A cooling condo market and a dwindling number of available rental properties in New York City are prompting developers and owners of newly built apartments to rent out their units.
“New condos are being rented out because they’re taking the place of rental properties,” said Daniel Baum, chief operating officer at brokerage the Real Estate Group. “They’re in lieu of traditional rental properties.”
In the burgeoning rental market in which demand exceeds supply, condo buyers are finding a good source of income in renting their apartments. And the competition for those apartments has become tight.
For every unit available on the market, Baum has at least three interested and qualified prospective renters. “We have a lot of clients offering more per month to secure the lease. If the rent is $4,000 to start, prospective tenants will offer $4,200 and as high as $4,500,” he said.
Andrew Heiberger, who founded the rental firm Citi Habitats and now heads development company Buttonwood Real Estate, said he is seeing about 20 clients for each available rental property.
“It’s an absolutely desperate situation, especially for studios and one-bedrooms,” Heiberger said. “I predict in the next two years a 20 percent [rent] increase per year.”
Still, rental income in most cases is not yet covering the expenditures required to own a condo.
“We are not at a point now where you could just walk in to buy a condo with 10 percent down and see positive cash flow right off the bat,” Baum said. “Rentals have not caught up with sales where that makes sense.”
Besides the shrinking number of rentals, owners of new condos can command top dollar from renters because the services and finishes are top of the line.
Heiberger purchased an investment property at 260 Park Avenue South, close to 20th Street, for $820,000. He received offers to sell the brand-new 850-square-foot condo in the new luxury doorman building for more than $1 million, he said. He also got a bid from an investment banker to pay $5,000 a month in rent. Since it only cost $3,500 to carry, Heiberger opted to rent out the apartment, netting $1,500 per month. The leaseholder signed a two-year lease with a no kick-out clause.
The scarcity of rentals is an unsurprising consequence of a hot condo market. New York isn’t a magnet for speculative investors, but many developers have converted rentals to condos, then found it’s more profitable to rent them out once again.
If new condo projects get into trouble, they could go temporarily rental if they wind up in the hands of lenders.
Ofer Yardeni, managing partner of Stonehenge Partners, a company that owns and manages multifamily buildings in Manhattan, says high-profile rental properties acquired for conversion to condos will end up in the hands of lenders “as the banks begin to realize that the condo exit strategy will not be able repay the original debt.”
Lenders will then have to write off underperforming loans and sell the properties at a reduced price, Yardeni said. “The new owners will then be able to operate the properties as rentals for the time being until the condo market picks up again and the exit strategy of condos becomes practical again.”
In order to hold on to their condo developments, some developers are selling enough of the building to pay off the financing, then renting out the remaining units.
“A new thing that’s happening right now because of the tight rental market, [is that] sponsors are not in such a rush to unload all of their apartments when some of them make sense as rentals,” Heiberger said.
While some developers are planning mixed-use developments, once condo projects are already under way, developers do not appear to be scrapping their plans midway to build rental buildings. “The cost inherent in building a condo makes it cost prohibitive to turn it into a rental,” said Jeffrey Levine, president of Levine Builders.
One can always take a rental — which lacks the pricey finishes of a sale unit — and dress it up by changing, among other things, the appliances and then deliver it for sale. But, Levine added, “a condo costs more to create, so the costs work against your turning it into a viable rental.” In some cases, however, developers who shelled out too much money for land are tabling condo plans and/or are assessing a rental option, Levine noted.
But because of the way financing arrangements work, the bank requires the sponsor to actually follow through with the condominium offering plan for a building conceived as a condominium, Heiberger said. “So it’s very difficult to abort a condominium plan when you have condominium financing,” he said.
Baum from the Real Estate Group said constructing a rental building in Manhattan would make more sense than a condominium in the current market. “There really isn’t a downside,” he said. “You can always sell the units as condominiums later.”
Yardeni of Stonehenge Partners agrees.
“With residential rents rising over 25 percent in the last six months — reaching over $60 per square foot in many cases — and vacancy rates approaching 0 percent,” Yardeni said, rental properties “are becoming safer and better investments than owning Treasury bills.”