Residential Rental Buyers Adapt to Today's Market

By MICHAEL STOLERFebruary 21, 2008
As the second month of 2008 comes to an end, members of the real estate community are beginning to accept the fact that the market has seen a price correction. Purchasers of residential rental property in New York City have had to adopt a whole new terminology, with phrases like "all-cash purchaser," "seller financing," "full and limited recourse," "higher debt service coverage," "lower loan to values," and "personal guarantees."
Despite the new rules now in place, investors are actively pursuing ownership of residential rental developments across New York City. With steady and even rising rents, demand is booming for the city's rental apartment buildings, which represent a safe haven for investors weary of uncertainty elsewhere in the real estate market.

"We continue to see strong fundamentals in the New York rental market," the president of Vantage Properties, Neil Rubler, said: "While operating expenses, particularly energy costs, have inflated significantly in the past 24 months, demand for rental units remains strong, with vacancy rates running south of 3% in most neighborhoods." Mr. Rubler added: "On the investment sales side, continued support for the asset class among both balance sheet lenders and financing agencies, like Fannie Mae and Freddie Mac, make both acquisition financing and refinancing far easier than in other asset classes. This said, leverage levels are generally in the 65% range versus the 80% and plus range that had been commonplace at this time last year, and spreads are up by several hundred basis points, offsetting lower benchmark pricing, which include Swaps or Treasuries. The net effect is that a buyer's overall cost of capital has significantly increased, and deals are generally being underwritten at levels of between 5% to 15% off of the highs achieved in the second quarter of 2007. Sellers generally have taken a wait-and-see attitude, and many aren't yet willing to accept enough of a price adjustment to make most deals work. This said, New York rental multifamily property remains far more liquid than other real estate categories, and we continue to have a very full pipeline of pending transactions."
The co-founder and managing director of Stonehenge Partners, Ofer Yardeni, is very bullish on New York, and especially its residential rental market. Late last year, his firm closed its Stonehenge Opportunity Fund II, and in the last three months it has closed on more than $400 million in property acquisitions. Last month, Stonehenge acquired both 360 E. 65th St. and 347–351 E. 58th St. for $126 million and $10 million, respectively. Last week, Stonehenge closed on the acquisition of 8 Gramercy Park South and 141 E. 33rd St. for $82 million.

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