Volume 17, Number 46 | April 8 — 14, 2005

The effects of Liberty Bonds and the end of Lower Manhattan rent subsidies
Climbing rents continue Downtown

By Alison Gregor

Finding an apartment to rent in Lower Manhattan has never been so difficult – or so pricey – a task.

Residential real estate agents who handle rentals say that the Downtown market has gotten stronger in recent months, perhaps mirroring a Manhattan-wide uptick in rentals being experienced earlier in the year than is typical.

“Downtown is extremely hot,” said Jon Cella, a broker with the Greenwich Village office of Citi Habitats. “There are a lot of people looking to rent lofts, but not enough [inventory] to show them, especially in the Soho and Village areas. In the past four months, I’d say, it’s just really picked up.”

Typically, the Manhattan rental market begins a boom in April and continues through the summer with, among other phenomena, an influx of millions of college students. But this year, brokers saw a surge in rentals as early as February.

That’s good news for many Downtown neighborhoods that have traditionally attracted younger residents, but which hit the doldrums after the 2001 terrorist attacks on the World Trade Center. The year after those attacks, the residential occupancy rate for Downtown was about 65 percent, but by 2004, that had rebounded to 95 percent. Nothing has stopped it since.

“The rental market is back, and it’s high, and there’s not a lot available,” said Stribling & Associates broker Kevin Meath, a former Downtown rental specialist who now does sales, but keeps his eye on the rental market.

Occupancy Downtown has continued to creep upward. The vacancy rates for rental apartments in Downtown neighborhoods in the first quarter of the year may be some of the highest in the city, but even so, they’re still hovering between 2 and 3 percent.

Gary Malin, chief operating officer of Citi Habitats, said rates between 2 and 4 percent usually means stagnant rents and does not explain the rising rents Downtown.

While the vacancy rate for the Battery Park City/Financial District area in the first quarter of 2005 may be 2.48 percent, that has dropped substantially from 2004’s vacancy rate of 2.74 percent.

On the other hand, Soho/Tribeca’s vacancy rate for the first quarter of 2005 is 2.18 percent – a huge leap from its 1.31 percent vacancy rate in 2004. Residents of these neighborhoods tend to be older than those who move to the Financial District, Lower East Side and Battery Park City, and perhaps less likely to rent.

Whether the numbers bear it out, brokers across the board, from those who handle students looking to rent cheaper quarters to those who house corporate clients in high-end short-term rentals, seem to agree the rental market is seeing a resurgence Downtown.

“I’m finding that the rental market is definitely getting a little stronger,” said Pamela D’Arc, a senior vice president at Stribling & Associates, who typically does sales, but also handles some rentals.

There could be several reasons for the phenomenon. An aggressive sales market may be prompting people to cash in on their property, but that same market may be preventing them from jumping back in; instead, they may be renting.

“They’re just burnt out,” D’Arc said. “People who have lost a few apartments in bidding wars and feel that there’s just not enough inventory may have decided to bow out and wait and rent.”

The Real Estate Board of New York announced in March that the average sales price of condominiums below 42nd St. was $667,000, surpassing the same price for condos Uptown. That price growth was largely buoyed by prewar condos south of 14th St., where the median price hit a stratospheric $1.275 million.

To take advantage of those ballooning prices, many owners may be opting to take their units off the rental market to sell instead.

“That’s creating less inventory for the rental agents,” Cella said.

Rising interest rates may be prompting more people to rent, while reports like one that appeared in The Wall Street Journal in March, asserting that skyrocketing sales prices have made it a bigger bargain to rent than to buy, may play a role.

Surveys of Manhattan rents by Citi Habitats show studios and one-bedroom apartments in Battery Park City and near Wall St., are some of the most expensive per square foot.
However, rental brokers were doubtful that was true Downtown.

“It’s always better to buy, if you have the liquidity,” Cella said.

Andrew Melnick, a broker with Tabak is Tribeca, L.L.C. which does a lot of rentals, said that there may be parity now between what one would pay in monthly rent versus what one would pay in housing costs when purchasing a similar apartment.

“But the only thing that holds people off from buying is lack of a down payment,” he said. “If you have that, given the fact that since the early ‘90s, nobody’s lost money owning real estate, that’s the attraction to buying.”

Bob Brooks, an associate broker with Manhattan Apartments, Inc., who focuses on Downtown, said as the rental market grows stronger with the spring season, renting will become less attractive to those who have the wherewithal to buy.

“It still is a good deal to rent, but I think after we hit May 1, it won’t be that way anymore,” he said.

Downtown Rent Subsidies

There are a few factors that have influenced the growth in Lower Manhattan’s rental market. One of those will play a role in its viability over the next few months: Two-year rental subsidies offered in 2003 by the Lower Manhattan Development Corporation of as much as $500 a month for renters have run their course. The last of them will expire in August.

Brokers said they are seeing residents changing their situations, if not leaving the area, when their subsidies expire.

“I’ve seen a good number of my listings, where people had relied upon that grant, moving away,” said Melnick, who deals only in Tribeca. That may partly account for the growth in vacancy rates in the Soho/Tribeca area.

D’Arc said she has one client who left the Upper West Side to take advantage of rental subsidies at 225 Rector Pl. in Battery Park City, and now, after the expiration of her subsidies, is in contract to buy – back on the Upper West Side.

“I think she just found that her social life and personal life is on the Upper West Side,” D’Arc said. “She definitely has noted more vacancies in her building” since the subsidies have begun expiring.

Warren King, a broker with the Tribeca office of Brown Harris Stevens, said he has seen 20 to 25 percent of those who were relying on subsidies leave upon expiration. But not everyone is leaving the neighborhood. Some are just shuffling around to find a more realistic situation, Cella said, plus many apartment complexes in Lower Manhattan are offering big incentives, like three months free rent on a two-year lease.

And most of those leaving due to expiration of subsidies will be departing during the height of the rental season, so the spaces should be easy to fill, Brooks said.

“I hate it for Battery Park City,” said Brooks of Manhattan Apartments. “People moved in there and what they were paying is going to go up 30 percent? Some people will be able to handle it, and a lot of people won’t.”

Brooks said with a lot of new residents in B.P.C. taking advantage of the subsidies, there may be a bigger change, “but Battery Park City won’t get hit with a massive move-out like it had right after 9/11. It won’t hurt so bad.”

Liberty Bonds

Another factor that may be affecting the rental market Downtown is the creation of residential units through $1.6 billion in Liberty Bonds offered by the city and state after the terrorist attacks. In New York City, the attractiveness of building rental units has diminished as the cost of land per buildable square foot has escalated.

In less frenzied real estate markets of the past, developers have been comfortable buying a property at about 10 times the net operating income, but those times are gone. Now, they may have to pay more like 20 times that, and many are electing to forego a long-term investment in rentals for immediate income in the form of condos.

But government incentives like Liberty Bonds, among others in the city, continue to encourage creation of rental housing. The bonds can be used only to fund rentals.

To date, five projects have been completed, bringing 2,104 rental units to market, including one huge development that just opened with 650 units at 2 Gold St. built by Rockrose Development Corp.

Another eight projects have been financed, which will provide an additional 2,493 apartments. Thus, Liberty Bonds have funded 4,597 rental units, with $203.9 million left to be allocated, or enough to subsidize one more huge project.

Since the 2000 Census, about 12,012 units have been created and occupied or are in the works south of Canal St., including the Liberty Bonds units, according to data from Community Board 1. That means more than one-third of the units being created south of Canal are rentals financed by Liberty Bonds.

Yet, perhaps because the units are rented at market rate, many brokers are not aware of this. All of the projects, except for one recently announced at 15 William St., to be built by the Manocherian Organization, will rent their units at market rate.

The William St. development in the Financial District will set aside 15 percent of its 386 units, or 58 units, as affordable, meaning a studio will go for $1,429 and a two-bedroom for $1,837. Currently, according to Citi Habitats data, a studio in Wall Street/ Battery Park City goes for $1,965, which is the highest renting studio in Manhattan on average, perhaps due to a shortage of studios in the neighborhood.

A two-bedroom in Wall Street/Battery Park City goes for an average of $3,645, which ranks fourth in Manhattan after Midtown East, Soho/Tribeca and Chelsea.

The small number of affordable apartments being created with Liberty Bonds – at 58 – has some community groups piqued that government funds are subsidizing upscale housing – especially when much of Downtown doesn’t currently have adequate services such as schools and hospitals, along with other amenities, to support residents.

“Who do they want to live in Lower Manhattan? It’s pretty clear when you’re subsidizing high-end apartments,” said Bettina Damiani, project director at Good Jobs New York, a subsidy watchdog group.

Still, Damiani said that funding the creation of units for sale at market rate – instead of rentals – would have been even worse.

Rental brokers agreed that a wide divergence in prices between certain Downtown neighborhoods and even housing stock within neighborhoods is largely due to the services or lack thereof.

“The thing that affects the value of rentals Downtown, like in the Financial District … is the services that are not really available there, and the fact that it’s not really a 24-hour neighborhood yet,” King said.

People who choose Downtown are typically prioritizing the location, for its edginess or artiness or some other indefinable quality, over the amenities that are lacking.

“You’re paying more for location than you’re paying for the apartment,” Brooks said.

That may be changing with the creation of so many upscale rentals, with all the amenities typically gracing condominiums, like elevators and doormen, laundry rooms, roof decks, gyms, parking, lofty ceilings, and top-of-the-line finishes and appliances. But it’s still difficult to pinpoint prices in Downtown neighborhoods, except to say that generally prices in Soho/Tribeca are about 20 percent higher than those for comparable apartments on the Lower East Side/Lower Manhattan, King said.

And that the past year has been a good one for rental agents Downtown.

“We’ve seen almost a 5 percent increase overall since last year on rental prices below Canal St.,” King said.

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