The Princeton rental market, substantially unchanged for decades, has been turned on its head in the past year – and more changes are on the way. New construction by Princeton University has drastically altered the decades-old balance of power between mom-and-pop landlords and tenants. At the same time, new construction by private developers has introduced super-luxury units to a market long-dominated by older apartments, often in the second-story, attic, or garage of a single-family home. These changes take place against the backdrop of a low-interest, rapid appreciation real estate environment that has made home ownership extremely attractive.

"It’s amazing to see what has happened all of a sudden," says Michelle Needham, a rental specialist and property manager with Gloria Nilson. Not long ago, anyone with an apartment to rent in Princeton had only to put a one-inch advertisement in a local paper and wait for the phone to ring – and ring, and ring, and ring. Competition for anything with a roof, some walls, and basic plumbing was fierce. Says Needham, who has been renting apartments in and around Princeton for 10 years, "before, if something was half decent, people would jump on it."

It was not uncommon to have 25 or 30 people line up, credit histories, letters of reference, and checkbooks in hand. A landlord could – and often did – conduct extensive interviews and ask for essays laying out the reasons that he should choose a particular would-be tenant. He had the luxury of accepting only those with secure jobs, spotless credit histories, and a record of exemplary behavior.

Now those landlords have to strain to hear a ringing phone. "In the last two, two-and-a-half years the market has taken a turn," says Needham. "Fewer people are looking and there are more properties. It’s not that nothing is renting, it’s that apartments are sitting longer. Landlords have had to drop prices $200 to $500. Maybe they have to fix them up."

The most concrete catalyst for the change was the construction by Princeton University, in 2004, of a substantial number of new graduate housing units at Lawrence Drive, just off Alexander Road, and opposite the site formerly occupied by the Rusty Scupper restaurant. The seven new buildings, located just a short bike ride from town, and served by free Princeton University shuttle buses, solved the problem of tight housing supply – and high rental prices – for scores of graduate students. The brand new units rent for between $575, for a studio, and $1,200, for a two bedroom – utilities included.

These prices, a real bargain in the Princeton housing market, are, in fact, even lower than they were when the apartments opened one year ago. In a letter to graduate students last winter, the university’s housing department wrote that the new units had been warmly received in all but one particular. "The Graduate Student Government, the Lawrence Committee, and many individual graduate students all stated that the rents were too high to fit within their limited budgets." In response, the housing department lowered the rents by 17.3 percent to 27 percent.

While the new apartments were good news for graduate students, and, by extension, for the rank-and-file renters with whom they once competed for a limited supply of apartments, they were bad news for landlords long accustomed to being on the right side of the supply and demand equation. Current advertisements for apartments in and around Princeton show that there is no way their owners can compete with the university for graduate school students. An advertisement for one and two-bedroom apartments in Princeton Borough lists prices of $1,295 to $1,795. Another asks $1,950 for a two-bedroom unit. A studio is offered for $1,000.

While demand has decreased for in-town apartments, almost anything within walking distance of Nassau Street still will rent, says Needham. It may take longer, pets may be accepted where they were never welcome before, and the rent may be lower, but if the unit is spiffed up, a tenant will most likely materialize in a month or two. Renting a unit a distance from downtown is more of a challenge.

But while older apartments, so recently the pursued, suffer the indignity of having to pursue tenants, and to be looked over critically to boot, newcomers on the rental scene are overnight stars, and are commanding princely rents.

Dianne Bleacher, a Callaway rental specialist and property manager who has been working with Princeton area rentals for 30 years, proclaims that "new is in." She talks about Witherspoon House, the new 24-unit red brick apartment house right next to the Princeton Public Library. Constructed on land owned by Princeton Borough, the luxury units were built by Nassau HKT Urban Renewal Associates, and are a distinct departure in a Princeton market dominated by older, more basic apartments.

"The layouts are wonderful, the product is great," she says, "but we didn’t know what the marketplace would do." The answer came quickly. She started "showing" the units before the walls were up, and by March, months before the apartments were finished, they were fully rented. The one and two-bedroom units rent for up to $3,500 a month, and are loaded with amenities. There are hardwood floors, gourmet kitchens, washers and dryers, terraces, huge walk-in closets, large entryways, wrap around, floor-to-ceiling windows, wiring for high speed Internet and cable television, elevators, and access from the lobby to the Spring Street parking garage.

Tenants, says Bleacher, include "corporate people," couples who have recently downsized from houses and "don’t know what to do next," and part-time residents for whom Princeton is a second – or third – home.

A second stage of luxury apartments, 53 units in all, are to be built on the surface parking lot on Spring Street, just across the street from Witherspoon House. Construction is due to start soon, and the units could be ready for occupancy in 2006. (Check www.princetondowntownliving.com for more details.)

Needham points out that Witherspoon House is not alone in the Princeton luxury rental market. The Waxwood apartments, built as a non-profit foundation by Robert Hillier, founder of one of the largest architectural firms in the country, as well as Hillier-built apartments built on the site of South’s Garage on Moore Street, are also luxury buildings. But while their units are now rentals, they are due to become condominiums within five years.

The newest luxury rentals are located at 253 Nassau Street, between Jay’s Cycles and the Wild Oats market. The developer, Jeffrey Albert of Princewood Properties, a company with offices at 19 Longview Drive, had originally planned to erect an office building at that site, according to Lee Solow, planning director of the Princeton Regional Planning Board. "We said ‘why not include apartments?’" Solow recalls. Albert’s reply: "’They’re not allowed.’" Indeed, there were zoning restrictions against residential use in that stretch of Nassau Street, once home to, among other businesses, a car dealership. The zoning was changed, and the building now contains offices on its ground floor, and two floors of apartments.

Prudential Fox Roach has just moved into office space in the building, and Yvonne Harris, rental specialist and property manager, is enthusiastic about the new apartments. Fully leased, they have, she says, "every amenity you can think of." Like the apartments in Witherspoon House, and renting for approximately $2,400 to $2,900 a month, the 12 one and two-bedroom units feature hardwood floors, ceramic tile in the kitchen and bathrooms, and full-size washers and dryers. They also come with a priceless downtown Princeton perk – free parking. Each apartment has one free space in a parking deck under the building, and additional parking is available for a fee (www.253Nassau.com).

Interestingly, Harris says that she wishes the new units in town were not rentals at all, but rather were condos. She is not alone in this sentiment. Needham and Bleacher, veteran realtors both of them, agree. "I have five clients right now who are looking for condos in Princeton," says Harris. She just cannot find them. "Whatever condos that exist are closely held," she says. "People just don’t let them go."

At the same time, she sees a groundswell of demand. "I have so many clients who want to scale back and stay in Princeton," she says. "They want that in-town feel." These people, often empty-nesters, don’t want the work of tending a house, but neither do they want to give up the financial advantages of home ownership. "They want to buy condos," she says. "That was a big trend in my business last year. There are just not enough condos in town for everyone who wants one. In a best case scenario, I would have 12 condos to sell." One of her clients, a New York City doctor, has made five trips to Princeton to find a one-story condo, and has come up empty.

Harris is seeing strong demand for one-story, in-town condo living from the generation ahead of the baby boomers, the 70 and 80-year-old group. She predicts that the demand will balloon when the boomers decide to downsize. But she is also seeing condo demand from young professionals. Both groups, she says, would prefer to buy rather than to rent. The 30 and 40-year-olds want a condo as an investment with appreciation potential, and the older people have assets, often including money reaped from the sale of a house, and want a safe place to stow it without incurring a large capital gains tax.

The demand for high-end apartments is more of a question, according to Harris and her fellow Princeton rental specialists, who also sell apartments and houses. Needham reports that there has been some difficulty in re-leasing Hillier’s Moore Street apartments. Bleacher says that when she showed some of the new luxury rentals "I had people angry that they couldn’t buy. More people wanted to buy (than rent)."

"Unless Palmer Square gets its act together, there isn’t much to buy," says Bleacher, referring to Palmer Square’s stated intention to build residential units over its parking garage on Hulfish Street. There has been no final decision as to whether those units will be rental or condo, according to Solow of the Princeton Planning Board. Palmer Square has not yet submitted its final proposal, he says, but is expected to do soon.

Meanwhile, Marvin Reed, former mayor of Princeton Borough and a member of the Princeton Regional Planning Board, predicts that there will be 700 new rental units within walking distance of downtown in 10 years time. Both the rezoning of 253 Nassau Street to allow rental units and the development of Witherspoon House were, he says, "all a deliberate attempt to encourage in-town rentals." He sees the inclusion of rentals in the housing mix as a matter of balance, a way to ensure diversity in housing options. "We know there is a very strong market for rentals," he says. As an example, he points to the 17 Palmer Square rental units above Mediterra on Hulfish Street. "They never became condos," he says, "and they have a one-year wait."

It is likely that the housing supply in Princeton will change once again as a result of Princeton Hospital’s decision to leave downtown. "We’re leaning toward residential," Reed says. "There is a strong consensus (on the Planning Board)." Solow confirms that that is the case. Reed says the Planning Board has been working hard on rezoning the hospital area, a process that, he says, is more arduous than the hospital, eager to move on, may appreciate. "They’d love to have us snap our fingers and have it done tomorrow," he says. He expects that the area will be rezoned in 2006. He sees a mix of housing types on the site – townhouses, apartment flats, and one and two-family houses.

"We’re talking about 280 units, some one bedroom, most two-bedroom, and we’ll require some three-bedroom or more," says Reed. "They won’t all look alike. We’ll try to make it not like the typical apartment development." He thinks that the Merwick site, the hospital’s nursing home, which is located on Bayard Lane, will be redeveloped to include 120 more housing units. The Planning Board does not want a corporate office center on either site. "It’s hard enough for people to get to and from work," says Reed. "That area couldn’t absorb that (office) traffic."

As for whether the units will be condos or apartments, Solow says that the Planning Board cannot dictate form of ownership. That part of the plan will be decided by whatever developer or developers the hospital chooses.

The new Princeton University graduate school apartments and the new downtown luxury apartments caused a sudden shift in the rental market, and it is possible that new apartments at the Princeton Hospital site will have an even greater impact. But the whole story is not new supply, or even the new trend toward top-shelf apartment amenities. Underlying the changing rental dynamic is a superheated housing market. Or as Callaway’s Bleacher says, "strong sales equates to weaker rental." With interest rates at historic lows, and with a proliferation of mortgage products that require little or no down payment on interest-only loans, there is tremendous incentive to buy. "People look at the price (of rentals)," she says, "and say ‘for that I can buy a house.’"

Even relocation companies are pushing short-term corporate transferees to buy. "I work with a lot of relocation companies that used to rent," says Needham. "Now they encourage people to buy rather than rent. That turned too. We’re not seeing high end renters anymore." Instead of looking at apartments, they are looking into adjustable rate mortgages, which generally carry tiny interest rates for one, three, five, or more years.

Sometimes Princeton residents who need to move out of the area for several years rent their houses as a way of covering costs and holding their place in the housing market. That can make sense, but unless a homeowner is quite sure that he is coming back, current economics probably dictates a sale, says Bleacher.

"If you bought for $100,000 and you can sell for $800,000, take the money," is her advice. For renting to make economic sense, she says, a landlord has to cover his carrying charges, and must also factor in wear and tear and liability. With taxes running to five digits, it’s tough to make the numbers work.

Still, she acknowledges that renting a house can be a good investment, especially for a younger person, who can be relatively sure of good long-term appreciation. "Work the numbers," she says. "If rent covers everything, why wouldn’t you rent it? It’s a good investment, but go in with your eyes open." This advice is mostly for people in their 30s and 40s. In Bleacher’s opinion, "if you’re a senior citizen, take the money and run. What are you waiting for?"

Not only may selling be a better option than renting, but lower rents – and less ability to pick the perfect tenant – may erase some units from the market. "I have a friend who used to rent out his second floor," says Reed, "but now he’s converting his home back into a single-family house."

But there are those who will want to continue to rent their homes, or a portion of their homes. Of this group, Reed says, "The third floor garret apartment owner has to make sure it’s cute, with up to the minute appliances, to compete."

In the ying and yang of rental economics, this is good news for tenants. Prices are down. "I used to rent studios in Palmer Square for $1,250," says Needham. "Now they’re $1,050." And quality is up as well, as all of those garrets get updated. For the first time in recent memory, potential tenants have some leverage. They may even be able to acquire a dog or cat.

In an interesting twist, Harris, the Prudential Fox Roach rental specialist who wishes that the new rental buildings were condos, is herself a renter. And her home of choice is an older Princeton apartment. As long as humans come in one-of-a-kind wrappers, there will be people who move counter to trends. So, while the luxury units in Princeton are the hot segment of the rental market, Harris says she is inexorably drawn to "character and charm." For her, a fireplace was a lot more important than granite kitchen countertops, and a clawfoot tub trumped giant closets.

She knows that there are tradeoffs in living close to downtown. "I sacrificed two rooms and a washer and dryer," she says. She is also aware that she sacrificed the opportunity to build equity by buying a home. She could have afforded to do so in another town, she says, but not in Princeton. Harris is happy with her rental apartment. Still, she would prefer to own a condo, "but not for more than $600,000."

While her choice of amenities may not be the norm in this housing market, Harris’ housing decision is common enough to ensure that Princeton’s rental market is not going to die out any time soon. The lure of a town – a real, walking town, full of restaurants and activities – is rare enough, and desirable enough, that even an unimproved third floor garret is likely to draw a tenant sooner or later.

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