Marcus Medina

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The Real Deal

Published 10/01/2009 - By The rental squeeze

The rental squeeze

Landlords may be more apt to allow tenants to pack in, but do they need to?

October 01, 2009 07:00AM

By Vanessa Weiman

With the combination of high building vacancy rates and the down market, Roberto Gonzalez, an agent at Bond New York, expected to see a wave of tenants erecting walls and "cramming" into apartments to save rent money.

But the expected flood of people seeking to pile into shares hasn't really arrived, he said. "Everything in my gut tells me there should be tons of people sharing, but there are actually fewer," said Gonzalez, who has rentals in Tribeca, the East Village and Williamsburg.

Brokers who deal with areas of Manhattan where there are a high percentage of shares -- such as the Financial District, Murray Hill and Union Square -- said that while landlords may be more apt to allow tripling and quadrupling up just to get an apartment full, that there hasn't been a huge surge.

The reasons for "why not" say a lot.

For one, buildings that are desperate to rent out apartments are now simply making their rents cheaper, as well as throwing in cost-saving concessions that help tenants steer clear of overcrowding. Additionally, fewer college grads are moving to New York to start jobs in finance and other industries because the job market here is so bad.

Gonzalez said he believes that's a big part of the reason that the surge hasn't fully aterialized.

Still, while it might not be widespread, the tenant squeeze is clearly more common now than it was before the downturn.

Ofer Yardeni, managing partner at Stonehenge Management, told The Real Deal a few months ago that because many tenants have taken in roommates to deal with the downturn, a building that once had 500 occupants may now have 700 or 800. Some have also put up walls to divide up the space. "Technically speaking they're not supposed to do that, [but] I can't control that …it happens," Yardeni noted at the time.

Last month, he said, "the history of New York is about sharing."

He noted that many of the buildings Stonehenge manages appeared fuller recently since some tenants had lost their jobs and were at home more than usual.

Meanwhile, Alex Karas, a sales and rental agent at Bond New York, said he recently rented a two-bedroom East Village apartment where the landlord was willing to take down and put up walls to accommodate the four people who wanted to move in.

The landlord also dropped the price and offered a free month's rent.

"He wanted to get good tenants in there ASAP," said Karas.

At 200 Water Street in Lower Manhattan, where 40 percent of the leases are shares, roommates are still doubling up, "but it's not turning into a dormitory," said Kathleen Gargan Scott, vice president of marketing and leasing for Rockrose, which manages the building.

She added that the building doesn't allow larger groups to rent apartments.

But Gargan Scott said that 200 Water has seen an uptick in a different trend: people coming from the boroughs to rent in Manhattan.

"People are gravitating back from Brooklyn and Queens," she said. "Fifteen percent of people currently at 200 Water relocated from the boroughs, and some even from Jersey City."

Marcus Medina, Urban Sanctuary's Midtown managing director, said he has also seen that trend. He said people who might previously have looked for cheaper shares in Brooklyn can now afford to rent in Manhattan, in part because some landlords have relented about accepting share applications that they might previously have denied.

As far as squeezing in more people, he said, landlords are more willing to allow it. "I feel confident that if you put in an application for three people for a two-bedroom, they will probably qualify," Medina said.

And Yardeni maintains that New York will continue to experience what he calls "natural growth" in the rental market -- the ongoing influx of students and graduates in the city. That, he said, will continue to feed the market for shares indefinitely.

The Real Deal

Published 09/01/2009 - By Riding out rental trends

Riding out rental trends

A look at the new rules in a market where renters are firmly in control September 01, 2009 12:54PM By Candace Taylor

The developer of 2 Water Street is offering free gym membership to boost leases

The rental market has changed dramatically since Lehman Brothers collapsed a year ago this month. In the second quarter of 2009, the average Manhattan rental price per square foot had dropped 17 percent from the same period a year prior, while the number of transactions plummeted 58 percent, according to a quarterly market report by Prudential Douglas Elliman.

As a result, a new breed of aggressive renters are throwing real estate agents for a loop.

"It wouldn't be surprising if an agent had dealings with 15 to 20 clients for five [of them] to offer rents that were one-third below the asking price," said Gordon Golub, a senior managing director at rentals behemoth Citi Habitats.

In this new environment, vacancy rates are high, landlords have completely revised their criteria for tenants and renters are even demanding a portion of brokers' commissions.

This month, The Real Deal polled agents and industry experts to see how they've gotten a handle on Manhattan's rapidly shifting rental market.

Lease length less rigid

In the past, rental leases in Manhattan were often very similar, and heavily weighted in favor of the landlord. Tenants were generally expected to move in soon after signing the lease and stay the entire year-long term — or else.

Now, however, things have changed, and successful agents need to stay on top of the new norms.

In the past, for example, signing a one-year lease was often non-negotiable. With unemployment on the rise, however, a lease that's too rigid in terms of length is now a deal-breaker for some tenants.

"We're seeing the lease term being discussed more," said Golub. "It's become an important qualifier when people make a move."

Move-in dates are also a lot more negotiable. At 200 Water Street, a new Rockrose rental in the Financial District, tenants signing leases last month were given the option of moving in as late as December.

Jodi Berman, a project manager at Rockrose, explained that the company wants to sign as many leases as possible during the busy summer rentals season, even if those tenants don't move in for a few months.

"We have to lease 576 apartments," Berman said. "We want to get as many as we can in the summer."

Elsewhere in the city, two-year leases — often offering a flat rate for the entire lease term — are becoming more popular as landlords look to stem the tide of vacancies and postpone rent decreases.

"[They] are hoping that in two years, things will be better," said Sean Oakes, a vice president at Halstead Property.

That's a change from the recent past, when the landlords nearly always raised the rent in the second year of a two-year lease.

Golub said landlords are also now more likely to put a "cancellation clause" in the lease allowing the tenant to back out after a certain time. There is also talk of eliminating or reducing the penalties for moving out early.

"Landlords are much more apt to do it now, whereas they didn't need to in the past," Golub said. "It allows them to fill their buildings."

For example, landlord Stonehenge Partners is now giving a 60-day cancellation rider for tenants who can prove they've lost their jobs, said Linda Wright, the leasing consultant at Stonehenge's Ritz Plaza at 235 West 48th Street. A tenant who provides proof of a layoff and gives the landlord 60 days' notice can vacate the apartment without a penalty.

Loosening ironclad income standards

Until recently, the financial requirements for renting a Manhattan apartment were incredibly strict, with landlords demanding tenants with excellent credit, an income of 40 to 50 times the monthly rent, and reams of documentation to prove it. Renters who weren't up to snuff needed a guarantor with even more sterling qualifications.

Now that vacancies are on the rise, some landlords are loosening those once unshakeable qualifications.

"Overall, landlords are looking to open up their pool of new tenants," Golub said. "To do that, they may be more lenient on the requirements for the applicant or guarantor."

Landlords now look more kindly on small blemishes on an applicant's credit history, and are relaxing income requirements.

"Landlords that used to require 50 times the rent might go down to 45," said Marcus Medina, a manager at the brokerage Urban Sanctuary.

When it comes to guarantors, landlords previously preferred them to be from New York City or the tri-state area. "Now, they're more willing to accept a guarantor from elsewhere in the country," Golub said.

Tenants with poor credit, meanwhile, were not to long ago required to pay six months to a year of rent up front. Now, that's dropped to three to six months, Golub said.

Landlords are also more likely to allow tenants to have pets and put up temporary walls, he added.

Overall, owners are considering each situation individually rather than rejecting a tenant outright for a small problem.

"We look at everything on a case-by-case basis," said Rockrose's Berman. "We want to make as many deals work as we can."

Don't expect landlords to loosen their income requirements too much, though, since it takes a very long time — sometimes up to a year — to evict a non-paying tenant. "Landlords have to be very cautious in New York City," Medina said.

That's one reason they still prefer to offer generous incentives as a means of luring the most qualified tenants, he said.

Right now, for instance, the Related Companies is offering a free one-year membership to any Equinox gym (which the company owns), free movers, or gift certificates to West Elm or Zipcar. Pan Am Equities, the developer of New York Plaza at 2 Water Street in the Financial District, is offering free membership to the New York Health & Racquet Club.

Renters ask for a piece of OP commissions

Renters aren't the only ones getting incentives. Brokers, too, are getting cash and gifts thrown at them by landlords eager to lease up their buildings.

Earlier this year, landlords began paying brokers' fees — usually equivalent to one month's rent — an expense that had traditionally been paid by renters. Now, some landlords are paying agents more than one month's rent as a commission.

New York Plaza, for example, is offering two months' rent as a brokers' fee, Golub said, while Silver Towers, at 610-620 West 42nd Street, is paying agents one-and-a-half months' rent.

Some landlords are even offering agents gift cards worth hundreds of dollars in addition to their commissions, Golub said.

Renters, for their part, know this incentivizing is going on, and some feel entitled to the loot.

Some are even demanding a portion of agents' commission, known in the industry as an OP, for "owner paid."

"They say, 'Why should you make this money when it took you five minutes to rent the apartment?" Medina said. "They're asking us to pay them something out of our pocket." But agents should avoid giving up their OPs at all costs, Medina said.

"An OP is already at the bottom level in our comfort zone in profitability," Medina said. "If you start going to that, your situation is untenable."

For that and other outrageous demands, Golub says a firm refusal is the best approach. The client may walk away, but "it's better not to work with someone who doesn't understand the value of what you do," he said.