Gregory J. Heym
Executive Vice President, Chief Economist
Stephen G. Kliegerman
President of Development Marketing
Douglaston Development Principal Jeffrey Levine wants to keep putting up residential housing, but he turns down a project a week and hasn't yet sought a building permit for a planned 53-story condominium tower on the Upper West Side.
“We are holding off right now,” says Mr. Levine. “Nothing is working in favor of permits today.”
In a dramatic turnaround from conditions a year ago, developers like Mr. Levine are biding their time instead of building. The number of permits for residential buildings issued in the five boroughs dropped by 46% in the first quarter compared with 2007 levels, a sign that the city's residential building boom is coming to an end.
The total declined to 558 from 1,038, according to figures released last week by the U.S. Census Bureau. The number of units covered by the permits also fell 46%, to 3,893 from 7,264. The steepest drops were in Manhattan, where the figure plunged 69%, to 485 units, and Queens, whose total fell 62%, to 705.
The decline follows a year in which 32,000 permits were issued citywide, bucking a national slowdown. That number was higher than in any year since 1972, and 2007 marked a record third straight year in which at least 30,000 units were permitted.
A wide availability of structured finance for developers and easy mortgage terms for buyers, combined with changes planned for the 421-a tax abatement program, led developers to accelerate projects that in a normal environment might not have been permitted until this year.
Bigger declines ahead
Now the market has done a 180-degree turn.
“It's harder for people to get mortgages, and it's also harder for developers to get loans,” says Gregory Heym, chief economist at Terra Holdings, the parent of residential brokerages Brown Harris Stevens and Halstead Property. “When most people are anticipating that the real estate market will slow, it's not surprising to see permits start to decline.”
Housing tends to trail other economic indicators, so as the downturn deepens and layoffs mount, the construction slowdown will continue.
“We are not going to see it bottom out for a while,” says Mr. Heym.
Developers point to three main reasons for the stark drop-off: The credit crunch, imminent reforms to 421-a and a scarcity of sites all have made building more challenging.
“It's relatively impossible for developers to get financing today unless they're the biggest of the best and have an incredibly low cost basis,” says Stephen Kliegerman, executive director of development marketing at Halstead.
Developers also need to have foundations in the ground by June 30 in order to qualify for tax abatements under the modified 421-a subsidy program. That prompted a rush for permits, which helped inflate numbers last year.
Furthermore, developers say, the surge over the past few years has cut into the number of sites on which to build, especially in Manhattan. And owners are still expecting big payoffs for their land, holding firm on asking prices that are unrealistic in today's market. Developers say that even for locations in the best neighborhoods, they can't afford to pay more than $150 to $200 a square foot, but landowners are still asking for $300 to $400.
“Sellers are still living off the expectations of a year ago,” says David Picket, president of Gotham Organization Inc., a real estate development and construction company. “Buyers are dealing with the reality of a lack of liquidity.”
The most optimistic, like Mr. Levine, see a brighter future. They believe that once the current stock of residential units is sold, a lack of product on the market will cause prices to go up. That, in turn, will motivate lenders to finance projects, developers to build them, and home buyers to line up for open houses.
“Permits will come back this time next year,” Mr. Levine says. “Once the tide turns, these buyers will be rushing to make sure they're not left high and dry.”
Sunday, April 27, 2008