New rentals: the next battlefield for brokers

<i>With new condo sales dormant, new development leasing emerges as key market for 2010</i>

Nancy Packes, president of her own new development marketing firm, at 316 11th Avenue, where she is the leasing consultant. The building is slated to begin renting units this winter.
Once the province of a few niche players, the new development rental sector is becoming a hotly contested battleground as brokerages look to replace once-lucrative condo deals.

In the booming economy of the mid-2000s, many new development marketing firms focused most of their attention on sales, while a few firms had the rental field to themselves.

But now, as marketers migrate over from the stagnant condo market, newly built rentals are emerging as an increasingly important source of revenue. And the sector is only expected to grow more competitive in 2010.

“During the condo boom, they only focused on condos — that’s where the money was,” Citi Habitats President Gary Malin said of new development marketing firms. “Their condo stuff has slowed down, so they’re trying to get in [to the rental market]. They’re looking to find other revenue streams,” he added.

While the pipeline of condos coming to market is slowing, brokers anticipate a healthy number of new rental buildings in 2010, largely because they have proved easier for developers to finance in the current climate.

Some 2,935 rental units have come online in Manhattan so far this year, compared to 1,482 in 2008, according to a market report by Nancy Packes, the president of Brown Harris Stevens Project Marketing and founder of her own new development marketing firm, Nancy Packes, Inc., which does both new development sales and rentals.

Roughly 2,840 units are expected in Manhattan in 2010. In Brooklyn, 1,245 new rental units have hit the market in 2009, while approximately 1,100 are expected in 2010.

“We certainly have more opportunities in the new development rental market than in the new condo market,” said Packes, whose company is the leasing consultant on Douglaston Development’s 295-unit rental project, 316 11th Avenue, which is slated to begin leasing units this winter.

These new development rentals provide a cheaper alternative to buying. But perhaps more important, developers of rentals have more freedom to offer months of free rent and other incentives that make their buildings more attractive in a down market, while condo developers are often not able to lower prices without asking permission from their lenders.

“[Rentals] are flexible in pricing when they need to be,” Packes said. “It’s much more limited when you’re doing a condo — the price target you have to achieve is much narrower.”

Perhaps not surprisingly, players like Packes and Citi Habitats are starting to notice that other firms are now attempting to capture a greater share of the new development rental market.

Citi Habitats is already representing the new Silver Towers development at 42nd Street and 11th Avenue, which has 934 market-rate rental units, and Forest City’s 354-unit 80 DeKalb Avenue in Brooklyn, but future projects will no doubt have more competition.

One of those new competitors is Halstead New Development Marketing. According to Stephen Kliegerman, Halstead’s executive director of development marketing, rentals currently only make up about 10 percent of his division’s business, but he expects that to increase in the future as the pipeline of new development condos dries up.

“It’s difficult to get [construction] financing for new development condos, but you can still get financing for rentals,” he said. “So we’ve been talking to a number of developers about representing them on their new rental developments.”

In addition to handling the initial lease-up, new development marketers are increasingly staying on to assist owners with successive waves of renters.

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Halstead recently finished leasing up the Standish, a 12-story building at 169 Columbia Heights in Brooklyn Heights, and is now handling the second round of rentals there, known as “re-rentals.”

New development firm the Marketing Directors is currently doing re-rentals at three Jersey City projects: 50 Columbus, Grove Point and Liberty Harbor, according to the firm’s president, Jacqueline Urgo.

Re-rentals in particular are new territory for many new development firms, which are accustomed to moving on quickly to other projects, Urgo said.

“We don’t typically do re-rentals,” said Urgo, noting that her firm took them on at the developers’ request. “It’s a new phenomenon.”

She also said her firm is also doing more business for rental developers that normally use in-house teams to lease up their units, such as the Value Companies, which is developing 140 Mayhill in Saddlebrook, NJ.

She attributed both of these trends to the fact that sellers seem more willing to bring in new development marketing specialists — which tend to be more expensive than in-house teams — because they want to ensure that their buildings are fully occupied in the current economy.

“There’s too much at risk not to put that investment into the building,” she said.

Kliegerman said he, too, has been pitching developers who normally use their own sales team.

The influx of new players in the new development rental market is already becoming apparent.

Prudential Douglas Elliman, best known as a sales brokerage, recently announced plans to hire 75 agents for a new rentals department and is now handling leasing at Upper West Side mega-project Columbus Square. Halstead took over the Standish from smaller, Brooklyn-based Awaye Realty, while the new development marketing firm Core is now the exclusive leasing agent at 99 Gold Street in Dumbo, which had previously been handled by the developer and the brokerage

But for ailing new development firms, doing more rental business may be only a Band-Aid solution. First, there may not be as much product as expected. Many industry observers anticipated that a flood of condos would go rental, but that hasn’t yet materialized, since the financing often doesn’t pencil out.

“A lot of people were expecting more buildings to go rental,” said Kliegerman, who noted that Halstead has only one condo-turned-rental project: the Bridges NYC North in East Harlem.

Moreover, companies that specialize in sales may not easily be able to make the transition to rentals, especially in an economy where developers are skittish about taking a chance on a new brokerage.

“It is not all that easy to position yourself to get big projects if you don’t have a lot of expertise,” Packes said.

Clifford Finn, the managing director of new development marketing at Citi Habitats, said he’s confident newer players won’t have much impact on Citi Habitats’ dominance in the new development rental field.

“We have a very strong rental new development specialty that other companies don’t have,” said Finn. “Some of them try, but they don’t really have the expertise to get most of these jobs.”