Gregory J. Heym
Executive Vice President, Chief Economist
Shadow units could mean residential market in more dire shape
By Candace Taylor
As New York City reels from the crisis on Wall Street, the real estate industry has taken some comfort in the fact that New York's infamously tight market has avoided the massive inventory buildup found in Miami and other cities.
But New York City has more homes for sale than you might think.
While market reports peg Manhattan's available inventory at around 8,000 units, experts say the real figure may be much larger, due to a "shadow inventory" of roughly 2,000 apartments.
Because developers often stagger listings of newly built units and strategically hold them off the market, official reports fail to capture a large number of available apartments. In a rising market, that would be good news for buyers, meaning there are more units available. But as prices decline, the excess inventory could become a problem and make for a longer recovery time for the city's floundering real estate market.
"Right now, inventory levels officially aren't that much different from a few years ago," said Derrick Gross, a business analyst at StreetEasy. "Brokers will say it's a great time to buy. But really, there are all these units that are hidden."
Jonathan Miller, president of the real estate appraisal firm Miller Samuel, said Manhattan listing inventory was at 7,003 units at the end of the third quarter — up from 6,869 units at the end of the second quarter. By the end of October, the most recent date on record at press time, the figure was 7,444 units, or about seven months' worth of homes for sale, he said.
But because his data is based on listings, it doesn't include the units that developers haven't yet put on the market, he said. He estimated that the real inventory figure could be closer to 9,444 units.
"In terms of absolute total numbers that are on the market, it certainly undercounts the product available for sale," Miller said of his data.
One question many are asking is whether that inventory was also undercounted a year ago, as experts try to get a handle on the magnitude of the slowdown.
However, counting the number of unreleased units each quarter would be a nearly impossible task, involving an analysis of how many units are left at each new development. So, that figure is still a mystery to many of New York's real estate experts.
"Those numbers are constantly changing," Miller said. "It's very difficult to extract which units are remaining."
The complexity stems from a popular method of marketing new condo buildings. The vast majority of developers put only a small percentage of their units on the market at a time, as a way of controlling the prices fetched for each apartment and the speed at which they sell, according to Andrew Gerringer, director for new developments at Prudential Douglas Elliman.
"If you put the whole building on the market at once, people tend to cherry-pick the best units," explained Gerringer. "You don't want to have all the hard-to-sell units at the end."
Releasing small batches of units at a time helps developers sell out the building evenly. "You play the units off each other," Gerringer said. "There's a bit of an art and science to it."
The strategy is often viewed as a necessity, especially in larger buildings.
"When you have an offering plan with 200 units, the developer may release to the brokers blocks of 50 units at a time so you don't flood the market with listings in this building," Miller said.
At the Edge in Williamsburg, for example, there are 575 luxury condo units planned, in addition to 347 rental units. But only 53 active sales listings are considered "available," according to StreetEasy.
The downfall of the strategy of holding back units is that it makes it nearly impossible for market analysts — like Miller, StreetEasy and others — to accurately track how many "shadow" units are on the market because their data is based on active listings.
Miller said in the third quarter, new development accounted for 26.8 percent of the total inventory, or 2,002 units. "I would think that the number [of units] that are not released, that are under construction or completed but not added to the offering plan, is at least double the number of units that are currently on the market," he said.
StreetEasy's third-quarter market report estimated that there were 8,635 units on the market in Manhattan, but Gross said the number of units not yet listed "is probably pretty high."
The difference between the two figures could have profound consequences for how long it will take New York City to recover from the slump.
"There's a big discrepancy between the number of apartments that StreetEasy has and what is really on the market," said Christine Toes, an associate broker at Corcoran.
"If you think we have 8,600 units, that means we're in a much better situation than other cities," Toes said. "But if it's more like 10,000 units, then it will take more than seven months to absorb that entire inventory."
Inventory has a direct relationship to prices, said Gregory Heym, chief economist for Terra Holdings. "If inventory builds significantly, prices will come down to sell off that inventory," he said.
A large number of additional new development units "would put in buyers' minds a different idea of the real estate market right now," Gross added. "Buyers would be less inclined to move forward."
For his part, Heym stressed that New York's inventory, while higher than it has been, is still much lower than other cities'; Miami, according to some reports, has roughly three years' worth of inventory overhang.
He also emphasized that the impact of shadow inventory will be neighborhood- and category-specific. "If people are looking for a co-op, prices are not going to be swayed by how much new development condos are," Heym said.
Areas where there has been a large amount of new development include Williamsburg, the Financial District, West Chelsea and Long Island City, Gross said.
"It's all about where the inventory is," Gerringer noted. "If you have 10 new projects in Chelsea but only a few on the Upper West Side, your pricing can tend to be a little stronger on the Upper West Side."
He said it's not just buyers and developers who are interested in the amount of shadow inventory in the city: lenders are also concerned. "I'm asked about it a lot," Gerringer said. "As a bank, you want to know how many units are out there."
The upside for the city is that the credit crunch has made it nearly impossible to finance new projects, meaning the pipeline of new inventory is expected to dry up quickly once the current batch of new developments is sold.
"The condo filing plans have fallen precipitously, and that's a good thing," said Jeff Bernstein, a partner at Guild Partners, a boutique real estate investment banking firm. "My guess is that you're going to see this pipeline go down to nothing."
Monday, December 01, 2008