During the financial crisis, many residential developments planned as condominiums became rental apartments when financing for condos became almost nonexistent. Now, some property developers are making the same decision for a different reason: a rental market that could be described as torrid.
A high-profile example of the phenomenon is One MiMA Tower on the Far West Side, where plans for 151 condos were scrapped last December in favor of renting them as high-end apartments. Now the developers of Mercedes House, an 864-unit building at 550 West 54th Street with 702 rentals, are floating the idea of turning the 162 condominiums planned for the top of the almost-completed ziggurat-shaped building into high-end rentals.
These apartments, on the 22nd to the 32nd floors of Mercedes House, most likely won’t be finished until December, said Asher Abehsera, the managing director of residential properties at Two Trees Management, which is developing the building.
“Basically,” Mr. Abehsera said, “the market is what I would describe as ‘white hot’ from a rental perspective, so at this time, it makes sense to consider them as rentals as opposed to selling them.” He has recently been coordinating the opening of almost 90,000 square feet of amenities at Mercedes House.
In the past year, several other developments have made the same decision, among them 75 Clinton in Brooklyn Heights and Jardin at 142 North Sixth Street in Williamsburg, both of which had made a handful of condo sales before making the switch.
Since lending institutions typically require developers to price out their projects both as condos and as rentals in order to obtain financing, the switch can be a fairly easy one, especially before the project is built, said Stephen G. Kliegerman, the president of Halstead Property Development Marketing.
But if the building has already gone up, the decision can be a riskier one, because rentals tend to be smaller apartments with fewer bedrooms, to appeal to a different market, said Jonathan J. Miller, the president of the Miller Samuel appraisal firm. Condos tend to be larger, both in square footage and in number of bedrooms, to maximize their value, he said.
“On the condo side,” Mr. Miller said, “the larger contiguous space generates a higher price per foot. In other words, a two-bedroom goes for more than a studio on a price-per-square-foot basis, on average, in a condo.”
Condos also typically have higher-end amenities and fixtures. For example, the 162 units originally planned as condos in Mercedes House have Sub-Zero refrigerators, Viking ranges and additional bathroom fixtures like Jacuzzi tubs, while rental units have Blomberg refrigerators and General Electric ovens. Thus it may be a more difficult proposition for a development company to recoup its investment when condos are rented.
Jed Walentas, a principal of Two Trees, the company founded by his father, David, says he believes that the units originally planned as condos will serve well as rentals. “They’re suitable for either one,” he said. “They’re a touch larger than the optimal rental units, though I think we’ll find a segment of the market.”
Other developers, like the Related Companies, which developed One MiMA Tower, have tapped into that market successfully, Jed Walentas said. “I think the market’s probably not as deep there, but I do think there’s still a market.”
The boom in rentals has been created in large part because tight credit in the home-lending market is making it difficult to get a mortgage, Mr. Miller said. There are families looking for larger apartments with no other option but to rent. Also, Mr. Abehsera said, even if they could obtain a mortgage, there are fewer condos out there to choose from as a result of the financial crisis.
“There are not many options in terms of condominiums to purchase,” he said, “so you have a lot of families and people who want to find slightly larger rentals.”
The strategy seems to have worked well at 75 Clinton in Brooklyn Heights. The building was originally marketed as nearly 75 condos and had almost a dozen in contract at about $1,000 a square foot when it was sold to the investment management company Invesco in February. Invesco chose to return the deposits of potential buyers and rent out the apartments instead.
Since early May, nearly 85 percent of the building has leased for more than $60 a square foot, said Andrew Gerringer, the managing director for new business development at Marketing Directors, which is handling the rentals.
The shift from condo to rental might not have worked in, say, Downtown Brooklyn, Mr. Gerringer said, but having larger rental apartments in Brooklyn Heights, something of a rarity, has been a boon. “Brooklyn Heights is such an established neighborhood, and it’s close to the financial district, and Brooklyn Heights has always been a family neighborhood, he added, “so having some bigger homes for rent actually was a benefit.”
The developer of the 44-unit Jardin in Williamsburg, the Read Property Group, also changed from condos to rentals late in the game. About 23 units had been sold when developers decided in January to make the switch. They did so because the market for rental buildings as investments is actually even hotter than the consumer rental market, said David J. Maundrell III, the president of aptsandlofts.com, which handled both the sales and the rentals.
“What we’re seeing in North Williamsburg is that in the multifamily investment marketplace, investors purchasing these buildings are paying higher than the general market will pay for the units,” he said. “So you have investors paying the top price, and then you also have the tax benefits of selling a building outright versus selling condos.”
Turning Jardin into rentals was also a quick exit strategy for the developer, while selling it off as condos would have been a longer, more expensive process, Mr. Maundrell said.
He added that the strategy worked. The building leased up quickly, and in late June, it sold to Steiner Studios of Brooklyn for about $38 million — even more than the $34 million projected by aptsandlofts.com.
Mr. Maundrell conceded that Jardin may have taken a small hit on its leasing prices when compared with other landlords in the area because of its larger units, but there was no difficulty marketing or renting them. Jardin achieved average monthly rates of $3,100 for duplex studios; $3,200 for one-bedrooms; $4,500 for two-bedrooms; and about $7,000 for three-bedrooms, Mr. Maundrell said.
“Less and less people are buying today, and instead they’re renting,” he added. “So there is a marketplace for larger apartments now that we really haven’t seen in some time.”
At Mercedes House, where Two Trees is busy fostering a community among its renters with the opening of 28,000 square feet of contiguous indoor amenity space and 60,000 square feet of outdoor space in the form of two huge decks, there are no plans to sell. The family holds onto its buildings, said David Walentas, the visionary behind the development of Dumbo.
“We build them, manage them, own them,” he said.
The Mercedes House amenity space has a fitness center to serve as many as 3,000 residents — who currently have free use of it for the length of their leases, as a developer’s concession — and as many as 1,500 nonresident members. Besides an indoor lap pool and soaking pool under a glass atrium; the spa and spa services; personal trainers; rooms for yoga, boxing and spinning; and other perks, Mercedes House has on its two sprawling decks an outdoor pool surrounded by sun chairs, a Zen garden, games like table tennis and bocce, and an amphitheater for movie-viewing. The Walentas family even commissioned a large sculpture installation for one of the decks.
“When you have such a large building,” Mr. Abehsera said, “the idea is, you want to create something where you get tenant retention and loyalty. We really wanted to create a sense of lifestyle and community unlike anything else in the city — an environment that ultimately people wouldn’t want to leave.”