The Real Deal New York

REITs bet Manhattan rental market will stay strong at sales’ expense for years

February 28, 2012 10:00AM

Real Estate Investment Trusts are betting that Manhattan’s rental market will remain strong for years to come, Bloomberg News reported, and consequently are betting against a sales rebound.

REITs have been snapping up Manhattan rental apartments in recent months, with Colorado-based UDR making the biggest splash. It entered the Manhattan market in 2011 and has already made five big acquisitions, including most recently, a five tower complex on the Upper West Side for $630 million. “People are going to stay renters for a long time,” said UDR CEO Tom Toomey.

The strict lending environment that’s hampering home sales nationwide is exacerbated in Manhattan, where the median price of a two-bedroom apartment is $1.2 million, nearly twice the $625,500 loan limit set for New York by the government controlled mortgage companies. Further, a widespread pay reform on Wall Street has shifted compensation packages towards stock and deferred cash, which offer no relief to the sales market.

As a result, while Manhattan rents rose 9.5 percent year-over-year at the end of 2011, sales activity fell 12.4 percent.

The trend is an amplified incident of the housing market nationwide, according to Bloomberg, and REITs are the benefactors. For example, Equity Residential and UDR recorded 11.2 percent and 10.8 percent returns, respectively, in 2011. [Bloomberg]