For at least the past six years, investors including wealthy individuals, institutional and foreign investors, real estate investment funds, and real estate investment trusts have been actively pursuing ownership of residential rental apartments in New York City. Billions of dollars of rental apartments have been sold at financing terms never before witnessed.

Tens of thousands of units have changed hands in part due to the widespread availability of attractive, low-cost financing. Then, the debt market turmoil placed a sudden damper on the sale of rental buildings, widely considered to be low-risk investments. The debt crisis postponed the closing of Tishman Speyer Properties and Lehman Brothers Holdings’s purchase of one of the largest owners of rental apartments in New York, Archstone Smith.

The credit turmoil may have had an effect on the July sale of the rental building at 530 Park Ave. The 177,307-square-foot building containing 139 luxury rental units and six ground floor professional offices was sold for $211 million, or $1,190 a square foot, to a joint venture of BlackRock and Northbrook Partners.

Today, investors continue to seek rental apartment buildings, but the rules of the game have changed. Many securitized lenders and investment bankers are sitting on the sidelines. Balance sheet lenders and others are tightening their credit standards on the amount of financing they provide to a purchaser or an owner who is seeking to refinance.

Investors, lenders, and real estate investment sales executives have varying opinions on the current state of residential rental marketplace in New York City.

INVESTOR PERSPECTIVE

The president of the City Investment Fund, Thomas Lydon Jr., said he expects “the pricing for the next group of residential properties to adjust downward by 5% to 10% to reflect the more conservative lending standards in the marketplace. The desire to own these properties are still strong and the fundamentals excellent as to vacancy risk and other factors. However, lenders will not be committing to loans, which have debt service coverage ratios substantially under a one-to-one. This means more equity is required for the same purchase made six months ago, and the cost of equity is higher than the cost of debt.”

He added: “Just as important to the buyer and the seller is that the ability for other than the most financially able purchaser to put a hard deposit down immediately. This is a deal term which will be negotiated more over the next few months. Most buyers will not have ten lenders chasing them for the opportunity to close their loan. This means a lot more uncertainty for a buyer, which should logically convert to a formal due diligence period before any deposits go ‘hard.’ Sellers have gotten very spoiled because of the liberal lending community.”

“It is like a tale of two cities,” the principal of the Kligerman Companies, Robert Kliegerman, said. “It’s not a good time to buy or a good time to sell; nevertheless, things are coming back to equilibrium. If we don’t have a full financial contraction, I believe we will digest this credit crunch.”

The director of real estate at Silvercup Studios, Mark Gold, said the city’s residential rental market “is considered as a very safe long-term investment. Foreign investors just like the rest of investors in New York, see the residential rental market as a unique market, which still has plenty of potential for growth.”

LENDER PERSPECTIVE

A managing director at Citigroup Global Markets, Paul Vanderslice, said financing for rental apartments “never slowed down with the recent credit slump. Leverage levels and pricing though (from a borrower’s perspective) are worse than several months ago.”

He added: “Financing is coming back strong in fixed-rate commercial mortgage-backed securities lending side, albeit on more conservative metrics than six months ago. This is primarily due to the return of investors both investment grade and below investment grade. The more conservative metrics are demanded by these investors as well as the rating agencies when they tranche CMBS deals. On the investor side, this slowdown will lead to a scarcity value that will tighten CMBS spreads and will eventually lead to better borrowing rates. The more conservative leverage though will be required for the foreseeable future.”

The president and chief executive officer of Metropolitan National Bank, Mark Defazio, said: “For as long as I can remember and through various economic cycles, the feasibility of financing stabilized residential properties has been strong — it is a product type that is considered very secure to lenders and stable to investors.”

Lowell Dansker, the chairman of the board of Intervest National Bank, a very active lender of residential rental properties, said New York multi-family properties “are unlike any others in the world for a variety of reasons. The city is the financing capital of the free world and as such has a special allure.

In addition, a substantial amount of multi-family units are subject to rent regulations, which create a number of effects not seen in other markets. These regulated rents are for the most part artificially below market rents. This results in an upside growth potential to the rents over time in nearly any kind of market condition. This ‘guaranteed’ income over time weighs very heavily in the mind of the long-term investor.

“The negative aspect of these regulations is that current cash flows are also impacted. Area lenders understand this and compensate for it in a variety of ways such as a greater loan to value ratios or by using a lower debt service coverage ratio based upon the inherent value of the asset,” he said.

He added: “The recent shake out in the capital markets has resulted in a number of lenders exiting this market and others adjusting their underwriting criteria which may result in marginally higher rates and lower loan amounts. Despite these conditions, financing — on a reasonable basis — is still widely available.”

The managing director at Holliday Fenoglio Fowler L.P., Evan Pariser, pointed to four changes in loan underwriting that have taken hold since the inception of this summer’s credit crunch, which have led to lower loan proceeds in financing income-producing properties. “One, higher spread on the pricing on multifamily loans have increased approximately 50 basis points,” he said. “Two, higher debt service coverage for financing. Three, amortization — lenders now size loans against an amortization constant and interest-only loans sizing is gone and a thing of the past. And four, loan to values — lenders are valuing properties with higher capitalization rates and are resisting an 80% loan-to-value ratio, which were universally accepted prior to the credit crunch.”

“Rental apartment properties appear to be the asset class least affected by the recent credit crunch,” the managing director at RBS Greenwich Capital, Chuck Rosenzweig, said. “Fannie Mae and Freddie Mac have always been very efficient providers of debt capital for these properties so they are much less dependent on the Wall Street capital that was highly impacted by the disruption in the CMBS and similar capital markets.”

INVESTMENT SALES PERSPECTIVE

“We are in the fourth quarter of 2007 and the level of pricing that our company has witnessed in the city’s multifamily sector is still astonishing,” the director and principal at Eastern Consolidated, Alan Miller, said. “While it is well known that we are in the midst of a climate change regarding financing of office buildings and land development projects, I have not seen that much of a slowdown as far a rental housing purchases are concerned.”

He added: “In the past four weeks we have gone to contract on three rental buildings at gross multiples of 18.5 to rent roll to more than 20 times the gross income generated by the apartment buildings. To me, it demonstrates the incredible desire to own apartments in Manhattan, especially for the long term.”

A managing partner at Massey Knakal Realty Services, Shimon Shkury, said there is “a substantial amount of rental apartments available for sale with great upside potential.”

Although many of the purchasers have been local and national players, he said, “we have seen a much stronger trend of international buyers coming into the New York City market. Since the beginning of October, we have received a multitude of inquiries and expressions of interest by international investors looking to place significant capital in the market, either directly or with local partners.”

Compared with the rest of the world, Manhattan “is still relatively a bargain, which to me is mind-boggling considering that our pulse makes the rest of the world tick,” a senior broker at Besen & Associates, Laurence Ross, said. “Manhattan is forever resilient and one of the most sought after cities to live in, which will in turn will help rentals maintain its value and intrigue to domestic and foreign investors for many years to come.”

A senior broker at Besen Associates, Adelaide Polsinelli, said that when the news of the fallout in the subprime industry hit the market, “all of my clients began buying rent-regulated apartments.

Regulations in residential properties actually contribute to the tight supply of available rental apartments and the high rents of these units. This creates a very attractive environment for investors. Many fortunes have been made by investors who have placed their bets on these properties. In the past month, I have been selling these ‘unsexy’ properties at an unprecedented rate.”

Without my crystal ball on the actual outcome of the market in the near term, I am at a loss, and yet I concur with Mr. Lydon when he says: “I expect a more ‘rational’ process will make its way into residential sale transactions in the near future.”

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