Shaky start to rental market for 2009

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With the world economy in arrears and increasingly loud warnings from both financial experts and elected officials that things will be worse and not better, at least in the near future, real estate watchers on the East End are starting to wonder what the coming season will bring.

Will plummeting mortgage rates spark a buying spree in the saturated sales market? Will continued weak sales mean another robust rental season, as conventional wisdom based on past trends would dictate? Or will the economic woes—Bernie Madoff victims and 30,000 out-of-work Lehman Brothers employees—depress both markets?

It’s pre-season in the summer rental market already—the traditional kickoff comes in just a few weeks with the Presidents Day weekend holiday—and experts are already fretting about bad signs, kvetching about worrisome possibilities, and grasping at scattered positives.

Thus far, a sampling of East End brokers agreed that activity in the rental market is undeniably off from last year, as early as it may be. In strong rental seasons, like the one just past, the first of the season’s shoppers were making walk-throughs by late fall, agents say, and by early January many of the most sought after houses or estates are already contracted out for the season still six months away.

This year, however, the fall and early winter market has been quiet. Most branch managers reported that there have been plenty of renewals of last year’s rentals, and that their most desirable properties at the high end of the market—$300,000 or more for the season—have been rented or are on their way to be. But beyond the realm of the super-wealthy, renters are not racing to the hedgerows to secure a hot rental.

“The action isn’t there for this time of year,” said Enzo Morabito, a broker at Prudential Douglas Elliman. “Typically, this time of year people are locking things in and you are starting to see a good number of lookers. This year there is not the immediacy. People are unsure, so what I think you’re going to have is people waiting later into the year.”

To say the season is running behind schedule may not be the way to look at it, said Rick Hoffman, regional vice presi-

dent for Corcoran Group. Rather, it is just back to normal, or what was normal for many years.

When the Hamptons summer rental market was earning its stripes in the late 1970s, 1980s and 1990s, he noted, the long Presidents Day weekend was when the market really first shuddered to life. The bear markets of the last decade steadily pushed things earlier and earlier as cash-flush renters battled to get the hottest spots before they were gone. With liquidity less viscous, the gears of that freight train are slowing.

“People are just waiting to see what happens,” said Gary DePersia, senior vice president at Corcoran Group in East Hampton. “They’re waiting to see what the economic situation is. I think some people will wait until February, March or even April.”

While the extent to which renters will be hunting remains to be seen, most brokers said they definitely expect the stumbling economy to affect the supply of rental units this year. If the sales market remains sluggish despite historically low mortgage rates, more houses will go on the block for seasonal letting. Some second-home owners or year-rounders, strapped for cash, may also look to milk some additional revenue from their Hamptons properties.

“There is an abundant supply of rentals, higher than in years past,” Mr. Hoffman said. “More people are saying, ‘Let’s use our property, for at least part of the summer, as an investment tool instead of just a luxury good.’”

Spec builders stretched thin by construction loans may also drop brand new houses onto the rental market, always a tempting move, if sales do not pick up come spring.

“Some of the houses for sale in that over-built middle range will be on the [rental] market,” Mr. DePersia said. “Sometimes those are very nice properties, sometimes they’re not the best. But they’ll take whatever comes along first.”

A higher volume of inventory will likely mean that the ultimate costs of rentals will come down a bit. Many brokers interviewed said that they are advising their clients putting houses on the rental market to lower their asking price 10 to 20 percent for the year and to be ready to negotiate if the market is overstuffed and demand is soft come the height of the rental season, whenever that may be.

“If you need to rent, you need to get on the market fast,” Mr. Morabito said. “Look at the comparable properties, what they are asking, and go a bit lower. I think, with things they way they are, people will want to cut down their spending—either a shorter season or a smaller house. I think the lower end is going to see a lot more activity.”

Vicky Reynolds, of Norma Reynolds Sotheby’s in Westhampton Beach, agreed. “I think what’s going to happen is, you’re going to see a lot of people come for July or August instead of a full season,” she said. “It’s just a sign of what’s happening in the economy.”

Ms. Reynolds said that regardless of the length of the desired vacation, property owners are going to have to be negotiable if there are lots of nice rental properties available. More inventory will mean better pricing.

Overall, the price reductions in rentals will likely mirror the drops seen in the sales market, said Janice Hayden, a broker at Coldwell Banker. “The sales market is a good benchmark,” she said. “Generally, things are down about 20 percent, but if you’re in a premium location you may not have to come down that much. If you’re north of the highway and don’t have a pool, you may have to come down more than that. But if they’re priced well, they’ll move.”

Better pricing may bring more people to the market, and most East End brokers remain optimistic that the season will not be a bust in the long run. Many acknowledged that the current economic climate is not one that most people in the Hamptons house market have experienced before.

Adding to the doubt are questions about what last year’s saviors, European vacationers, will do this season. Unlike last summer, European nations are now thoroughly tangled in the broadening repercussions of the credit crisis and firmly in recession too. The U.S. dollar has also shed much of the weakness against foreign currencies that had made the New World extra tempting to overseas vacationers in 2008.

“All bets are off,” said Stuart Epstein, owner of Devlin McNiff in East Hampton. “The way things worked in the past is not going to be the way they work this year. Even though sales are weak, rentals could be weak too. We just don’t know yet. But it’s about to develop before our eyes, and it’s not going to be long before we know.”

Lack of clarity and paradigm change was a recurring theme among the agents and brokers.

“It’s a whole different world,” Mr. Morabito said. “It’s like we landed on another planet, and whatever worked in the past may not work anymore. People need money and don’t know what’s coming down the pike. It’s going to play on a lot of different levels.”

Mr. Hoffman added a final optimistic bent to the discussion. People in the New York metro area still have a lot of money, and when the sun’s arc starts rising above the skyscrapers again, the thought of spending the hot summer months in Manhattan will start an itch.

“The first few warm days we get,” he said, “people will start saying, ‘Let’s bite the bullet—I don’t want to spend the summer in the city.’”

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