12/02/08

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Trouble making rent

Marc Kaplan of Stonehenge Management in the penthouse of one of his listings at 20 Park Avenue.

Fear has prevailed among landlords of high-end Manhattan rental buildings in recent months. An increasing number of their plush units remain vacant as, perhaps not coincidentally, an increasing number of deep-pocketed Wall Street employees find themselves out of work.

Building owners try to downplay the effect widespread layoffs in the financial industry will have on the real estate market. But they are holding their collective breath, hoping that the rental market's recent slip doesn't leave them holding onto new, luxury developments with few tenants willing to pay the premium rents they banked on.

"We can see they are very, very concerned about vacancies," said Laurence Rosenberg, president of RDNY.com, a Web site that provides information about no-broker-fee apartments in the New York City region. "The renter has a little bit of the upper hand."

Many landlords point out that Wall Street is just one of many industries fueling New York City's economy. Still, the depth of the Wall Street-based cuts cannot be ignored: The city's Independent Budget Office estimates that by the end of 2009, the financial sector will have slashed 20,200 jobs. Also, as economic woes widen beyond those of the investment banks, New Yorkers in all industries are cutting expenses.

The specter of rampant job loss has led even wealthy residents to reduce their spending. Marc Kaplan, vice president of leasing at Stonehenge Management, which owns 18 rental properties throughout Manhattan, noted that an increasing number of tenants have asked whether they could lower their rental rates, or perhaps move into a smaller, cheaper unit.

"I've spoken to five to 10 Bear Stearns employees," he said. "I can't predict their future. It's almost as if I've become a therapist. We realize there's a lot of unrest and uncertainty."

Kaplan, whose company rents one-bedroom units that range from $2,000 to $4,500, said he has encouraged renters to meet with him to talk about their concerns. The majority of his tenants are staying put, but "the concern is definitely there," he said.

Matthew Buckle, a trader on Wall Street who's currently between jobs, said he had many properties to choose from in his budget range — a maximum $9,000 a month for a two-bedroom — as he hunted for an apartment a couple of months ago. His ideal apartment had to fulfill several criteria. A large, newly renovated, high-end kitchen was at the top of the list.

"There's obviously loads of apartments advertised to rent," he said, adding that he was frustrated by a lack of pictures on numerous sites he trolled through.

Buckle eventually found a $5,000-a-month one-bedroom unit in a refurbished Soho brownstone that met his needs.

Buckle said some Wall Street colleagues have held off on buying property until they have a better sense of the direction of the city's housing market. But he didn't know whether people had changed their hopes for rental units as a result of the current economy.

"It's not something you normally talk about with your colleagues," he said.

The city's rental market has long been tied to economic cycles. In Manhattan, rents jumped by almost 16 percent from 2005 to 2007 during the height of the real estate boom and a stronger economy. Now those record-high rates are dipping, according to data compiled by Citi Habitats.

In the first quarter of 2008, for example, rates for studios declined by 2.1 percent compared with the first quarter of last year. Rents for two-bedroom apartments dropped 4.9 percent, and prices for three-bedrooms decreased by 7.6 percent.

One-bedroom apartments were the lone bright spot: Rates there increased 3.7 percent. Vacancy rates also inched upward during the first quarter, increasing from 1.12 percent in 2007 to 1.30 percent in 2008, according to Citi Habitats.

Gary Malin, Citi Habitats' president, said his company is "getting calls from all the banks" to find fully furnished apartments for relocating employees. "I haven't seen a slowdown in that set," he said.

In general, Malin said, market players are taking "a wait-and-see approach" with the effect Wall Street's slump will have on their properties.

"There are all these question marks," he said. "People really say it's not necessarily a crisis."

Daniel Baum, CEO of the Real Estate Group New York, said in some seasons, he doesn't have much inventory to show clients due to the tightness of the market. But this year, Baum said, prospective renters will have more options.

However, the city's increasing vacancy rates are not spread evenly among neighborhoods and income brackets.

"So far, it seems to be disproportionately at the luxury ends on Manhattan," RDNY.com's Rosenberg said, referring to apartments that are priced above $2,700 a month for studios and above $3,500 a month for one-bedrooms. "We have not seen that at all on the bottom."

Upscale apartment owners are shelling out incentives — such as one month's free rent — to fill empty apartments. New developments in Battery Park City are among the hardest hit, Rosenberg said.

In its quarterly report released on April 14, Citi Habitats reported that Battery Park City properties saw their vacancy rates rise from 1.06 percent in January to 1.25 percent in March.

City residents have also been looking for smaller apartments in recent months, when possible, Baum said. "Studios have fared the best, one-bedrooms after that," he said. "People will continue opting for smaller units."

While wary of potential economic troubles to come, landlords have managed to keep rental rates relatively stable in the past few months. According to the Real Estate Group New York, March rental rates were on par with February's. This relieved some building owners, whose rates, especially for properties in the Financial District, plummeted late last year.

However, rental rates usually increase in March after the traditionally sleepy winter season.

Baum said he expects prices to rise in late spring and summer, which tend to be the busiest for rental properties. But "our data indicates that this spring could be less lucrative for landlords than the warmer months of the past few years' unprecedented rental boom," his March report said.

"Nobody wants to be a pessimist, but at the same time, you have to look at the practical reality," Baum said. "Many owners will not be happy with their own vacancies."