NYC’s hybrid revival
Condo-rental hybrids come back in vogue after dying down post-recession
In the annals of New York City real estate, the residential development at 400 Park Avenue South is something of an anomaly.
The 40-story building is part rental, part condo, with two developers sharing a general contractor and little else. At the base, Sam Zell’s Equity Residential is installing 269 rentals that will occupy floors two through 22. At the top, Toll Brothers City Living, run by David Von Spreckelsen, is building 81 condos on floors 22 through 40.
“It’s almost as if we’re developing two separate buildings within the same shell,” said Todd Dumaresq, marketing manager for Toll Brothers City Living, which is reportedly spending $155 million for its part of the building, compared with Equity’s $251.9 million.
While hybrid projects have been around for more than a decade, and became especially popular in the wake of the 2008 financial crisis when the sales market was weak, they are now back in vogue — but for different reasons. Today, the sales market is strong, yet rising land prices have diminished the viability of rental projects in Manhattan. At the same time, developers and lenders are looking for ways to mitigate risk for fear of a market bubble, particularly as lenders shy away from underwriting large condo projects, which they did frequently before the recession.
Two-in-one projects like 400 Park Avenue South, where two developers are joining forces, are also new.
Recently launched hybrid projects as well as those in the pipeline include Stahl Organization’s 388 Bridge in Downtown Brooklyn, with 234 rentals and 144 condos, and 250 East 57th Street, where World Wide Group is planning 93 condos and Rose Associates is developing 173 rentals. Rose is also developing 70 Pine Street, which will have 612 rental units and 165 extended-stay suites.
Sources said developers increasingly are considering the hybrid model for future projects, as well, where rental units can generate immediate cash flow, and condos — typically on higher floors — can be sold at a premium.
“I believe we will see more down the road as larger developments are built, primarily in Brooklyn,” said Stephen Kliegerman, president of Halstead Property Development Marketing. “When you have that many units, it makes sense to mix it up so you don’t cannibalize yourself and introduce so many units to the marketplace that you actually diminish the value of your units.”
Rentals not viable
The key driver of this new wave of hybrid buildings, according to developers and marketers, is the rising cost of land.
Citywide, average prices for development sites jumped 17 percent, to $224 per buildable square foot, during the first half of the year, according to Massey Knakal Realty Services. Manhattan saw a 14.7 percent jump, to $511, during that time, while Brooklyn saw a 23.2 percent increase, to $166.
Much has been made in recent months of the fact that rental buildings, particular in Manhattan, are no longer a viable backup option for developers planning condos.
“The price of land is such that you can’t afford to build rentals,” said Nancy Packes, president of her eponymous residential marketing firm.
Packes, however, added that banks also don’t want to underwrite large condo projects because of the risk.
“So you can’t do very big buildings, you also can’t build rentals as a standalone,” she said, describing the conundrum that some developers face.
That’s where hybrids come in.
At 46 Lispenard Street, a former textile warehouse in Tribeca that was converted to condos in 2013, the developer sold six of the building’s 11 units and held onto the rest as rentals.
“The strategy is cash flow,” said Douglas Wagner, director of brokerage services at Bond New York Properties, which is marketing the property’s rentals. The rentals include a 6,000-square-foot penthouse asking $34,500 monthly, a 4,800-square-foot triplex asking $28,500, and a 3,200-square-foot triplex, asking $19,500.
Wagner said particularly in boutique buildings, a developer may hold several units to see if the market gets even hotter.
“If a developer has their mind set on a particular price, collecting revenue in the interim is definitely a solution.”
In this case, he said, the developer — who Wagner identified as the Jangana family — will be able to recoup the cost of construction by selling some units and renting others.
Different this time
To be sure, hybrid residential buildings are not new to New York.
More than a decade ago, major developers started to build the first rental-condo hybrids, such as the Related Companies’ Caledonia, on West 17th Street, which hit the market in 2006, and One Carnegie Hill, on East 96th Street, where construction started that same year.
More recently, Extell Development’s Lucida, at 151 East 85th Street, hit the market in 2009, and the Aldyn, at 60 Riverside Boulevard, launched in 2011. At that time, developers were adding rentals to their condo projects because sales were slow in the wake of the recession.
In the last several years, the popularity of hybrids faded somewhat as the sales market took off, only to re-emerge recently.
In contrast to the waxing and waning popularity of rental-condo hybrids, the hotel-condo model has been strong. The most recent batch of those buildings includes Extell’s One57, which has a Park Hyatt Hotel at its base.
In addition, while condo-office hybrids are rare, they also exist. For example, an investment group led by Alchemy Properties is developing 34 condos on the top 30 floors at the Woolworth Building. The bottom floors will remain offices.
The amenity balance
In rental-condo buildings, of course, the big question is often what access tenants have to the building’s amenities.
For example, 388 Bridge has one entrance and one elevator bank. Amenities are shared, though the building’s 46th-floor entertainment lounge is exclusive to condo owners.
Although tensions over separate amenities has yet to reach the level of acrimony of so-called “poor doors” (or separate entrances for affordable-housing residents), Bond’s Wagner said that differing levels of amenities can “create an imbalance.”
“But I think there’s a market for it as long as the developer is sensitive to providing amenities for the renters and owners, even if they’re separate,” he said.
At 400 Park Avenue South, there will be two entrances — one on 28th Street for rental tenants, and one on Park Avenue for condo owners. The condo portion of the building will have studios through four-bedrooms and prices listed from $1.3 million to over $18 million.
According to Toll’s Dumaresq, residents will mostly share amenities, but an additional indoor/outdoor residents’ lounge on the 27th floor called the Sky Lounge will be reserved for condo owners.
The logistical challenge of building separate projects inside one building aside, Dumaresq said the project made sense for Toll and Equity, who came together after separately eying the site. (A former Toll executive who now works at Equity connected the two.)
Dumaresq said the site was too large for Toll. “Our sweet spot is around 100 units,” he said.
But it was appealing because the previous owner, A&R Companies, had already obtained approval for the exterior design by French starchitect Christian de Portzamparc.
“With the market where it is, land prices are getting very expensive, and a joint-venture situation like this can sometimes help to create an opportunity where there wouldn’t be one otherwise,” Dumaresq said.
(A correction was made to this story on Oct. 17)