Gregory J. Heym
Executive Vice President, Chief Economist
Stephen G. Kliegerman
President of Development Marketing
Park Avenue Office
At the height of the real estate boom in Manhattan, it seemed a new glass-walled apartment tower was unveiled every week and sold out before the next one even got its Web site up. Now, as the market plods along in a slow but steady recovery, brokers and developers are saying the city will soon face a shortage of new development projects.
Skeptics might be forgiven for snickering at the suggestion that this shortage will spur demand and — what else? — drive prices up. But a look at one indicator, the number of building permits filed for new residential units in recent years, might give the doubters pause.
Last year, through November, the city issued permits for only 10 new residential buildings, for a total of 505 new units. That’s 95 percent fewer apartments, either condo or rental, than for the same period in 2008, when permits were filed for 9,448 units in 147 buildings, according to census data. (The number of units had dropped to 1,203 in 31 buildings in 2009.)
“We tend to go through these cycles where, when you finally come out of a recession, there’s a shortage of inventory,” said Gregory J. Heym, the chief economist for Halstead Property and Brown Harris Stevens. “You usually expect the slowdown to come over a couple years, but this was like slamming on the brakes. So to start up again may take awhile.”
Brokers, developers and market watchers say that barring any significant economic hiccups, real estate values in Manhattan will continue to grow at a measured rate through 2011. But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again. “Once we work through the existing inventory and there’s nothing new coming on line,” said Kelly Mack, the president of the Corcoran Sunshine Marketing Group, “there’s going to be a major shift in the market. Prices may start going up significantly in 2012, in anticipation of the shift in inventory.”
Mr. Heym said that since a permit doesn’t always translate into bricks and mortar, many permits from 2008, and even earlier, have yet to turn into buildings that can be sold and occupied. “There’s also the question of how many buildings that were stalled during the downturn are still out there and when they will hit the market,” he said. “So there are a lot of unknowns.”
Gary Barnett, the president of Extell Development and one of the few developers who continued building through the downturn, said the lack of inventory was more pronounced now than in previous recessions. “In the early 1990s,” he said, “there was a big overhang of things that had been built in the late ’80s, but when things stopped this time, it just fell off a cliff.”
The number of building permits “didn’t go from 10,000 to 6,000,” he added, “it went from 10,000 to nothing. So we don’t have the overhang and no big inventory to work through. That’s why the market recovered much more quickly than people expected.”
Brokers and developers agreed that the reason for the sudden falloff in building permits was the lack of construction financing. Apartment hunters have had a hard time in the last two years getting a mortgage, but developers have had an even tougher haul.
“If you look at all the traditional players in the condo market, very few have anything under construction because there’s just no financing available,” said Bruce A. Beal Jr., an executive vice president of the Related Companies, which this year is completing a 60-story tower at 42nd Street and 10th Avenue that will have both rentals and condos.
Both Mr. Beal and Mr. Barnett acknowledged that a few big projects would open this year but said they could not think of any major developments set to open in 2012. Projects that get under way this year will not be ready for sale until 2013 at the earliest, after inventory has been depleted and just as prices have begun to rise.
Last year, Extell started a hotel/condo project on West 57th Street near Carnegie Hall with 136 condo units, which Mr. Barnett said would come to market in 2013.
Related is planning its mixed-use project at Hudson Yards, and could also start building on a West 30th Street site on the edge of the yards, but Mr. Beal said neither location was likely to produce new apartments until 2013 or 2014.
Kenneth S. Horn, the president of Alchemy Properties, which primarily builds condos with fewer than 100 apartments, said that he felt lucky both to have closed on a site in late 2010 and to have obtained a construction loan. “I’ve been saying for the last 18 months that now is the time to buy and build,” he said, “but the financing just wasn’t there. The only reason we could get this loan was through relationships that we had built up over the years.”
The project will be a 23-story tower on 15th Street and Fifth Avenue that will have a school on its lower floors and 57 apartments above. Alchemy will start construction this year and hopes to start selling units in late 2013. “Who knows if prices will go up in 2013,” Mr. Horn said, “but it does stand to reason, on pure supply-and-demand basis. If I can deliver product in 2013, I’ll be ahead of the curve. And I would have done more projects if I had been able to convince my other financial partners.”
Mr. Beal said that although construction financing had been hard to obtain for both rental buildings and condos, he knew of as many as 3,000 planned rental units that could start construction in 2011. “There are a couple of deals here or there that people have heard about,” he said, “but not much in a market that once was producing as many as 10,000 units a year.”
Andy Gerringer, the managing director of the Marketing Directors, said that developers and investors had just recently started buying land again. “Sites have been trading,” he said, “and we’ve been talking to people who are dusting off plans that have been on the back burner for the last two years.”
Many projects conceived before the downturn are getting a second life, said Howard Lorber, the chairman of Prudential Douglas Elliman. Most have been taken over by new owners and are likely to start construction within the next six months, he said.
“I have 10 different projects that we’re working on,” he added, “and none of them have started yet. Let’s say only seven of them eventually get done, that’s still probably 1,000 units” that could come to market by 2013.
The handful of buildings that start selling apartments in 2011 are expected to do well, especially in neighborhoods that have little new construction.
In 2007, when buyers were signing contracts based solely on floor plans and glossy brochures, more than 8,500 new units hit the market in Manhattan, not including Upper Manhattan neighborhoods, according to data compiled by the Corcoran Sunshine Marketing Group. That number dropped to just 553 units in 2009, when the presale market shriveled up because buyers were loath to invest in properties they could not see or touch.
Prices for new developments also peaked in 2009, with a median price of $1.215 million, according to streeteasy.com. Prices continued to rise during the downturn — even as resale prices dropped — because many contracts signed before the financial crisis did not close until late 2009. By 2010, the number of new development units had climbed back up to 1,767, but the median price had dropped 13 percent, to $1.059 million.
Ms. Mack said she expected only about 600 to 700 new condo units in about a dozen buildings to hit the market this year.
Two big projects include the Aldyn on Riverside Boulevard, a 40-story tower built by Extell and being marketed by Corcoran Sunshine, and Related’s 42nd Street tower. At the Aldyn, which is to have 286 rental and condo units, rents will start at $2,695, for a studio, and condo prices will range from $775,000, for a one-bedroom, to $15.9 million for a six-bedroom. The 42nd Street building will start leasing 500 apartments in March, but sales on its 150 condos will not start until later in the year.
Activity on the rental side will probably be greater, with about 2,500 new rental units expected to open in 2011, said Gary Malin, the president of Citi Habitats, “but we’re not talking about massive construction coming on line.”
The 2011 number includes 900 apartments at 8 Spruce Street, the 76-story tower designed by Frank Gehry; 250 units at Clinton Park, a Two Trees Management project at 53rd Street and 11th Avenue that will eventually have 900 apartments; and 338 units at the Continental, a 53-story tower at Avenue of the Americas and 32nd Street.
“A lot of what’s going to come on line this year has been planned for a long time,” Mr. Malin said.
Durst Fetner Residential recently closed on a failed condo site that will now become a rental building. It plans to break ground in early 2012 on a 40-story rental tower at 855 Sixth Avenue, at 30th Street. The building would have either retail space or a hotel on the lower floors and several hundred apartments above. It would not be completed until 2014.
Prices in the buildings that open this year will most likely start to rise in some areas before others. Emerging neighborhoods like Harlem, the financial district and Downtown Brooklyn still have substantial inventory, and prices will stay stable.
“But about 80 percent of New York City has very little product in it right now,” Mr. Gerringer said. That doesn’t mean a new building can expect to sell 50 units a month, as they used to in 2007 and 2008, “but those levels weren’t real, and a level market is more like 5 to 10 units a month, which is what we’ve been seeing lately.”
Several new buildings that have opened downtown, for example, have fared well in recent months. Ms. Mack cited 123 Third Avenue, a 19-story tower at 14th Street that started selling last fall. It sold 70 percent of its 47 apartments in four months, she said, adding that the projects with healthy sales are the ones priced well for their neighborhoods.
Gramercy 19 on Third Avenue, a 16-unit condo that Halstead Property started selling last November, sold 12 units in 10 days, said Stephen G. Kliegerman, the executive director of development marketing at Halstead. Four of those sales had bidding wars and sold for about 5 percent above initial asking prices. The range at Gramercy 19 starts at $440,000, for a one-bedroom, and reaches $2.65 million for a three-bedroom.
“That kind of thing isn’t happening everywhere and there are always going to be bright spots and lower spots,” Mr. Kliegerman said. “But generally, we are seeing good demand almost everywhere.”
On the Upper West Side, an area that has historically had little new development, Brown Harris Stevens began sales in December for the Laureate, a 20-story building with 76 apartments. Made up mainly of large apartments with three to seven bedrooms, the building is not yet finished, but interest has been so keen that as of Jan. 1, 600 people had signed a waiting list to see units.
Mr. Kliegerman said that fewer new apartments entering the market “can be a good thing for the market,” adding, “It gives the market time to catch up to itself.”
Friday, January 14, 2011