Playing Rental Roulette

Skyscraper prices leave apartment seekers flat broke

The newspaper ad described it as a "charming penthouse with fireplace" in a "restored town house." But when the apartment-hunting couple gave a taxi driver the address in lower Manhattan's East Village, he blurted: "That's the combat zone! I'm not going there, buddy." The couple finally pulled up in front of a building that had rats scurrying up the narrow stairs, cockroaches dancing in the fetid rooms and bars on the narrow windows. The "fireplace" was a drawing with colored flames. Rent? "Well," rasped the agent, "they're asking a thousand, but seeing as how you and the missus could make this a lovely home, you can have it for $950." The couple fled.

In most of the country, the search for a rental apartment ends more often in this kind of frustration than in the acquisition of a lg 2 bdrm w/wbf, A/C & riv vu. Vacancy rates in cities such as New York, Chicago and even Kansas City are far below the 5% to 8% that Realtors consider is needed for renters to have a reasonable choice at a fair price. So tight is the market in Manhattan that as an old woman lay dying in her $400-a-month, two-bedroom Gramercy Park apartment, 374 people signed up for the prospective vacancy. It was rented for $1,600 not 15 minutes after she was pronounced dead.

"What we are seeing," says San Francisco Realtor Rosalynn Graham, "is that there are fewer apartments available. Therefore, people have to pay a higher price for them." A two-bedroom apartment that went for $400 a month last year in San Francisco's North Beach today fetches $850. In New York City, where rents have been rising 15% to 20% annually for the past three years, one-bedroom apartments command $1,000 a month and two-bedrooms start at $1,500 in new Manhattan buildings.

Blown to oblivion is the traditional budgetary restriction of paying no more than one-quarter of pretax income for rent. Apartment dwellers are writing checks for as much as 50% of their gross salaries each month and enduring a straitened life-style for everything else: food, clothing, doctor bills, vacations and savings accounts.

Rental housing is becoming scarcer because of demolition, abandonment and especially condomania. In Chicago 60,000 leased apartments have converted to condominiums since 1963, creating a severe housing crunch in parts of the city, notably the fashionable Near North Side. Last year 12,000 New York apartments went cooperative. The trend may accelerate as a result of Citibank's announcement last week that it was making $1 billion in loans available for houses and coops.

Very little construction is under way to replace this lost housing. Building costs are stratospheric--often $40,000 and up per two-bedroom unit--and speculators can make more money buying existing properties, raising the rents and selling out a few years later. Construction financing is expensive and difficult to get. Says Robert Mascaro, an Atlanta property manager: "We don't just pick up the phone like we did five or six years ago and say, 'I want $2 million.' "

Rent regulation has spread to nearly 100 cities, and it discourages building. In Los Angeles, San Francisco and several other California cities, voters adopted various controls after many landlords failed to pass along their property tax savings from Proposition 13 in the form of lower rents. Result: construction of additional rental housing in California is at an all-time low. Builders say the return on investment is simply too unattractive.

There is not much relief in sight for the renter, short of moving to cities such as Dallas, Houston, Minneapolis and Atlanta, where housing is plentiful for varying reasons, including no rent controls and mobile populations that create high turnover. But some localities are trying to improve life for the renter. Wichita needs 30,000 workers over the next three years to keep its economy booming, and city fathers recognized that recruiting them would be easier if they had places to live. The city floated a revenue bond issue last April and used the proceeds to make loans at interest rates between 8.5% and 9% available to builders of five rental projects. Spurred by low-interest money, rental construction has surged. The vacancy rate has moved up from one-fifth of 1% last August, but it is still an extremely tight 1.2%.

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