A coming wave of developments originally envisioned as condominiums will instead be rented, observers say, due to lenders' reluctance to finance condominiums in the midst of a credit crunch.
On the crest of the wave is an 18-unit condominium development in East Harlem, the Bridges NYC North, which is being repositioned as a commercial and residential rental property with Wachovia bank and a government agency as anchor retail tenants, the developer will announce today.
"There's been an enormous shift in the past 12 months," the senior managing director of Beck Street Capital, Kevin Comer, said. While lenders in the past were anxious to finance condominiums, they now want to ensure that renting the units is a possibility if they don't sell. "Lenders only want to lend on cash flow projects. They want to be certain that they have a fallback as a rental that works," he said.
As a result, he said, condominium projects all over the city have begun to go rental, especially those in the areas of the city where the real estate market has been hit hardest, such as Harlem and areas of Brooklyn and the Bronx. "I think that trend is going to continue and move into Manhattan in the coming months," he said.
Other recent examples include 99 Gold St. in DUMBO, 192 Spencer St. in Clinton Hill, and the Continental at 185 S. 4th St.
The president of the real estate consulting and marketing firm aptsandlofts.com, David Maundrell, said 95% of his company's projects at one time were condominiums, but roughly 60% now are rentals. "That all would have been condos three years ago," he said. "It's a good play to do this right now. There's been a slowdown in the sales market, but the rental market is still fairly strong."
The Bridges North, situated at 125th Street and Third Avenue, consists of two- and three-bedroom apartments. Rents will start at $4,000 for the units, which range between 1,200 and 1,700 square feet.
While smaller units in the adjoining building, the Bridges South, have been sold, the north building has failed to land a single buyer, according to the president of the developer, North Manhattan Construction, Michael Waldman.
He said Wachovia Bank will lease space on the first floor starting in August. Another federal agency also is in talks to occupy space in the building, which originally was not intended to have retail space.
The residential units were too big — and thus too expensive — for the East Harlem market to support, especially once the market began to soften, the executive director of development marketing at Halstead, Stephen Kliegerman, said. Halstead helped reposition the units.
"Studios, one-bedrooms would have been fine," Mr. Kliegerman said. "The trend in East Harlem is affordability, and the building just missed the mark a bit."
Mr. Waldman said he feels confidant the emerging East Harlem market will soon heat up.
"We were a little early," he said. "And the market got soft."
In the meantime, changing the units to rentals seems like a good opportunity, he said. "We were getting a lot of low offers," he said. "I didn't want to sell out cheaply and move on."
Still, he may find it's an uphill battle, the executive vice president of Glenwood Management, Gary Jacob, said. Glenwood is the developer of the rental development Hampton Court at 333 E. 102nd St. in East Harlem.
"It's a growing, emerging neighborhood," Mr. Jacob said. "We have very nice luxury units, but they are less" than in neighborhoods further south. "It's going to be hard for them to get high enough rents for it to work."
New York's emerging neighborhoods have begun to feel the effects of the housing downturn more than Manhattan, a business analyst at the real estate Web site Streeteasy.com, Derrick Gross, said.
Like the Bridges North, the development at 192 Spencer St. was in a peripheral area. "It wasn't in prime Clinton Hill," Mr. Gross said. "It was on the edge."
Similarly, in the area of East Harlem where the Bridges is situated, "a lot of families probably aren't comfortable," he said. Still, "if they were selling two years ago, they could have done better."
The difficulty of financing is playing a key role in the preponderance of conversions to rentals. "We are providing a rental fallback on all our jobs right now," Mr. Maundrell said. "It has to make sense from a rental standpoint. If it doesn't, you won't get the loan. Banks are concerned."
Going rental is a better option for developments in some areas than others. In Manhattan, land has often been purchased at such high prices that a rental development may not be an option for many developers, Mr. Kliegerman said. As a result, they'll continue selling the bulk of the units but may "hold back some units to rent," with plans to sell them in the future, he said.
Other developers are aiming to abandon projects altogether, Mr. Comer said. "We have seen an increase in the number of investment opportunities that we see that are fully permitted development sites where the developers are just trying to get out of them," he said. "There is a lot of behind-the-scenes maneuvering that will become visible in coming months."
In the meantime, more and more condo developments likely will falter, especially if they're priced too high.
"This doesn't mean that there aren't going to be successful condo projects," Mr. Comer said, "but they're going to have to be in great locations, with flawless amenity lists."