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Mentioned in this Article:
Stephen G. Kliegerman

Stephen G. Kliegerman
President of Development Marketing

Crains

'Shadow' Condos Dim Sale Outlook

By Amanda Fung

A little over two years ago, SDS Procida suspended plans to market The Dillon, its 83-unit Hell's Kitchen condo, when residential real estate tanked. Months later, it faced a second setback: the collapse of the project's lender. With financing for The Dillon now in place and condominium sales picking up, the developer finally put the units on the block three weeks ago.

The Dillon's owners have lots of company. Their building is one of more than a dozen across the city that were once classified as shadow space—apartments completed or near completion that are held off the market or temporarily converted to rentals—whose owners are now putting them up for sale. While the number of units is small, it is expected to swell later this year, and that has some experts worried.

“It is still early—you're not seeing a flood of apartments yet—but we may see it happen during the second half of the year,” says Jonathan Miller, chief executive of appraisal firm Miller Samuel Inc.

In some cases, the apartments are going up for sale now because banks have extended developers' loans or taken over projects themselves. In other instances, once-reluctant developers have taken the pulse of the strengthening market and decided that this is the perfect time to relaunch their projects or to take temporarily converted rental units and put them up for sale.

Risk of deluge

Mr. Miller estimates that there were 6,500 units of shadow space in Manhattan alone during the first quarter of this year. If those apartments were unloaded all at once, supply would potentially skyrocket by 70%. Although such a sudden release is extremely unlikely, there is the possibility that thousands of units will crowd into a market that's still fragile: While sales volumes are rising, median prices at the end of the first quarter were 11% below year-earlier levels.

For now, at least, former shadow units are being well-received. At +Art, a 91-unit condo at 540 W. 28th St. in Chelsea, near High Line park, marketing resumed last week. Stephen Kliegerman, executive director at Halstead Property, says he has already received an offer for two penthouse units, which the prospective buyer plans to combine.

“It is a good time for these projects to come back on line,” says Mr. Kliegerman, who anticipated five more firm offers by the end of last week. “The market is active.”

The buying flurry comes 17 months after the developer got its lender's approval to sideline +Art in the wake of Lehman Brothers' collapse and the freezing of the credit markets.

The developer of The Dillon is also doing well. Eleven contracts have been sent out for signatures and another half a dozen are expected to follow in short order, according to Corcoran Sunshine Marketing Group, exclusive brokerage firm for the property.

Even condo projects that only months ago stood on the brink of foreclosure have reignited. Earlier this year, 120-unit Warehouse 11 in Williamsburg, Brooklyn, returned to the market after the developer and its lender worked out their differences. Now 75% of the building is either in contract or sold, according to David Maundrell, president of Aptsandlofts.com, which handles sales for the project.

Sales at the massive 264-unit Be@Schermerhorn in downtown Brooklyn resumed last week. The move comes six months after investment firm Jamestown Properties bought the mortgage on the troubled property. The original developer had stopped selling apartments last year following a series of missteps.

Rentals redefined
With the market strengthening, even buildings that were temporarily converted into rentals during the downturn are being put back on the sales block. At 87-unit Olive Park in Williamsburg, for example, 30 units that the developer rented out last year will come back on line sometime this year, Mr. Maundrell says. As of two weeks ago, six of those units were on sale; the rest will become available as leases expire.

While those and other developments test their luck, a long list of others are queuing up in the wings. In Manhattan, sales are expected to resume by the end of the year at 1 Rector Square, a 174-unit condo conversion in Battery Park City; 34 Leonard, a 16-unit TriBeCa co-op conversion; and 245 10th Ave., a new 22-unit development in Chelsea.

The influx of apartments has insiders wondering how much supply the market can cope with before the bottom begins to give way again, especially since much of the former shadow space is being offered at cut-rate prices.

“If pricing is competitive, you'll see supply rise and sale prices fall,” says Mr. Miller of Miller Samuel. “That is a concern.”

Sunday, May 23, 2010