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The Rental Tide Subsides

Apartment rents in New York City have been rising rapidly for several years, but signs are now emerging that the market has hit a speed bump and is finally shifting to a slower gear.

Manhattan rents have been dropping, with the average price $3,368 in November, $76 less than in October and the third consecutive month prices have declined, according to Citi Habitats.

While some of this may be seasonal — the rental market tends to soften during the winter — the pace of rental growth year over year has also slowed. According to Streeteasy.com, median rents are 1.5 percent higher than one year ago, a marked drop from the 10 percent increase that rents posted two years ago and the 15 percent of three years ago. Inventory is also up, with 13,618 Manhattan apartments for rent in November, a 21 percent increase over November 2011, Streeteasy found.

“The market is at an all-time high,” said Gary L. Malin, the president of Citi Habitats. “How much higher can it go in an economy that is still weak in many sectors? To think that the rental market could keep having record-breaking growth is just not realistic.”

In addition to the economy, factors creating a softer rental market include greater numbers of first-time homebuyers and resistance from tenants, who are leaving when their leases expire rather than pay higher rents.

Those rents are pushing first-time buyers to the market, as are historically low mortgage rates. These buyers typically want studios and one-bedrooms, and over the past year, studio rents have shot up nearly 5 percent while one-bedrooms have posted 3.4 percent increases, according to Streeteasy. In comparison, rents for two-, three- and four-bedrooms have declined over the past year.

As more first-time buyers have entered the picture, sales of studios and one-bedrooms have jumped four percentage points, exceeding 52 percent of the market in the third quarter compared with a year ago. Meanwhile, rentals of studios and one-bedrooms dropped six percentage points, to 70 percent of the market, according to data from Miller Samuel.

“We have clearly seen a wave of people trying to become buyers, and this is taking the steam out of rentals,” said Mr. Miller, of Miller Samuel. “There hasn’t been a flood of buyers, however, because lending standards remain tight. All things being equal, if lenders weren’t being so irrationally conservative, you would have a housing boom at the expense of the rental market.”

The number of vacant rental units to come on the market has also surged, indicating so-called market churn, whereby tenants search for more affordable apartments rather than renew their leases. In November, 3,634 vacant rental units came on the market in Manhattan, a 41 percent increase from the same period last year, according to Miller Samuel.

But while the rental market is slowing, prices are unlikely to drop much. “This is not a bubble that is going to burst,” Mr. Malin said. “That would mean that the numbers we have seen were being propped up by something artificial, but that isn’t true.”

Instead, Mr. Miller said, rents are likely to “bump along at this very high level, but not increase or decrease precipitously, at least over the next year.”

Sofia Song, the vice president for research of Streeteasy, feels a “litmus test” coming up. “What will be interesting is to see what happens this spring and early summer, when the market should be at its peak,” she said. “If rents don’t rise then, it could mean they are simply too high.”