Luxury rental throwdown: Q&A, part I

From the June issue: After experiencing an incredible run-up in prices over the last five years, the NYC luxury rental market may be finally hitting a ceiling. “Last September is when things started to shift and demand started to taper off a little bit,” said Dan Marrello, a leasing director at Town Residential.

Although Miller Samuel’s most recent rental report showed that luxury median rents in Manhattan reversed its decline in April by climbing 2.9 percent over last year to $8,536, the number of new leases signed fell by 1 percent to 486. All told, an estimated 8,000 rental units are entering the NYC market this year.

They include the Durst Organization’s 750-unit starchitect project VIA 57 West at 625 West 57th Street, Related Companies’ 84-unit complex 456 Washington and Moinian Group’s Sky at 605 West 42nd Street, which will boast 1,175 apartments and 70,000 square feet of amenity space. Meanwhile, investors who bought condos at projects like One57 are adding to the luxury rental market. Given the supply, one trend to watch this summer will be the number — and quality — of concessions. “That is usually an indicator that the end is near, when you see them throwing in cars and fun stuff,” said Andrew Barrocas, president of MNS.

In our first web installment, we turn to Dan Marrello of Town Residential and Jonathan Drescher of Durst.

Dan Marrello
Leasing director, Town Residential

There have been a lot of news reports recently about the softening luxury rental market. What are you seeing in Manhattan?

I definitely do see a softening. I can see on certain listings that we have that aren’t seeing the same prices as last year or the year before. Over the last three to four years, there have been a lot of condominiums that have come to market that have been sold to investors and turned into rental products. You have a couple rather large buildings that have hit the market. You have Sky with about 1,200 units, VIA 57 West with 700-plus units and 160 Madison Avenue, not a huge building, but with over 300 units.

You’ve also seen an expansion of the market, in neighborhoods like Brooklyn where people never thought of renting five-plus years ago. You’ve also got people going into Queens, Long Island City.

How long is it taking for luxury rental buildings to reach full occupancy?

It really depends on the size of the building. Related just launched a 100-unit building in Tribeca at 456 Washington. They launched at the beginning of April and they will probably be done by August. Their timing is perfect. Meanwhile, the Durst Organization is probably going to be working 8-12 months on Via 57. They launched in the winter and demand in December, January and February is much less. But you can’t always control when you come to market. The shovel was in the ground three-and-a-half years ago. There are construction delays, there are permit delays. You name it.

What concessions, if any, are landlords offering in the luxury rental market these days?

I’m seeing lots of “OP,” which stands for Owner Pay. The owner pays the broker one month rent if they bring the tenant in. You’ll see that in addition to one month free for the tenant. Landlords can’t adjust prices down in new construction because they have a bank to answer to and the financing was based on certain pro-forma of base rent. So instead of dropping the rent, they will offer one, two, three months free rent to entice a renter to rent. We saw three months free on a two-year lease — though I can’t say which building.

Equity Residential, the largest publicly traded apartment landlord, said in February that its two- and three-bedroom units in Manhattan have become “more difficult to lease.” What are you seeing in terms of demand for each unit type?

Yes, that coincides with the price point. In that luxury sector, the apartments are larger. So whether it’s two, three, four or five bedrooms, everything built condo is huge. Some of those are the investor units hitting the market [as rentals], which puts pressure on rents for larger-size units. Classic rental buildings don’t have an excess of units that have four or five bedrooms. In the past, you never got that big. That has shifted with the condo development world.

Where do you see rents moving for luxury apartments in Manhattan in the next six months?

I thought in October we would see a correction. Job growth is not in the sectors we are used to, like finance. There is job growth in education, health services and hospitality, but those jobs don’t always pay a lot. There’s got to be a correction. You’ll probably see a 10 percent to 20 percent correction, depending on location. You’re already seeing it. First come the incentives, then you see the price corrections when the incentives don’t work anymore.

Which Manhattan or Brooklyn neighborhoods are seeing the biggest declines in rent prices?

Upper East Side is always impacted because it has the most product and is the largest residential neighborhood. It has the most expensive and the most affordable apartments. There’s a lot on the market in the Financial District. Meanwhile, the West Village and Soho tend to be protected because you can only build so high there, so there’s no oversupply there.

Will more luxury condo developers be enticed to convert their units to rentals if the buying market continues to shrink?

Some developers that are not out of the ground yet may suspend construction for the time being or change direction and go rental. It really depends on how much the developer acquired the land for. Between the land cost and cost of construction, there has to be enough room for profit in order to build. For example, if the developer is all in for $2,000 per square foot, then he may need to get $2,600 for the project to work. There may be uncertainty if the market will bear that, especially in one to three years.

Jonathan Drescher
Senior vice president of project development, Durst Organization

What’s your take on the softening luxury market? What kind of monthly rents are you seeing in Manhattan and Brooklyn?

The fundamentals of the rental market are inherently strong. New York City suffers from a housing shortage and it will take decades to build our way out of it. There might be some modest fluctuation in rents, but as long as talented, smart and motivated people continue to flock to New York City from across the country and around the globe, the rental housing market will remain strong.

Are you concerned about a rental glut?

There is an oversupply in the condo market at $5,000 a square foot and above. This represents a small fraction of the market. Conversions of the apartments of this type and quality to rentals is difficult. However, it represents a trace amount of the market. Making the process more difficult is that the financing in-place on condos such as these make it very difficult to convert them to rental properties.

Aside from supply, are there any other market forces at play that account for the weaker demand for luxury rentals?

The expiration of 421a in June and then January led to the creation of a vast pipeline of rental projects that will keep a steady supply of new product on the market for the next two years. However, without 421a, there is no way to build market-rate rental housing and the supply of rental units will fall off the table. This will reduce inventory and put upward pressure on rents.

How long is it taking for luxury rental buildings to reach full occupancy? And what concessions, if any, are landlords like yourself offering in the luxury rental market these days?

It takes approximately 20 months for a large rental building to reach stabilization from initial occupancy. We open our buildings in phases and offer more generous concessions when construction is ongoing and amenities have yet to open. We are seeing one to two months rent concessions in new construction.

Extell recently abandoned its plan to list 38 units at One57 for lease, electing to sell them instead. What do you think about that strategy and what it says about the luxury market right now?

Converting a $5,000-per-square-foot condo into a rental is a challenge. A $5,000-per-square-foot condo basically translates to $180 per square feet in annual rent. We have built our buildings to compete with condos in terms of amenities, views and other features but with an eye on design for the rental market. In most cases, unless there is a very deep discount, anyone who is renting will find our product a better value.