It must have been a bad dream, yet it was only 12 months ago that owners of apartment buildings and condos were pulling their hair out trying to figure out how to induce shoppers to rent or purchase. Landlords offered concessions of up to three months of free rent to entice tenants to sign a lease. Brokerage fees were paid by some landlords, and that wasn’t all: American Express gift cards; breakfast, lunch and dinner with cocktails; health club memberships, and even transportation to subway stops and office buildings. It was also common to offer incentives to retain existing tenants, including rent reductions of 10 to 30 percent.
Well, that was then. “The market has changed since last spring, and incentives are down,” said Ofer Yardeni, managing member and cofounder of Stonehenge Partners, a New York firm that owns and manages more than 2,400 rental apartments. “In certain of our properties, such as 10 Downing in the West Village, we are no longer offering any incentives to rent an apartment, while at other locations we may offer concessions for one month of free rent, as well as payment of brokerage fees.”
The founder and CEO of Stellar Management, Larry Gluck, concurred with Yardeni, noting, “In properties in Tribeca, we don’t have to pay any incentives for a tenant, while in our brand-new buildings at Columbus Square, we are offering two months of free rent during the construction stage.”
Investors continue to have a desire to own rental apartments, as indicated by the four market-rate residential properties purchased earlier in the year by Equity Residential from Macklowe Properties.
“Sam Zell’s company made a great purchase [with] those buildings,” said Yardeni. “They paid about $500 per square foot. Two years ago, the price would have been $1,000 per square foot, and I guarantee you that in less than one year from now they will be worth close to $800 per square foot.”
David Kramer, principal at the Hudson Companies, agreed. “If you can find a quality residential rental building, you will see at least twenty investors seeking to purchase the property. Today, rental buildings are in demand, and financing is available from local savings and commercial banks.”
Joining savings and commercial banks in financing this asset class are insurance companies, Fannie Mae and Freddie Mac, and HUD. There are commercial mortgage-backed securities available as well. The chairman, president and CEO of New York Community Bancorp, Joseph Ficalora, said, “We hope to provide as much as $5 billion in mortgage financing in 2010, with the majority of the mortgages for rent-regulated multifamily apartment buildings in the five boroughs.” The president and CEO of New Jersey-based Investors Savings Bank, Kevin Cummings, entered this market in 2009, and noted that he hopes to lend at least $1 billion for this asset class.
A number of owners of multifamily rental buildings are also still preparing to convert buildings into condos. “This year,” Yardeni noted, “we are in the process of converting our first building on the Upper East Side off Lexington Avenue into condominiums. We plan to convert many of our buildings over the next few years. It is the American dream to own your home, and purchasing an apartment in Manhattan is a great long-term investment.”
Gluck, of Stellar Management, is among the ranks of owners planning to convert properties into condos. “We are planning to convert our building Embassy Towers on Second Avenue and 47th Street, at prices which we expect to sell for $800 per square foot. It is a great way to own an apartment in a great location for less than a half-million dollars.” The Hudson Companies is also upbeat about condominiums, with Third and Bond in Brooklyn, the Knick in Bushwick, as well as Riverwalk Court on Roosevelt Island. “The market has really improved; our sales offices are very active,” said Kramer.
Perhaps the biggest obstacle facing the sellers of new condominiums is the difficulty potential buyers are having getting mortgages. Vincent Riso, principal of the Briarwood Organization, which is developing condos in the Bronx and the Arverne section of Queens, said: “We have contracts to sell the apartments, yet it is very difficult to get local banks to provide financing.” To alleviate this challenge, many developers are seeking qualification for Fannie, Freddie and FHA financing so a purchaser can make a down payment as low as 3.5 percent. Yet even with all of these programs, the biggest challenge is end-loan financing.
As we look forward to the summer, times have changed for the residential market.