Gregory J. Heym
Executive Vice President, Chief Economist
Development, Demand and Sales Remain Strong
By: Teresa O'Dea Hein, Managing Editor
The term "high rise" takes on added meaning in the Big Apple, a city that is synonymous with "the high life." Another round of record year-end bonuses on Wall Street continues to propel real estate sales prices upward in the city. And on the other end of the cost spectrum, Mayor Michael Bloomberg remains committed to creating affordable housing in New York City, even though the popular 80/20 financing subsidy has become over-taxed and the 421-a tax abatement program may be drastically curtailed by the state legislature.
While national reports indicated fallback in prices in metropolitan areas around the country, New York City bucked that trend, according to first-quarter reports. Bolstered by a strong economy, low unemployment, the strongest year for jobs growth since 2000 and a growing population, the city's multifamily sector is also benefiting from favorable exchange rates for overseas buyers. Wall Street bonuses are especially important to the local economy because even though financial service jobs comprise only 5 percent of the city's total jobs base, they account for 23 percent of personal income, so four consecutively positive years have had a strong impact.
New York City's population continues to grow. In 2005, the U.S. Census Bureau reported that the city was home to 8.2 million residents and experts expect it will add 35,000 to 40,000 newcomers each year. While New York is home to only 38 percent of the region's population, the Census Bureau says it now accounts for 50 percent of the region's new housing permits, up from only 20 percent a little over a decade ago. Seventy-two percent of building permits issued in 2006 were for units in Brooklyn (which led with 9,191 permits), Queens, the Bronx and Staten Island, with Manhattan accounting for the remaining 28 percent. Together, permits for 2006 and 2005, totaling 62,526, mark the highest for any two-year stretch, according to the Bureau, since reliable construction figures became available in 1965. Some of this is driven by rezoning initiatives supporting residential use of formerly industrial sites. "New projects are still entering the market as capital is relatively plentiful," Miller says.
Plus, there is said to be an increased interest in raising children in Manhattan, creating more of a market in the borough for larger units and more kid-friendly amenities. Gregory Heym, chief economist for Halstead Property LLC, notes that the number of children under age 5 in Manhattan has grown 32 percent since 2000.
Also noteworthy is the current surge in sales volume, says Jonathan Miller, president and CEO of Miller Samuel, a leading appraisal firm. Inventory levels are 14 percent below the same time last year due to rising demand and high sales levels. While Miller had expected an increase in sales, "I didn't expect sales to go up this much; sales activity is eating into inventory."
At the same time, Miller warns, it is essential that condos be priced correctly. "There is a big difference now from the mindset of two years ago when the NYC multifamily market was at its peak. The market had to re-train itself on pricing units properly." The average listing discount in Manhattan for first quarter 2007 was 2.6 percent versus 5-7 percent three years ago. (Listing discount is the difference between the last asking price and final sales price.)
The average price of a NYC apartment is up, now reaching $1,070 per square foot according to Miller's report and $1,023 per square foot in Heym's report. Subdivided between condos and co-ops, Miller adds that the price rises to $1,169 per square foot for condos and $965 per square foot for co-ops, showing that buyers put a premium on the condo form of ownership.
Miller's firm also prepares quarterly reports for Prudential Douglas Elliman. Since the middle of the third quarter of 2006, Miller says, inventory has been declining while sales have been rising. In the first quarter of 2007, sales reached 3,500 units with available inventory at about 2,750 units. New developments are 24 percent of Manhattan sales, Heym says.
Manhattan apartment prices gained in the first quarter of 2007. According to the Prudential Douglas Elliman report, prices rose 6.6 percent per square foot on average in the first quarter from a year ago. Miller notes that in the first quarter of '07, 60 percent of Manhattan apartments cost under $1 million, 36 percent cost $1 million to $4 million, and the remainder were over $4 million, the same ratio as Q1 2006.
Heym points out that Manhattan apartment sales set a new record median price of $770,000, which is four percent higher than a year ago. A big question is whether supply will rise at too great a pace, he notes. But at the moment, Heym adds, brokers report that bidding wars are back.
The rental market is very strong, Heym says, due to a plethora of condo conversions and lack of new development.
On the political front, key changes affecting the housing market are afoot. On Jan. 1, 2007, New York got a new governor (Eliot Spitzer) for the first time in 12 years and he naturally appointed new commissioners to carry out his vision for the state. Priscilla Almodovar, Spitzer's pick to head the New York State Housing Finance Agency (HFA), had to make some tough decisions soon after taking office as its president and CEO when it became apparent that the limited supply of tax-exempt housing bonds was going to be less than a quarter of the $4.8 billion that developers were requesting for a surge of new projects. (Tax-exempt bonds help finance apartment buildings that peg rents on 20 percent of units to be affordable to low-income families.)
Due to this dramatic imbalance, Almodovar and her staff quickly introduced new financing requirements and asked developers to re-apply for funding in accordance with these revised guidelines, initially expected to cap the amount of tax-exempt bonds that developers could get at $1.5 million for each affordable unit, significantly less than they'd originally requested. Negotiations moved that cap up for some deals in the pipeline that were already far along, but the end result reportedly saw the same number of low-income units financed at a lower cost.
Almodovar adds that preservation, not just new construction, will be a top priority "because, frankly, the scarce resources go a lot farther—particularly in high-cost areas." Furthermore, she also wants to see if there is a cost-efficient way to introduce "green" elements into these housing preservation efforts. "Preservation and green are key goals for me, and for the administration."
Besides a reduced volume cap for 80/20 projects, more storm clouds are looming on the real estate horizon in the form of proposed limits to the city's popular 421-a tax abatement program, credited for prompting much development over the past 30 years. The 421-a program keeps buyers' monthly carrying costs low for several years, enabling them to afford higher-priced units. In exchange, developers build affordable housing elsewhere.
Michael Slattery, senior vice president of the Real Estate Board of New York (REBNY), a lobbying group that represents New York property owners, builders, brokers and managers, expects that the state legislature may take up the proposed 421-a changes in mid May or early June but hopes that legislators do not follow the New York City Council recommendations, approved in December 2006, to further limit areas that can utilize the popular 421-a program. Slattery says, "The proposed changes in 421-a is certainly going to slow the pace of new housing development in many parts of the city, particularly those emerging areas in Brooklyn and Queens that are being affected as well as parts of northern Manhattan that are finally seeing some market-rate development for the first time in decades."
Likewise, Slattery believes that the inability to fund all the 80/20 projects that are in the pipeline "is really going to hurt the affordable housing market. It's likely some of those will move forward as market-rate if projects can't get 80/20 funding. Others may not go forward, or find another use, like a hotel," he predicts. "I think those two factors are certainly going to curtail the pace that we've seen in housing production in the city in the last two years."
At the moment, though, the Big Apple outlook is rosy. Jackie Urgo, executive vice president of The Marketing Directors, based in Manhattan, reports, "Things have been going incredibly well since January." She adds that out-of-town investors—especially from Chicago, Los Angeles, Washington, D.C. and Florida—who purchase pied-a-terres in NYC don't necessarily choose smaller condos. "We see people buying even three-bedroom units so they have the luxury of space for the few weeks they use the condo." Urgo has also noticed the "interesting phenomenon" of parents buying units for adult children to help them get a start on the property ladder, and has seen friends and families buying condos in the same building so they can live closer and with neighbors they know.
With the new Visionaire, the first "green" condo developed in Manhattan's Battery Park City by the Albanese Organization after their two successful for-rent "green" buildings, people are enjoying the ownership opportunity, Urgo says. Ten percent of this new condo recently sold in its first nine days on the market, she notes.
Urgo says buildings now have to be very heavily amenitized to stand out. "People like living in a resort-type atmosphere where you never have to leave the building to go to the gym, for instance, and it's available when you are," she adds. "Manhattanites have so little time to unwind that they value convenience. And a roof terrace or backyard is particularly important to people moving back from the suburbs."
Urgo believes people have become less neighborhood-specific over the years and more open to looking at "the best value for the best lifestyle, at an amenitized building—whatever neighborhood it's in."
Buyers have even been taking the "A" train—and other subway lines—to Harlem to purchase condos, where their dollars go farther. Harlem's 2003 rezoning is supporting multifamily development in neighborhoods like Hamilton Heights. One just-opened high-profile project is West 145th Street's The Langston, named for Langston Hughes, a leading poet of the early twentieth-century Harlem Renaissance. The Langston's first floor will house a Starbucks Coffee and a NY Sports Club branch, which is the first major health club facility north of 125th St. While 70 percent of these 180 units were priced within affordable income limits, the building offers luxury finishes. As of presstime, 76 percent of the units were sold; sales began last fall.
The Langston is the Gotham Organization's second area joint venture with The Richman Group Development Corp.; the two completed The Hamilton, a 77-unit co-op a block west, in 2002. David L. Picket, Gotham's president, says, "Gotham is proud to be part of this new wave of Harlem's continued revitalization that has helped provide the impetus for the arrival of amenities to this dynamic community."
Spencer Garfield, managing director of the Manhattan-based Hudson Realty Capital, says, "It's an interesting time and we're being cautious, especially with the increases in construction costs. We are choosing our investments very, very selectively," Garfield adds, "especially now, with the subprime meltdown. We're less inclined to do equity financing because of market conditions in general," he points out, instead offering bridge or mezzanine financing in some cases. "While N.Y. has dynamics that are not true throughout the country, we are still steering clear of properties in secondary locations or ones reaching for price but short on amenities."
Copyright 2005 Multi-Housing News
Tuesday, May 01, 2007