Over the past few years, New Yorkers have gotten used to condo-hotel combinations.
But recently, rentals — true rentals, not would-be condos that get leased out when a project runs into trouble — have started appearing more frequently in both condo buildings and hotels in Manhattan.
While the first hybrid rental buildings appeared about a decade ago, they’ve always been few and far between. Now, however, a number of rental hybrids are hitting the Manhattan market all at once. They include Extell’s the Aldyn at 60 Riverside Boulevard; Related’s under-construction condo-rental project at 450 West 42nd Street; and J.D. Carlisle Development Corp.’s Beatrice/Eventi combination on 29th Street.
There are several reasons why rentals are becoming more frequent guest stars in other kinds of projects, experts said. For starters, overall attitudes about rentals (at least, new development rentals) are changing. Moreover, adding rentals can help developers hedge their bets in today’s uncertain sales market.
These days, “there’s much more concern about the sales end of things,” said Greg Young, head of the real estate training and consulting company Broker Heaven. “If you were involved in something right now, you would be more likely to keep part of it as a rental as opposed to counting on being able to sell it all out.”
Experts noted that there is a significant difference between a building that was planned as a hybrid, and a condo project that was forced to rent out its units because they didn’t sell. The latter scenario often comes with a host of problems, including mortgage snafus and PR headaches that generally do not impact projects originally intended to be hybrids.
Still, developers have traditionally avoided mixing rental and for-sale units in their new projects. For one, finishes and amenities in condos have been much pricier than in rental buildings (see story on page 32). In addition, purchasers worried that their property values would suffer if the developer didn’t do a good job of maintaining the rental portion of the building. Plus, there is a perception in the marketplace that renters don’t treat their homes with as much care as owners.
Still, the first, pioneering condo-rental hybrids began to surface around a decade ago. Beth Fisher, a senior managing director at Corcoran Sunshine, recalls working on the Brodsky Organization’sBridge Tower Place at 401 East 60th Street. Completed in 2000, the 38-story apartment tower was primarily condos, but had “a wing of rental residences,” she recalled.
The Related Companies completed its first hybrid, One Carnegie Hill, in 2006, and Extell’s Lucida, which hit the market in 2007, had a limited number of rentals that were not part of the offering plan.
These early projects helped make today’s developers more comfortable with putting rentals in what would otherwise be condominiums, or vice versa, Fisher said.
Fisher is currently marketing Extell’s the Aldyn, which has 150 condos and 136 rentals, all located on floors two through 10. Rentals at the Aldyn officially kick off Nov. 1.
Related, meanwhile, is planning to start leasing some 600 rentals at its new 42nd Street project in the early spring of 2011, said Daria Salusbury, a senior vice president at the company who heads Related’s rental team. The top 10 floors of the building, meanwhile, will be condos. Salusbury is collaborating with Susan De Franca, president of Related Sales, on the branding and marketing of the building, which will have separate sales and rental offices.
A little further downtown, Beatrice is a slightly different type of hybrid. The building’s 301 rentals start on the 26th floor, above the new Eventi hotel. Evan Stein, president of J.D. Carlisle, said that as far as he knows, the rental-hotel combination is the only one of its kind in New York.
So why this sudden increase in new rental hybrids?
For one thing, rentals are losing their reputation as the redheaded stepchildren of condos and co-ops. New development rentals now come equipped with condo-level amenities, as many wealthy New York renters expect a higher standard of living.
In fact, Stein said, that’s one reason why J.D. Carlisle decided on a rental-hotel combination: to help make the building stand out by offering hotel services to rental tenants.
“We have a hotel concierge within the rental, which is very unique,” he said. “My residents can book a private jet to the islands, and get flower service to their apartment, and anything in between.”
Another crucial factor, however, is that adding rentals can reduce the developer’s risk, which is attractive in the uncertain sales market of the last few years.
Building a hybrid “can minimize the risk for the developer, so you don’t have too much of one thing in the market at one time,” De Franca explained. She added that renters in a hybrid building often become purchasers down the road, which provides owners with a built-in pool of buyers.
At the Aldyn, for example, Extell “didn’t want to flood that submarket with a lot of condominium product,” Fisher said. “By splitting the building, they are introducing only another 150 [condos]. It helps preserve the value of the condominiums.”
When the condo market started to soften two years ago, rental-condo hybrids became more attractive to developers — at least those who had purchased land cheaply enough for a rental to pencil out, said the Marketing Directors’ Andrew Gerringer. “They were concerned that they didn’t know where the market was going to be when it opened, so they felt it was going to be a lot less risky to do part of the project as a rental,” he said.
Moreover, it’s easier to finance rentals, especially in the tight lending climate of the past few years. “If you went to the bank and said, ‘I’ll do part of this as a condo and part of it as a rental,’ it probably is easier than getting straight condo financing,” Gerringer said.
Of course, not every developer can just add rentals to their condo project. Doing so means having the wherewithal to own and manage a rental building for years to come, which makes larger companies — like Related and Extell — more likely to build hybrid projects.
Plus, there are some drawbacks to the hybrid model. For one, the perception persists that having renters in the building will harm property values, which can turn off potential buyers. Moreover, in today’s difficult lending climate, Fannie Mae won’t back mortgages in condo buildings unless at least 51 percent of units in the building are owner-occupied. That means developers have to work with lenders to make sure buyers can get loans in the building.
Fisher said the Aldyn team is hoping to work around that with a strategy that’s been successful at other mixed-use developments: getting all 136 rentals to be considered one sponsor-owned condo unit. That way, their presence will not have a significant impact on buyers’ ability to get mortgages. The arrangement won’t be final until the offering plan is approved, she said.
“We have had to take a lot of care to work with bank representatives to get to the point where we’re comfortable that buyers can get financing,” she said. These days, she added, “it behooves the developer to be smart and strategic from the start.”