Vacancy! High-End Renters Flee to Buy

Could the suddenly busy sales market be draining Manhattan’s luxury rentals?

Landlords and brokerages report more luxury tenants leaving, partly due to a largely unexplainable upturn in the Manhattan sales market this past winter.

At the same time, new tenants are coming into the rental market, which now has more vacancies because of the exit of tenants for the sales market.

It’s a sort of real-estate symbiosis: The luxury rental market feeds the sales market, and the sales market opens apartments in the tight rental market.

William MacLeod, the director of listings at the brokerage Mark David & Company, first noticed luxury renters leaving in larger numbers about two months ago, right as the annual Wall Street bonus season—a record this year—was ending, and right as sales brokers reported the sharp upswing in activity.

(Defining “luxury” in the rental market, as in the sales market, can be difficult; generally, though, it means a market-rate apartment in good condition in a doorman building. The least-expensive Manhattan doorman-building apartments are probably Lower East Side studios, according to a February report from brokerage The Real Estate Group; the median monthly rent for those was $2,296.)

“I speak to a lot of the landlords—East Side, West Side, pretty much everywhere,” Mr. MacLeod said. “A lot of the tenants in the high-end luxury buildings are moving out to purchase apartments. I noticed more high-end inventory hitting the market starting in February; these people were going somewhere.”

Not that landlords or rental brokers need fret. Especially at this (spring)time of year, fresh crops of eagle-eyed apartment-hunters roam Manhattan, replacing the ranks of luxury renters jumping to the busier sales market.

The Manhattan rental vacancy rate has hovered under 3 percent each quarter since the end of 2005, according to the investment-sales brokerage Marcus & Millichap, which doesn’t broker leases. For the latter half of 2005, the rate was just above 3 percent. And for much of 2004, the vacancy rate was nearly 4 percent—high for Manhattan.

It was in 2004 that the Manhattan sales market entered its frenzy.

The first quarter of that year boasted 1,916 condo and co-op sales, according to the appraisal firm Miller Samuel; the second, 2,147; and the third, 2,429, which turned out to be a high through the third quarter of 2006 for quarterly sales. By the end of 2004, tales of home-buying triumphs drenched Manhattan cocktail-party talk, and the city bustled in the vanguard of a national housing boom.

The sales market in 2005 continued its success, but something happened: The market became more noteworthy for prices than for the number of sales. The average price per square foot for a Manhattan condo or co-op cleared $1,000 for the first time, for instance, and the median sales price set a then-record of $775,000 in the spring, according to Miller Samuel. Sales, though, were off by nearly 900 from 2004’s total.

The rental vacancy rate inched downward through 2005.

In 2006, the Manhattan sales market exited the frenzy; but the number of condo and co-op sales remained strong, climbing 713 from 2005 to near-2004 numbers—but only near, not at. The rental vacancy rate, of course, dwindled to below 3 percent, and Marcus & Millichap projects that the rate will drop to 1.9 percent by the end of 2007.

The local economy, the lower crime, that enduring and appealing je ne sais quoi of the Big Apple—whatever the reason, people keep moving to Manhattan, and usually a rental apartment is their first stop in the borough’s housing market.

But they’re not staying, not on the luxury end—not when the sales market’s as hot as it was in the winter, and as hot as it’s expected to be in the spring, which is normally a busy sales season in Manhattan.

A landlord on the Upper East Side who owns 1,000 units, in fact, predicted the attrition rate of luxury tenants could be double in 2007 what it normally is annually—around 10 percent, rather than the usual 3 to 5 percent.

These lurches from luxury rentals to co-ops and condos fits with an age-old Manhattan reality, one only amplified by the currently alluring sales market. Barak Dunayer founded Barak Realty, a Manhattan brokerage, in 2000; he said renters often do the unavoidable math that arises in this always-pricey market.

“Certainly,” Mr. Dunayer said, “as the rental prices are going up more and more, they’re realizing: ‘Hey, it doesn’t pay to rent any more—I might as well buy.’”

Vacancy! High-End Renters Flee to Buy