th Avenue, which has 1,359 rental units in two towers, by three months.
“We found ourselves moving faster than anticipated with construction; therefore, we obtained a certificate of occupancy for the lower portions of the building about three months earlier than expected,” the company’s president and CEO, Larry Silverstein, told The Real Deal.
“We’ve now leased about 323 apartments, or about a third. We’re thrilled.”
Studios at Silver Towers start at $2,505 a month, one-bedrooms start at $3,115 a month, and two-bedrooms begin at $4,335 a month. The building is offering one month’s free rent on a one-year lease and two months’ free rent on a two-year lease, as well as partial payment of brokerage fees.
“We originally projected about $70 a square foot in rentals,” Silverstein said. “What we find we’re getting is about $65 a square foot in rentals” once incentives are factored in.
That “is a little bit less than we anticipated,” he said.
Despite that, Silverstein said he wasn’t worried about servicing debt, since the building is leasing faster than anticipated. Also, unlike many new rental projects, Silverstein Properties has the added benefit of owning the land since 1984, so its land costs were minimal.
“That made a dramatic difference for us,” he said. “[During the boom], land costs were very high, which made it difficult to do rental housing.”
Hackett declined to provide a specific number for the December 2006 land acquisition for the Brooklyner (some reports put it at $72 a square foot). But she noted that it was below the $100 a square foot that would be the ideal limit for a rental project.
At the 369-unit Ohm at 316 11th Avenue in West Chelsea, which will be ready for occupancy next month, Jeffrey Levine, the chairman of Douglaston Development, which is leasing the land upon which it’s built for 99 years (as opposed to buying the land outright), admitted that “two or three years ago, when this project was conceived, rents were flying through the sky.”
He noted that rents have backed off their high points “somewhere in the magnitude of 10 to 20 percent.”
Now, Ohm may get rents of $2,000 a month for a studio, $2,600 to $2,700 for a one-bedroom, and $4,000 for a two-bedroom, Levine said.
However, Levine said he is optimistic about Ohm’s capacity to service its debt, because Douglaston was conservative in its initial financial projections. He ticked off a list of factors that have helped Ohm avoid the economic pitfalls of being a rental in this market, including declining construction costs, low interest rates, and a 25-year tax abatement for including affordable housing.
Hackett also cited historically low interest rates as a saving grace. Rates are “50 basis points [over prime], so we haven’t spent nearly the amount of money on interest that we had budgeted or planned for,” she said.
Jon McMillan, the director of planning with TF Cornerstone, a development firm formed by two partners formerly with the residential giant Rockrose Development Corp., said that for rental developers, the time is ripe for the acquisition of failed condo projects, but only if they are purchased at the right price. If their owners sell them cheaply enough, failed condo projects are another way developers can do a lucrative rental project.
“They have to be acquired below or at a certain price that makes sense,” McMillan said.
In Lower Manhattan, developers would have to pay under $200 per square foot of floor area ratio for a failed condo project to do a successful rental, he said.
While some condo projects may be attempting to go rental, Hackett said it’s harder to execute a rental backup plan than might be anticipated.
For instance, she said, the Clarett Group never considered converting to rental apartments at the Forté Condominiums, their Downtown Brooklyn-Fort Greene project that recently went back to its lender.
“A basic factor is that so many of the condo developments have a higher percentage of two- and three-bedroom apartments,” she said. “The rental market is dramatically studios and one-bedrooms.”
Ironically, now that land prices have fallen enough that rental projects are more feasible than ever, banks continue to shy away from construction financing, Levine said.
“The combination of the construction costs, much like the land, being at significant recent lows, coupled with low interest rates, means we are getting closer to the day when rental projects once again will pencil out,” he said. “The flip side of that is that our financial institutions are not of a mind to finance these projects.”
Silverstein said he anticipates construction financing for rental projects to become routinely available again by 2010 or 2011 — and he plans to be ready.
“Whatever land we’ve had in the past is fully developed, and we’d like to find some other sites for tomorrow’s projects,” he said. “It would give me great pleasure to buy another site on which to build another million or 2 million square feet of rental housing.”
