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Rising Rentals Squeeze Sales
An unexpected surge in rentals in February has brokers wondering why sales haven't kept pace, and the principal suspects are a lack of sales inventory, astronomical prices and gradually increasing interest rates.
Several residential brokers said they've noticed an atypical uptick in rentals. Noah Freedman, president of BOND New York, cited a 20-percent increase in rentals over March 2004 numbers. The spring rental season doesn't normally get into gear until April, he said.
"I expect rentals to increase between 10 to 15 percent by the summer," Freedman said.
Some brokers attributed the unanticipated interest in rentals to frustration with a residential market where bidding wars are increasingly vitriolic and creeping long-term interest rates may be making the idea of purchasing less attractive.
"Rentals have gotten pretty hot in the past month," said Andrew Barrocas, a broker at The Real Estate Group, a new company founded by several ex-Citi Habitats brokers. "A lot of people are getting discouraged in the sales market, are getting outbid and are alternatively turning to the rental market."
Kirk Henckels, director of Stribling Private Brokerage, indicated brokers in the luxury sales market have noticed the anomaly.
"The rental market has definitely come on strong," he said. "I attribute that to lack of inventory and the price increases. And certainly interest rates, which determine whether it's cheaper for them to buy or rent."
If a lack of inventory is to account for a move toward rentals, it also may explain another recently identified phenomenon at the high end of the market.
Many of the late 19th- and early- 20th century mansions that line the rarified avenues of the Upper East Side have been scooped up by families for prices ranging from $15 to $20 million after being monopolized for decades by nonprofit organizations, elite clubs and diplomatic missions.
"It's true because we're out of inventory of very large cooperatives, certainly on the East and the West Side," Henckels said. "There's so little to sell. If you want 8,000 or 10,000 square feet, you have a serious problem. So this lack of inventory will buoy a townhouse market, where there is still some existing inventory."
Still, more and more for-sale apartment units will most likely be coming on the market in anticipation of the spring season.
Analysts expect inventory rates, which hit a low in recent months at 3,922 units in December, to trend upward in March, though February saw a decline of 2 percent, said Jonathan Miller, president and chief executive officer of real estate appraisal service Miller Samuel Inc.
Henckels said "bigger is better" in the current market, especially as buyers are looking for deals now in anticipation of interest rates burgeoning – though watching for this has been a bit like "Waiting for Godot," he joked.
One group cashing in on cheap money is foreign buyers. They are creeping back into the market, Henckels said.
"There's been talk that there are a lot of Russians in town, finally," he said. "People are starting to see more foreign buyers, but that is long overdue."
Miller said foreign buyers comprised about one-third of apartment buyers in Manhattan in 2004 and that trend is continuing in 2005.
A strong euro, cheap air travel, and the absorption of weak currencies in European countries united by the euro have made it viable for foreigners to buy in the United States while the dollar is limping along.
"The market that's affected by them is the condominium market," Miller said. "And that's largely been the new product that's come on line.
" Wall Street bonus purchases continued to drive the frenzy on the upper end of the market into March. When bonuses are good, they filter into the real estate market like clockwork in the first and second quarter of the year, Miller said.
"We're seeing it at the very high end, with purchases over $5 million," he said.
Many of those purchases are being made Downtown, where the Real Estate Board of New York recently found that the $667,000 average condo sales price below 42nd Street exceeded the average price Uptown. South of 14th Street, prewar condos surged to a median price of $1.275 million.
Some brokers discounted that data since it didn't include co-ops, but others called it part of a trend toward airy loft spaces, especially among baby boomers.
"I call it the Mini Cooper effect," said Doug Magid, CEO of Century 21 William B. May. "The same people who are bringing back their youth by saying, 'Wow, this Mini Cooper reminds me of the ragtops of the past,' are those looking to be hip and trendy and maybe youthful in Soho, Tribeca, the Village, Chelsea."
"I'm not surprised to see the condo market is burgeoning because of it," he said.
Miller agreed, though he said his price per square foot data doesn't quite show that condominiums Downtown have overtaken those north of 42nd Street.
However, prices throughout the Manhattan residential market are equalizing, he said.
"The Downtown market is growing because of the loft market," Miller said.
"If you look at the three price averages of East Side, West Side and Downtown, there's not a lot of difference, so we've become almost a more homogenous market in terms of prices."