With its May purchase of a luxury apartment building overlooking the Hudson River, Denver-based Archstone-Smith realized one of its biggest goals: establishing a presence in Manhattan. The multifamily REIT, formed last year by the merger of Archstone Communities Trust and Charles E. Smith Residential Realty Inc., bought 101 West End Ave., a 35-story apartment building on Manhattan's Upper West Side, for $209 million.

But did the company pay too steep a price? And is it entering the market at the wrong time? Some analysts are asking those questions.

New York-based Tishman Speyer Properties Inc. was the seller of the property, which was about 95% leased at the time of the transaction. Archstone-Smith assumed $126 million of tax-exempt, floating-rate bonds to fund the deal.

The acquisition also is noteworthy because Archstone-Smith is believed to be the first apartment REIT to purchase a property in Manhattan. Meanwhile, another multifamily REIT, Atlanta-based Post Properties Inc., is building two apartment communities in Manhattan.

Archstone-Smith plans to hold 101 West Ave. as a long-term asset, says Jack R. Callison Jr., group vice president at Archstone-Smith.

Completed in 2000, 101 West End Ave. features studio, one- and two-bedroom units. Monthly rents range from $2,350 to $8,590.

However, the purchase left at least one analyst puzzled. “I don't know what they gain by making such a large entry into the market in the face of what should be declining fundamentals for the next several quarters,” says Stephen Swett, a REIT analyst in the New York office of Wachovia Securities. “Waiting a year and taking a pulse, that may have been better.”

The Manhattan apartment vacancy rate increased from 3.2% in first-quarter 2001 to 4.5% a year later, according to preliminary first-quarter 2002 statistics compiled by Marcus & Millichap Research Services, based in Encino, Calif. The average asking rent per unit declined from $2,057 to $2,000 in the same period.

Ross Smotrich, a REIT analyst and managing director of New York-based Bear, Stearns & Co., says that at first glance Archstone-Smith appears to have paid a “relatively rich price” for 101 West End Ave. However, he applauds the use of the low-interest-rate, tax-exempt bonds, noting that such financing will enhance Archstone's return on equity.

Maintaining occupancy and creating rent growth at 101 West End Ave. could be a challenge, at least for a while, in light of the New York market conditions and some new supply coming on line in the surrounding area, Smotrich adds.

Callison says that Archstone-Smith calculated the rent on a “very conservative basis” when underwriting the transaction. “We're absolutely convinced that this is a good deal.”