By Adriana Brasileiro and Peter Millard, Bloomberg Markets Magazine

Lucia Faro is working harder these days. For the past three years, the realtor was flooded with unsolicited calls from clients eager to buy apartments in Rio de Janeiro, the beachfront metropolis that will host the 2016 Olympics and some of Brazil’s 2014 World Cup games. Now, she is doing the calling, working her four phones most of the day, then organizing happy hours and advertising on social media sites to find potential clients.

“Buyers would just pour in until not too long ago,” says Faro, who has been selling new apartments in Rio’s beachside Barra da Tijuca neighborhood for five years. “Now, I have to chase them, and I’m offering bonuses in some cases to convince them to buy a unit.”

Rio, which occupies a narrow strip of land between lush, forest-covered hills and the Atlantic Ocean, is one of the world’s richest real estate markets. Prices to buy and rent houses and apartments in the city’s most sought-after neighborhoods have jumped six-fold in the past decade, making Rio property as expensive as that in New York and Paris, according to data from Secovi, an association of Brazilian real estate agencies.

The discovery of vast deep-water oil deposits in 2008 boosted demand for residential and office space. Then the announcement in 2009 that Rio would host the 2016 Olympic Games sent the city into a building frenzy, with government officials scrambling to double hotel capacity, extend subway lines and renovate airports.

At the same time, a surge in world demand for Brazil’s commodities, together with the oil boom, created a new middle class eager to buy its own homes, while banks eased up on mortgage requirements.

Slower Growth

No one is saying the boom has gone bust. Yet, the property market is cooling. The volume of mortgage lending slowed to a two-and-a-half-year low in July.

“We don’t expect to see over the next six months the same exuberance we’ve seen in real estate over the past five years,” says Marcio Guedes, head of investment banking at J. Safra Banco de Investimento.

One reason is that the broader economy has decelerated. Brazil expanded at an annualized rate of 1.6 percent in the second quarter amid weak demand for exports. That’s down from 2.7 percent in 2011 and 7.5 percent in 2010. Brazil is growing slower than all three of the other BRIC countries — Russia, India and China.

Manufacturing Decline

Industrial production fell 2.9 percent in July from a year earlier on declines in manufacturing and construction. Brazil’s Bovespa (IBOV) stock index, which soared 84 percent from Jan. 1, 2009, to Dec. 31, 2010, has risen just 4.35 percent this year as of Oct. 2. And Brazilian consumers, who took advantage of a huge spike in bank lending, are hurting. Personal-loan defaults stood at 7.9 percent in August, a 30-month high.

The government of President Dilma Rousseff has deployed a combination of interest-rate cuts and tax reductions on cars and appliances to try to kick-start the economy. Officials project growth of at least 4 percent next year.

Experts say the excesses of the real estate market are self-correcting.

“In practice, the market is sort of healing itself,” says Thomas Shapiro, president of New York-based real estate investment company GTIS Partners, which has several projects under way in Rio. If planned developments in Brazil don’t attract enough buyers before construction, he says, they get canceled.

“It will get weaker before it gets better, but we don’t expect to see a crash similar to what you saw in the U.S.,” Shapiro says.

Brazil Opens Up

Rio’s real estate boom coincided with Brazil’s emergence as a global business center. The stage was set by former President Fernando Henrique Cardoso, who, starting in 1995, opened the country up to foreign investment and tamed the rampant inflation that had plagued the economy for decades. Then the discovery of billions of barrels of offshore oil during the administration of President Luiz Inacio Lula da Silva lured hundreds of new companies, from construction to asset management, to both Rio and Sao Paulo. They brought with them executives and service workers needing places to work and live.

The influx continues. Newport Beach, California-based Pacific Investment Management Co., or Pimco, the world’s biggest bond trader, announced in April it would open its first Latin American office in Rio in September.

Yokohama-based Nissan Motor Co. and Paris-based PSA Peugeot Citroen are expanding existing operations in the state of Rio de Janeiro. British oil giant BP Plc has enlarged its Rio staff and is moving to bigger offices after buying exploration acreage off the coast in 2011.

13th Most Expensive

Ron Radnik has watched firsthand the rise, and recent leveling off, of rental prices in Rio’s best neighborhoods. A Chicago native, he owns Focal Point Relocation Services, which caters to foreigners moving to Brazil to work in the oil industry. In August, he rented a 330-square-meter (3,550-square- foot) apartment in the seaside neighborhood of Alto Leblon for 19,000 reais ($9,300) a month.

“Five years ago, maybe it would go for 11,000, 12,000 reais,” he says. “I’ve seen apartments that even the expats can’t rent because they’re so expensive.”

Rio is the 13th-most-expensive city in the world for expatriates, according to a June survey by consulting firm Mercer. Sao Paulo is 12th, making it the most costly city for foreigners in the Americas.

Prices Easing

Prices are now easing even in Rio’s most exclusive neighborhoods, Radnik says. Still, it’s not easy for newcomers. In August, one couple was looking for a modern 150-square-meter apartment in Ipanema, Rio’s most famous seaside enclave, for up to 8,000 reais a month. They couldn’t find one.

“It just doesn’t exist in Ipanema and Leblon,” Radnik says.

The good news for companies moving to Rio is that the price of office space is on the decline, falling 3.2 percent from the first to the second quarter of this year, according to a study by broker Colliers International UK Plc that looked at 53 buildings across six districts.

Rossano Nonino heads a new real estate fund launched by Gavea Investimentos Ltd., an asset manager founded by former Brazil central bank president Arminio Fraga. Nonino says the fund plans to raise $500 million this year, and he sees better opportunities in malls and warehouses than in residential housing.

He notes that the Olympics “will throw into the market thousands of units at the same time. We really need to be more conservative and assume a stabilization in residential rents and prices.”

Olympics Preening

New York-based real estate giant Equity International Inc., which has investments in Brazilian home building, logistics and personal storage, is now looking for opportunities in large retail stores and hotels.

One likely damper on Rio real estate prices is the preening of the city for the Olympics. City, state and federal governments plan to spend $88.4 billion to expand highways, trains and dedicated bus lanes leading up to the Olympics, and that will work against property speculators by making run-down and inaccessible parts of the city more attractive to homeowners, says Julio Bueno, Rio state’s economic development secretary.

“In 2016, we’ll have a milestone in transportation,” Bueno says. “Prices will be lower because you’ll have several options of places to live in Rio de Janeiro.”

Barra da Tijuca

One up-and-coming neighborhood is Barra da Tijuca, the locale for the Olympic Village. The area, which spreads out before forest-covered mountains, is a former wetland. Developers have built dozens of apartment complexes in the district during the past five years, along with hotels and shopping malls. The city and state are installing new metro lines and express bus lanes.

Lucia Faro and other real estate agents took advantage of a buying frenzy in Barra da Tijuca. Now, reality has set in, says Luiz Carlos Torres, who’s been selling property in the neighborhood for 10 years.

“People were betting prices would explode here, and they did rise a lot, but now I think buyers are starting to realize many projects were overvalued,” Torres says, leaning against his white Volkswagen Golf one afternoon in dusty Recreio dos Bandeirantes, a neighborhood west of Barra where construction of a ring road around the Olympic Park is proceeding at full speed.

“I have clients who bought two-bedroom apartments here for 195,000 reais in 2010,” Torres says. “They’ve been trying to sell them for around 480,000, but everyone thinks that’s way too much.”

Donald Trump

One market is still very hot: the area around Rio’s port in the center of the city. Sergio Lopes Cabral, the finance director of an 8 billion-reais project to refurbish downtown ahead of the Olympics, is turning the run-down port area — best known as a crime-ridden barrio for the homeless — into a modern business and residential district. In his offices, he paces around a 3-meter-long conference table where a satellite map of the city’s center is spread out, and he points to an empty plot of land.

“Over here, we’re negotiating two office towers with Donald Trump,” Cabral says.

Cabral has been selling city land to developers such as Trump and using the proceeds to build infrastructure. A new highway and three tunnels will be constructed, along with a cable car that will connect Rio’s oldest hillside slum, or favela, with a subway and light rail system now under construction.

Port Development

Across the street from the prospective Trump properties, Solace, a consortium of Brazilian construction and engineering firms, is building a 1,330-apartment residential tower that will house visiting media and staff for the Olympics and then be sold to private buyers, with city employees getting first dibs.

“It’s the first big residential development near the port,” Cabral says. “I think there’s a lot of pent-up demand.”

Apartments are being marketed in the area for 5,000 reais a square meter, not much less than they go for in the exclusive Zona Sul, which includes Leblon and Ipanema.

Shapiro’s GTIS Partners is building two office towers near the port.

“We’ve always been a big believer in downtown Rio,” he says. For companies seeking Rio office space, he adds, “there is no place else to go.”

Even if the port area offices and apartments are hot sellers, for most of Rio the boom may be over — four years before the Olympics get under way.

“It seems the market has matured,” Faro says. “Consumers are no longer willing to buy anything at any price.” For both Rio real estate and the rest of Brazil’s overheated economy, that can’t be bad.

To contact the reporter on this story: Adriana Brasileiro in Santiago at abrasileiro@bloomberg.net. Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.