Despite the cloudy economic forecast and the nearly 80% drop in investment sales of commercial office properties in the first quarter of 2008, industry leaders are bullish on the value of residential rental apartments in New York City and nearby New Jersey.

“Multi-family residential rental apartment buildings in New York City with values under $50 million are not coming down in price,” the chairman of Massey Knakal Realty Services, Robert Knakal, said. “The volume of sales in this niche is down slightly, but mainly due to supply constraints. The demand is still excessive, which is keeping prices buoyed.”

He added that sellers “are holding firm on pricing because of the abundance of debt that continues to be available from both commercial and savings banks and life insurance companies.”

A senior broker at Besen & Associates, Adelaide Polsinelli, said the past year for rental apartment buildings “was an unusual time where everything was for sale at the right price. Surprisingly, many owners were offered crazy prices and thus became sellers. Many of the sales that took place were not due to a ‘need’ to sell, but rather the market was being so generous that it was more profitable to sell than to own. Owners today have many options: Many don’t ‘need’ to sell and can refinance, lease, or simply just hold.”

Ms. Polsinelli added: “Today, the real sellers have separated from the not real sellers. Those who must sell are dropping their prices until they find a buyer who can close. Those who don’t have to sell can return to operating their property. The buyers must also be separated into the ‘must buy’ versus ‘shopping for a steal’ category. Those who need to buy, will buy. Those who are shopping for a bargain basement price will complain that there is nothing to buy.”

As far as the investment sales market is concerned, the president of Citi Habitats, Gary Malin, said, “sellers have price expectations based on their own criteria that may or may not be based on — or in conformity with — the current credit issues facing today’s market. As a result, many sellers are holding firm on their prices and if not obtained, they are opting to hold their property knowing that they can capitalize on the current market rental rates.”

Landlords and buyers “have expressed far more concern on expenses than rental revenues, especially with today’s oil prices,” a partner at Massey Knakal Realty Services, Shimon Shkury, said. “Since the city’s rent regulations naturally restrict rental unit supply, most owners of this product type are protected from rental downturns anyway. However, buyers are expressing hesitance at paying very low capitalization rates given the uncertainty surrounding the next heating season.”

The senior executive vice president and chief lending officer at New York Community Bank, James Carpenter, said: “The bread and butter of our lending is to owners of residential rental buildings, with loans ranging in size from as little as $1 million to $150 million.”

Savings and commercial banks and insurance companies, as well as Fannie Mae and Freddie Mac, are very bullish on lending for purchases and refinancing of residential rental apartments. Under the new guidelines of lending, purchasers are required to have larger equity and must be able to pay the debt service on the mortgage debt.

“Lenders are increasingly cautious, resulting in lower loan-to values and higher debt service coverage ratios,” the senior vice president at Marcus & Millichap Capital Corporation, William Hughes, said. “Portfolio lenders today are generally pricing multi-family loans at 235 to 265 basis points over the 10-year treasury note. Apartment investors have the advantage of using Fannie Mae and Freddie Mac, which have increased originations and pricing loans at 220 to 250 basis points over the 10-year treasury.”

The co-founder and managing partner of Stonehenge Partners, Ofer Yardeni, said: “My favorite asset to purchase continues to be rental apartments. This year, we have purchased properties ranging in size from $2 million to $140 million. When you are purchasing these assets at significantly lower than replacement cost, it is a very worthwhile long-term investment.”

The Apartment Research Market Update by Marcus & Millichap for the first quarter of 2008 says, “With 40% of all households in the region occupying rental housing, apartment properties in Northern New Jersey are expected to perform well in the months ahead, despite the effect of sluggish employment and growth on household formation. The market-wide vacancy rate is currently in the mid 3% range, and rents are rising by approximately 4% annually, exceeding the rate of growth in most other markets.”

According to Reis Inc., a provider of commercial real estate performance information, “New York City’s 146,270 unit market rate investment grade apartment market remained extremely tight in the first quarter of 2008, with the lowest vacancy rate among the top market.

“The pace of rents gained slowed significantly, however, and market watchers reported signs of weakness in some locations and for some types of property,” the report said. It is possible that the market may have begun to be affected by the condominium boom and the slowing economy, and New York City’s rents — the steepest in the country, according to Reis — may have grown beyond tenants’ ability to pay, the report said. Asking rents are up 8.8% in the year to the first quarter, according to Reis. Average household income is up 4.3% in that time, the report said.

A number of condominium apartments under construction will significantly add to the supply of rental apartments. According to Reis, during the first quarter, a total of 1,821 condominium units were completed and the total number under construction is more than 12,000. Industry leaders expect at least 20% to 25% of these condominium units to be placed on the rental market. The challenge for developers is that condominium units are often larger than rental units, making the rents on a condominium unit higher than on a typical market rental. Industry leaders feel that in today’s economy, a tenant will choose the lower rent over the additional size and amenities of condominium rental.

Mr. Malin of Citi Habitats said: “Our rental business has been vibrant for the first four months of 2008. In fact, business is ahead of where we were in the same period of 2007. While we have seen some modest fluctuations in price, it is important to realize that we are coming off of very healthy price gains in 2006 and 2007, and the ‘busy’ rental season has just begun for this year. Overall, average rental prices in Manhattan remained strong with the exception of one-bedroom apartments, which rose 3.7% over the first quarter 2007 levels.”

A number of residential rental properties are in various stages of construction in Manhattan and the boroughs.

In Lower Manhattan, nearly all of the apartments have been leased at Glenwood Management’s recently completed, 396-unit Barclay Tower. The building is at 10 Barclay St. just west of Broadway and across the street from the legendary Woolworth Building. The tower marks Glenwood’s third development in the Financial District.

Only a handful of apartments are available for rental at the recently completed 89 Murray St. The 163 rental units are part of the mixed-use complex that houses the luxury condominiums at 101 Warren St., which houses a Barnes & Noble and a Bed Bath & Beyond. In a few months, downtown residents will be able to shop at the Whole Foods Market in the complex.

Last month, Forest City Ratner closed on $680 million in tax-exempt Liberty Bond financing for its 76-story mixed-use tower in Lower Manhattan, which is bounded by Spruce, William, and Beekman streets. The building would house 904 market-rate apartments, a 21,000-square-foot ambulatory care center for New York Downtown Hospital, 1,300 square feet of ground floor retail space, parking for 175 cars, and a new public school.

Leasing is under way at the Moinian Group’s conversion of 95 Wall St., the former JP Morgan tower, into a luxury residential rental building with 507 units.

AvalonBay Communities continues to be very active in the leasing of rental units throughout the city. Leasing is under way at its third rental building in the Bowery, Avalon Chrystie Place at 229 Chrystie St. The largest units, two-bedroom, two-bath apartments with about 1,113 square feet, are being offered at $6,600 a month, or $72 a square foot.

In Long Island City, the company is offering tenants the opportunity to lease studios apartments starting at $2,128 a month, one-bedrooms starting at $2,425, and two-bedrooms ranging between $3,178 and $5,815 a month.

Construction is progressing on Avalon Morningside Park, and the leasing office is scheduled to open next month. The building is on the corner of Morningside Drive and Cathedral Parkway at 110th Street. In September 2006, the Cathedral Church of St. John the Divine entered into a 99-year lease with AvalonBay Communities to build and manage a 20-story, 296-unit residential rental property that would have 80% market rate units and 20% “affordable” units.

At least four residential rental developments are in various stages of development on Tenth and Eleventh avenues in the high line and meatpacking district. Perhaps the most notable is the development of the joint venture of Taconic Investment Partners and the Related Cos. of the Caledonia at 450 W. 17th St. The building is a mixture of luxury condominium apartments and rental units. Other residential developments in this area include rental developments of Rockrose Development, Douglaston Developers, and Atlantic Development.

Perhaps the largest residential rental development under construction in Manhattan is the second phase of One River Place, on Twelfth Avenue and 42nd Street. When completed by Silverstein Properties in 2009, Silver Towers at River Place will offer more than 1,350 luxury rental apartments, of which 20% are reserved for “affordable” units.

Even though residential rents have fallen in recent months, industry leaders expect developers to continue developing residential rental apartments in Manhattan and the other boroughs.

Mr. Stoler, a contributing editor to The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.