Gregory J. Heym
Executive Vice President, Chief Economist
By Janet Morrissey
NEW YORK (Dow Jones)--Manhattan, long considered immune to volatility that crumbles other residential real estate markets, is showing symptoms of a chill.
The cooling off means properties are on the market for longer periods. Worried owners are offering bigger incentives, such as paying closing costs. Also, developers are offering bigger commissions to woo buyers to newer condominiums.
The slowdown reflects a surge in new construction, with the number of permits being issued hitting their highest level in 30 years, paired with a pullback in demand especially for condominiums priced under $1 million. It's an eerie omen of what led to current slowdowns in California and Florida, where builders are seeing orders drop like rocks.
Michael Slattery, senior vice president of the Real Estate Board of New York, said the number of residential permits issued in 2005 for construction of new units that will be delivered in New York City in 2006 and 2007 exceeded 31,000 units - the highest level since the mid-1970s. In Manhattan alone, 8,493 permits were issued, up from the historical average of between 4,000 and 5,000.
"Clearly the activity has picked up," he said.
At the same time, buyers are taking longer to make decisions.
"There's been a period of hesitancy where people are balking at price," said William Zeckendorf, owner and co-chairman of Terra Holdings, the closely-held parent of brokerage companies Brown Harris Stevens and Halstead Property LLC. The last time he noticed a similar slowdown was during the Russian currency crisis of 1998 and the period immediately following the Sept. 11, 2001 tragedy.
Zeckendorf said sales have slowed from the historic levels of 2005, but they haven't fallen off a cliff.
"Is it a spectacular year like 2005? No," said Zeckendorf. However, he still expects it to be a "good year." Although sales volume is down, pricing has not declined - at least not yet, he said.
"There are more apartments on the market, and things overall are taking longer to sell," said Greg Heym, chief economist of Halstead Property LLC. "A lot of things that we were selling in a matter of days or weeks a year or two ago have now returned to more historical levels and people are panicking that they're sitting in the market."
This trend mirrors the conditions facing other housing markets earlier this year - just before cancellations surged and publicly-traded builders and other sellers began heaping on incentives and slashing prices to move sales.
"We're seeing a slowdown in the pace of growth...(but) I haven't seen a price correction," said Slattery.
A surge in condominium units is driving much of the slowdown in Manhattan.
Historic low mortgage rates, small inventories, Wall Street bonuses and international investors all caused a spike in demand for condos over the past few years. All this caused a mad dash to convert hotels and rental properties into condo units and build new towers at a feverish pace.
About 16,000 new condo units are expected to hit the market in 2006, more than double the 6,930 units that were added in 2005, according to Heym.
"We're way above the average" number of units that are added each year, said Pam Liebman, president and chief executive of the Corcoran Group, a New York brokerage firm.
At the same time, homes are taking longer to sell and prices are flattening. Condos and co-op units took 193 days on average to sell in the second quarter of 2006, which is 25% longer than the 154 days they took to sell a year earlier, Heym said.
Condo prices have soared in recent years, rising 38% in 2004 and 26% in 2005, according to Liebman. But prices have started to come down in 2006, with the average price being off 15%, she said. Overall market prices are slightly up.
Heym said it's clear the market could not sustain 26% annual price increases, and he believes condo prices are simply returning to more "normal" levels.
Slattery said prices are flattening.
"Last year you were looking at clearly double digit increases in pricing, and now we're seeing low single digit increases," he said.
Zeckendorf said sales have slowed for much of 2006, with the biggest slowdown occurring among the low-to-middle end of the market - or those valued at $1.5 million or less.
The biggest inventory buildup in Manhattan appears to be among one-bedroom condo units, said Liebman.
"As interest rates have ticked up and prices for one-bedroom apartments have gotten a lot more expensive, it has forced a lot of those first-time buyers back into the rental market," she said.
As a result, sellers have started offering incentives, such as paying the closing costs and throwing in extra amenities, Liebman said.
Competition for buyers has become so intense that many developers are offering higher commissions to brokers who can lure buyers to their properties, she added.
Many sellers still don't get it, pricing condos based on last year's conditions. "The average price in New York City now is over $1 million," Liebman said. "We've driven some of the buyers out of the market with the high prices."
Still, demand for studio apartments has remained healthy. "For those who insist on buying, they're now willing to buy a studio instead of a one-bedroom," she said.
So far, brokers are not reporting dramatic price slashing, although some developers have ratcheted down asking prices on some of the new developments.
Liebman said press reports about housing corrections in other parts of the country are fueling buyer concerns.
"It certainly does play into the psychology, particularly where you had a lot of investors coming into new condominiums and buying to flip," she said, referring to quick resales. "It was certainly much more prevalent in Miami and Las Vegas, but there are some in New York."
She said flippers were most prominent in lower-priced buildings.
Still, Zeckendorf remains confident the Manhattan market is not poised for a crash.
"Don't confuse what's happening in Las Vegas and West Palm Beach and San Diego and starter-home markets with Manhattan," said Zeckendorf, who remains bullish about the city's outlook.
"The economy is in good shape in this city," said Zeckendorf. "It's hard to have a significant housing recession if your economy is in decent shape."
Conditions are far different from the early 1990s when Manhattan's residential market crashed. Condos and co-ops lost at least 25% of their value over a two-year period. "Trying to sell apartments when you've got negative job growth and rising unemployment is impossible."
Zeckendorf said it's tougher to bring down Manhattan's economy because it's broad-based, where finance, insurance, real estate, education and the international community meet and flourish.
"There is big job growth and big income growth in those industries right now," he said. The diversified economy makes the city less vulnerable to a downturn as markets that rely on a single industry, such as the auto or aviation sectors, for employment and growth.
Slattery said lenders have started to pull in the reins on new construction in Manhattan due to the slowdown, with many requesting the developer put more equity into a project. He said this should slow the amount of new construction going on.
Also, demand for Manhattan properties is far deeper and broader than other markets, as international investors, finance industry executives, insurance, musicians, high-profile entertainment personalities, people looking for second and third homes, and others all jockey for a slice of the apple.
While no one is predicting a severe housing correction similar to the one experienced in the early 1990s, no one is ruling it out either.
Zeckendorf said it's impossible to predict.
"It might. I just don't know," he said. "I never say never. I don't have a crystal ball. Through August, the market is hanging in there in Manhattan, but listen - we're not blind to the rest of the country."
Friday, September 15, 2006