Building costs rise for landlords as jobless renters stay home

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In a bad economy, the plight of the unemployed gets most of the attention. But as the ranks of New York City’s jobless increase, and more people downsize apartments or take on roommates to deal with the economic downturn, they also send their landlords’ utility and maintenance costs skyrocketing in rental buildings.

“Where you get lots of move-ins and move-outs, you worry about damage at the building,” said David Picket, president of the Gotham Organization, which operates more than 1.7 million square feet of residential and retail real estate in New York and other parts of the Northeast.

“Even in a good market, it’s a fine line,” he said. “When you boost rents up, which forces certain people to leave, you create certain costs for yourself that you don’t have if people stay in place.”

In a bad market, however, those costs don’t come with the added benefit of higher rental income.

“Repair and maintenance [have] increased, maybe even doubled” during the downturn, said Ofer Yardeni, managing partner at Stonehenge Partners, which maintains more than $2 billion worth of real estate in New York City.

Because many tenants choose to deal with the downturn by finding roommates, a building that in better times had 500 tenants could now have 700 or 800, Yardeni said.

Some of these tenants also put up new walls in their units.

“Technically speaking, they’re not supposed to do that,” Picket said. “[But] I can’t control that, it happens … Is there more wear and tear because you’ve got people living in a three-bedroom as opposed to [a] two? Yes.”

Besides taking on additional roommates, as more New Yorkers stay home during the day because they are jobless (the city’s unemployment rate hit 9 percent in May, according to State Labor Department statistics), they are inevitably using more utilities.

Yardeni noted that with more free time on their hands, unemployed tenants use more gas in their apartments to cook meals that they might once have ordered in and hot water for showers they would have taken at the gym.

Roberta Bernstein, president of the Small Property Owners of New York, a group that represents the city’s residential rental property owners, agreed.

“The more people there are, the more hot water you use, the more fuel,” she said.

While data isn’t tracked for city rental buildings in general, operating costs for rent-stabilized buildings increased 4 percent through April, according to the New York City Rent Guidelines Board. The data may not yet be reflective of the recession, though, said Andrew McLaughlin, executive director of the Rent Guidelines Board. The 2008 numbers, by contrast, showed a rise of 7.8 percent, including a 37.4 percent increase in fuel oil costs.

While higher vacancy rates in rental buildings — another byproduct of rising unemployment — do ultimately translate into lower utility costs, there are still maintenance expenses associated with every apartment that turns over.

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“Every time somebody moves out, you have to repaint that apartment,” Bernstein said.

Painting, decorating and cleaning expenses have also gone up in Glenwood Management’s buildings, where turnover has increased, said Gary Jacob, executive vice president.

“We also have more in the way of broker commissions than we’ve had before” because of that higher turnover, Jacob said.

But overall expenses at Glenwood have not gone up significantly, he said, because other costs, including fuel costs, have actually stayed low this year, unlike last year. The Rent Guidelines Board found a 10.1 percent decrease in fuel oil costs for 2009.

The president of Halstead Management Company, Paul Gottsegen, agreed that lower prices for some key products have kept overall building operating costs down.

“Costs are 80 percent fixed in multi-family housing,” he said. His company, which manages co-ops and condos, usually builds into the budget a 3.75 percent annual increase in costs, and does not expect to budget for any greater increase because of the recession, Gottsegen said.

Picket said he hasn’t seen his costs change significantly, but he attributes that to the high rents in the buildings Gotham manages.

“You really can’t pay $3,000 for a one-bedroom and be unemployed,” he said.

A June rental survey by credit agency TransUnion found that of the more than 870 property managers surveyed across the country, more than half were having trouble finding qualified tenants, and 81 percent said they were worried about finding qualified tenants for the rest of the year.

Yardeni is one landlord who said his company has been “relaxing” its approach to tenants as a result of these worries.

Despite the potential for apartment damage and increased expense, it’s in property owners’ best interest to adapt to the market, Picket said.

“It’s not going to stop you from changing policy to fit whatever economic climate you [happen] to be in.”

Yardeni agrees.

“We are a profit organization,” Yardeni said. “If we could have kept the units for one working person, we would.”