With the vacancy rate for rental apartments at less than 1% in Manhattan and sales of condominiums slowing, a number of developers have turned their focus to construction of residential rental apartments.

“Developers today are increasingly looking to build rental units for two main supply side reasons and one demand side reason,” the chairman of Massey Knakal Realty Services, Robert Knakal, said via e-mail.”On the supply side, the number of condominium units is increasing rapidly while … the velocity of sales in this segment is slowing,” meaning there is no reason to add to the inventory unless a project has significant, unique characteristics, he said.”That being said, the inventory of available units is minimal and rents … now approach … $80 per square foot for well-located new construction. Trends in demand are exacerbating these supply side issues as the number of people looking to move into New York continues to increase.”

A 34-story, 370-unit 80/20 residential tower is to be constructed at 316 Eleventh Ave. in Chelsea. The developer is Douglaston Development LLC and Jeffrey Levine. Earlier this month, the New York State Housing Finance Agency approved the issuance of $191.5 million in bonds for the tower.

Twenty percent of the units will be available to families earning no more than 50% of the New York City area median income (approximately $70,000), and 15% of the units will be reserved for families earning no more than 40% of the area median income.

“Developers are really investment bankers, since we take 24 to 36 months to begin a project,” the chairman of Douglaston Development, Jeffrey Levine, said.”We are making a bet that the world is going to be in a better place when we conclude a development. Today, developers are more motivated to acquire a site, and get into the ground sooner.”

The parking garage across from the famous Katz’s Delicatessen at 205 E. Houston St. will become a 23-story residential tower with 242 units, of which 20%, or 49, will be reserved for affordable housing. In addition, households whose gross income does not exceed 150% of the area median income will occupy 5% of the units. Edison Properties is the owner of the former parking lot. It entered into a 99-year land lease for the site at 188 Ludlow St., at the corner of Ludlow and East Houston streets.

More than 50% of the rental units have been leased at Avalon Bowery Place, the second AvalonBay Communities building between Houston and East 1st streets. A total of 25% of the units in this building is reserved for tenants whose income is less than 50% of the area median income. Construction is under way for a third AvalonBay Communities building in the area, which is expected to be ready for occupancy in the second half of 2007.

Across the river in Long Island City, Avalon Riverview North, a rental tower, will be ready for occupancy in 2007. The company is also building a 39-story rental tower with 588 rental units in New Rochelle.

The Housing Finance Agency next month is expected to approve $204 million in bond financing for the Witkoff Organization’s 34-story, 309-unit 80/20 rental tower on the southwest corner of 44th Street and Eighth Avenue. The mixed-use building will also have retail and a garage with 458 parking spaces.

“There are several compelling reasons why we elected to build a rental versus a condominium on the site,” the CEO of the Witkoff Organization, Steven Witkoff, said. “We purchased the site years ago at a number that rental makes logical sense. There are substantial after-tax benefits” of owning rental apartment buildings.

“I like owning rental much more than I like selling condominiums,” Mr. Witkoff said. “Selling condominiums is not just one trade: It can be hundreds, and each sale is its own transaction. There will not be a lot of rental built in this neighborhood on a going-forward basis, because the land cost is too expensive, and therefore I will have very little competition.” Furthermore, he said, rents are up substantially, making the after-tax analysis of rentals versus condominiums more compelling and profitable over the long term.

Construction is expected to begin within 12 months on Glenwood Management’s new rental tower at 331–339 W. 37th St. and Silverstein Properties’ second mixed-use 57-story rental tower with 1,157 units at 600 W. 42nd St.

Meanwhile, the rental office will open in February at the Epic, a 400-unit 80/20 rental tower developed by the Durst Organization and Sidney Fetner Associates at 125–135 W. 31st St. Occupants will arrive starting in April. “We reviewed the condominium option as we finalized plans for the building in February 2005 and determined that the planned rental scenario would both maximize the true value of the site and provide the best fit to our long term hold strategy,” the co-president of the Durst Organization, Douglas Durst, said via e-mail.”The availability of the New York State Housing Finance Agency Bonds, and the corresponding 421-a tax benefits made this approach economically viable, and in turn, the project contributes to the City’s tremendous need for affordable housing.”

Owning a condominium “is a pain, while owning a rental building is easy,” the principal at the LeFrak Organization, Jaime LeFrak, said. In a rental building, he said, unhappy renters move out, while in a condominium, the buyers “sue the developer for not completing the construction in a manner that the purchaser expects. Condominium construction requires perfection, while a rental building requires functionality. Construction projects are always painful; at least with a rental you keep the fruits of your labor. Don’t give a perfectly healthy baby up for adoption, unless you can’t afford to raise it.”

“With land and construction costs at record levels, a number of developers are taking the strategy to build condominiums on the upper floors for sale and have the profit in the condominium sales applied to lower the basis in the land for the 80/20 rental portion of the project,” the chairman of the national real estate practice at Greenberg Traurig, Robert Ivanhoe, said. These projects include Clinton Green, a joint venture of the Dermot Organization and Archstone Smith. The multifamily mixed-use apartment complex will have rental apartments, condominiums, a parking garage, and live performance theaters on the west side of Tenth Avenue at West 51st through West 53rd streets. There will be 687 rental units, of which 20% will be affordable housing.

In Chelsea, the Related Companies and Taconic Investment Partners are constructing a mixed-use building in a continuous structure on the block bounded by Ninth and Tenth avenues and 16th and 17th streets. A total of 288 rental units will be built, 20% of which will be reserved for affordable housing at 50% of the area median income. The top portion of the tower will have residential condominiums.

On the Upper West Side, a new mixed-use residential rental tower will be available for occupancy in 2008. The site, at 808 Columbus Ave., is a development of Stellar Management and will include 220,000 square feet of retail. The site covers 97th to 100th streets on three contiguous blocks.

In Lower Manhattan, construction is in various stages of progress for rental apartments financed by Liberty Bonds and tax-exempt bonds financed by the New York City Housing Development Corporation and the state Housing Finance Agency.

Earlier this month, the New York City Housing Development Corporation approved $90 million in Liberty Bonds to finance construction of the Rockrose Organization’s mixed-use building at 201 Pearl St., a 29-story, mixed-use building with 189 rental apartments.

Another project is an Edward J. Minskoff rental apartment building at 89 Murray St. This building is adjacent to the 101 Warren St. condominium tower and mixed-use site that will house Lower Manhattan’s first Whole Foods outlet. The rental building will have 288 units, of which 163 will be reserved for an affordable component.

I concur with Mr. Knakal when he says: “We are seeing the quintessentially cyclical nature of the residential market. As rents increased in 2002 and 2003, everyone wanted to purchase a unit. As consumer condominium prices rose, more consumers wanted to rent and as more people want to rent, rents increased again and are continuing to do so presently. When residential rents hit $80 per square foot, purchasing will seem relatively attractive again and sale prices will once again rise.”

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