Rentals dropped slightly in first half of 2001, report says.

The average rental price for the Manhattan market fell by 1.87% in the first half of 2001, compared with growth of 15.43% during the year 2000 and an increase of 10.43% at mid-year 2000.

Studio and one-bedroom apartment prices were firmer than those of two-bedrooms because of inherently greater demand for smaller and less expensive space and competition from the sales market with its very attractive interest rates. According to the Real Estate Board of New York's 2001 mid-year report, sales prices were still increasing, although on lesser volumes of transactions. The sales market benefits from pent-up demand because of customers' flexibility in timing transactions without the limitation of a lease expiration date.

The rental market lacks this mechanism. Also, an overwhelming number of renters is motivated to rent in Manhattan by new jobs or job relocations. These factors account for approximately two-thirds of all rental demand.

Other reasons for renting are new household formation or dissolution, moving to a larger or smaller apartment, the sale of a rented apartment, or lease expiration. When prices in the rental market are falling, approximately 20% of demand come from tenants relocating within Manhattan in search of a better deal.

Thus, the rental market has a predominantly seasonal character geared to new jobs, which start between July 1 and October 1. On average, prospective tenants are in the market for four to six weeks, starting in mid-May. Market activity declines substantially by mid- October. After a holiday season, January tends to be a more active month and the following months until May are slow. Because the rental market is primarily driven by new employment, there is almost no flexibility to store and spread demand. Corporate housing, which used to be routinely extended to many new hires, was largely transformed into housing trips and ultimately into a sign-on bonus.

The result is that the creation of new jobs in Manhattan has become the barometer of the rental housing market. Today, Manhattan rental housing exists only for people who earn at least $50,000 and have no dependents.

Because of this predominantly seasonal market, owners of new rental buildings use free rent as a mechanism to increase demand and maximize absorption during the peak demand period. This increases their competitiveness with older buildings, where vacancies result only from annual lease renewals. This season, it is not unusual to find one month free rent on one and two-bedroom apartments.

The pipeline of future rental construction in Manhattan contains a total of approximately 6,500 units for 2002 and 2003 combined, with the bulk of supply coming in 2003. This is substantially less than the 4,000 plus units delivered to the market in both 2000 and 2001. This diminished level of future supply should help stabilize rental prices.