Manhattanites Move to Luxury Rentals as Cost Falls Versus Buying

Adam Neumann and his wife set out in 2008 to buy an apartment in lower Manhattan, hoping to get a bargain on a 2,500-square-foot (232-square-meter) luxury unit.

Failing to find a deal, they chose an increasingly practical option for the city’s wealthiest residents: renting. They’re paying $300,000 upfront on a five-year lease for an empty TriBeCa loft with almost twice the space that the landlord will outfit to their design.

More people are leasing the most expensive Manhattan apartments as rents fall and sale prices climb from last year’s post-financial crisis lows. New leases signed for units with monthly rents above $15,000, the top 1 percent of the market, more than doubled to 77 in the third quarter from a year earlier, according to appraiser Miller Samuel Inc.

“We want it to be just like owning, but you don’t have the liability and the headache,” said Neumann, the 31-year-old founder of an office-leasing company, who estimates the monthly cost of his rental is slightly more than buying a unit half its size. “I would rather keep the cash and keep my options open than spend it all on property when I’m not clear where the market is going.”

The median monthly rent for all luxury units in Manhattan, defined as the top 10 percent of the market by price, declined 18 percent to $6,950 in the third quarter from a year earlier, according to New York-based Miller Samuel. The median luxury sale price rose 13 percent to $4.39 million, after bottoming out at $3.78 million in the final three months of 2009.

Rental Supply

The divergent moves left the gap between the cost of buying a luxury apartment and the annual cost of renting at its widest since the first quarter of 2009, when the median purchase price peaked at $6.6 million. Buying cost 53 times renting in the third quarter, compared with 38 times a year earlier and 58 times in March 2009.

The own-versus-rent comparison doesn’t take into account the benefit buyers get by deducting mortgage interest from taxes.

The supply of luxury rentals is being fed by owners who don’t want to sell at today’s prices, said Jonathan Miller, president of Miller Samuel. “Rather than wait, they rent it out,” he said in a telephone interview. “It’s a win-win for the disaffected seller and the nervous buyer.”

Adding to units on the rental market are developers of unsold condominiums built during the property boom and condo investors waiting for sale prices to recover further, said Gordon Golub, executive vice president and director of rentals at brokerage Citi Habitats in New York. There are about 6,000 unsold condos of all prices in Manhattan, according to Miller.

Trump Waiting List

Equity Residential, the largest publicly owned U.S. apartment owner, has a waiting list of renters seeking penthouse units in its three Trump Place buildings on the Upper West Side, Frederick Tuomi, president of property management for the firm, said in November at an industry conference in New York.

The units range in price from $9,500 to $22,000 a month, with some would-be tenants seeking to combine more than one apartment, said Marty McKenna, a spokesman for the Chicago-based company.

“You don’t have to have ownership of the place to enjoy it,” Tuomi said in an interview at the conference. Instead of “tying up a lot of personal capital in a single asset,” he said, “people are valuing optionality, flexibility.”

‘Way Station’ Rentals

Some people are using rentals as a “way station” to a purchase, said Pamela Liebman, chief executive officer of the Corcoran Group brokerage in New York. Buyers are taking longer to make decisions on a deal, even as they are no longer wary about overt spending, she said.

“Two years ago somebody might not have felt comfortable spending $20,000 a month, just like they didn’t feel comfortable buying a new Porsche,” Liebman said. “Today, people are back to wanting what they want and being willing to pay for it.”

New apartment rentals in Manhattan more than tripled in the third quarter, as landlords offered fewer concessions and tenants sought better deals by moving out. New leases signed across all price categories surged to 8,593 from 2,549 a year earlier, according to Miller Samuel and property broker Prudential Douglas Elliman Real Estate.

The surge in leasing was concentrated in the middle of the market, which helped drive down the level of rents comprising the top 10 percent.

Manhattan Market

In the Manhattan market overall, the cost of buying an apartment was 25 times more than the annual expense of renting in the third quarter, up from 24 times a year earlier. Rents in all price categories rose 1.7 percent to a median of $3,000, while the median purchase price gained 7.5 percent to $914,000.

During their two-year search, Neumann said he and his wife, actress Rebekah Paltrow, sought out properties they thought had fallen at least 35 percent in value since the market’s peak. They found owners were unwilling to accept such a discount.

After seeing “at least 250” apartments in neighborhoods south of 14th Street -- including condos at 211 Elizabeth St. in NoLiTa and TriBeCa’s Pearline Soap Factory -- they decided renting was a better deal.

“You’re not owning, but you’re living better and you kept your cash and you’re not falling into this old-fashioned concept that you have to own a home,” he said.

Good Times Gone

The money he’s not spending to buy “can go into my business,” said Neumann, co-founder of We Work, a New York firm that rents shared office space by the month. “In my business, my cash brings a much higher return than purchasing an apartment,” he said.

“The good times we saw in the past are not coming back anytime soon,” he said. “People are not going to buy a home for $1 million and see it worth $2 million in five years. I see the market going up but nothing like in the past.”

The couple is set to sign a five-year lease next month for a 4,800-square-foot loft off Hudson Street that the landlord has agreed to design and build out based on their input, said their broker, Danny Davis of Citi Habitats. They plan to turn the space into a four-bedroom, three-bathroom apartment, with exposed brick and beams, Neumann said.

The couple’s $300,000 upfront payment will be used to defray monthly rent once they move there in April. The lease carries an option to renew for another five years, Neumann said.

Simultaneous Listings

In Manhattan, 45 properties listed for sale at $3 million or more are simultaneously listed for rent, according to data compiled by Sofia Song, vice president of research for property listings website StreetEasy.com.

A 7,700-square-foot duplex penthouse at 610 Park Ave., with five bedrooms, a “walk-in butler’s pantry” and a private terrace, is listed for sale at $25.8 million, according to StreetEasy. The monthly cost of owning the Upper East Side apartment is $148,372, assuming a 20 percent down payment, a mortgage at 5 percent and monthly common charges and taxes of $18,786, according to StreetEasy.

The monthly cost of renting that same apartment is $75,000, or about half, according to the StreetEasy listing.

“It just seems like renting is a much better deal,” Song said of the property.

On the Upper West Side, a 4,300-square-foot “trophy penthouse” at the Grand Millennium, with “two massive terraces” and Hudson River views, is listed for sale at $15 million, according to StreetEasy. Buying at that price would mean monthly payments of about $77,000. It could also be rented for $45,000 a month.

Of six properties listed for both sale and rent that Song tracked in May, four of them were leased and two were sold.

“People are much more hesitant to put down their money into such a large investment when there is such a strong possibility that the market could go down further,” Song said.

To contact the reporter on this story: Oshrat Carmiel in New York at ocarmiel1@bloomberg.net.

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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