The New York Times

Changing Course to Avert a Glut

November 19, 2006

blueprint glut miki outside bldg

In the last few years, renowned architects and enterprising developers have rushed to put their stamp on Manhattan

with contemporary condominium buildings that have seemed far more inventive than the staid old co-ops

of the Upper East Side. But now, they are looking at the horizon and fearing that there will soon be a glut. They

are trying to figure out how to avoid flooding the market they once fought to build in.

There are currently 28,258 new condominium units either under construction or being planned in Manhattan, according

to Cushman & Wakefield, the commercial real estate brokerage.

Of these, 14,430 units are in buildings that have already broken ground, and 13,928 units are in buildings that are

being planned. If they are all built, the total will approach the borough’s current stock of 36,000 condo units and

will be equivalent to a fifth of Manhattan’s 138,000 co-op units, according to census data supplied by the Real

Estate Board of New York.

But with a softer real estate market in New York and a growing inventory of co-ops, condos and houses in the

region, real estate experts do not believe that all of these projects will be built, or at least built as condos.

In some cases, developers are trying to sell their lots before they start construction. “I’m getting five calls a week

from people who own sites and want to sell them,” says Michael Forrest, a senior associate who works in the

New York office of Marcus & Millichap, a real estate investment brokerage based in Encino, Calif. “I’m surprised

at how many developers are running for the hills.”

Many other developers are saying that they will go forward with buildings only in the parts of Manhattan that they

see as fail-safe, like certain blocks in Midtown and on the Upper East Side and Upper West Side, and at the highest

end of the market.

Real estate brokers are advising developers to turn some of these projects into anything other than condominiums:

rental apartments, hotels or office buildings. And some major banks that lend to condo developers are cutting

back on loans for proposed projects or for land that developers want to buy. Before granting loans, they are

requiring developers to put more of their own money into their projects, to lower their prices or to sell more units

in advance.

Some condominium projects already on the market have been shifted to other uses. The developers of a condo

conversion project at 485 Fifth Avenue (41st Street) returned deposits to prospective buyers and sold the project

to the Global Hyatt Corporation, which will convert the office building into a hotel. The Related Companies has

turned seven apartments in its new 39-unit building called Astor Place into rental apartments — partly because of

a complicated tax structure and not just the state of the condo market.

Still, the inventory of unsold Manhattan condos has jumped by more than 70 percent in the last year. As of Oct.

31, Manhattan had 4,115 condos available for sale, compared with 2,381 a year earlier, according to data from

the Miller Samuel appraisal company.

Jonathan J. Miller, its president, pointed out that in many cases these numbers were conservative because developers

often release apartments gradually onto the market to limit the perception of oversupply.

“There are more units that could hit the market,” Mr. Miller said, “but they will be brought in at a pace that won’t

flood the market because it’s not in the developer’s best interest.

National housing and finance experts say while an oversupply of apartments may be good news for condo buyers,

they do not believe the oversupply will grow so large that it could actually drag down the overall housing

market in New York City. Stephen Blank, a senior fellow at the Urban Land Institute, a nonprofit planning and

research group in Washington and a specialist in real estate capital markets, said that while he thinks there may

be some overbuilding in Manhattan, it may not be excessive because banks won’t lend to developers the way

they did a year ago.

“While prices may flatten or even decline slightly, there are other markets that the real estate community thinks

are at greater risk for larger price declines,” Mr. Blank said. “Many people point to Miami, Las Vegas and San

Diego, where there has been a lot of speculative buying.”

Mr. Blank said that in New York, he wasn’t “worried about planned condominiums because it’s going to become

increasingly more difficult to finance new construction.”

Academics tracking the national markets don’t think that the Manhattan market will ever have the inventory problems

that Miami and Las Vegas are currently facing.

Las Vegas has 83,400 condos that are under construction or proposed, and plans for building 12,200 more have

been canceled or suspended, according to data collected by Applied Analysis, a Las Vegas research group.

The Miami market now has 82,486 condo units under construction or planned, and plans for 3,246 have been

canceled, according to data from the city’s Planning Department.

John McIlwain, a senior fellow for housing at the Urban Land Institute, predicts that there may be some deals for

buyers in the boroughs outside Manhattan and in Manhattan neighborhoods where banks and developers are

pulling back — Harlem or the financial district, for example.

“If you wanted to move into Manhattan, this is probably a good time to buy in a second-tier neighborhood,” he

said. “They may not be the top performers. But they are the entry points for a lot of people who want to get into

Manhattan or who simply want a bigger space.”

Miki Naftali, the chief executive of El Ad Properties, encourages buyers to jump on deals in these parts of the

market now, so they won’t have to compete with Wall Street bankers and their annual bonuses early next year.

For projects that will not be completed for several years, developers say they are becoming much more selective

about what and where they will build.

Gary Barnett, the chairman of the Extell Development Company, said that for some of his projects, he was still

figuring out how many units he might turn into hotel rooms or rental apartments.

One building that he is planning to construct on Riverside Boulevard between West 62nd and 63rd Streets may

have some rental apartments. He is planning to turn the lower half of his project at 135 West 45th Street into a

hotel, and part of his project at 151 East 85th Street into rentals.

Jules Demchick, the chairman of the J. D. Carlisle Development Company, who is building 290 apartments at

23rd Street and Third Avenue, said he would decide within the next month what the breakdown would be between

rentals and condominiums.

Converting projects to rental apartments is starting to make more sense because this sector has strengthened.

The vacancy rate for rental apartments in Manhattan is a very low 0.8 percent, according to Citi Habitats, a Manhattan

real estate brokerage. The borough hasn’t had such a small percentage of rental vacancies since before

Sept. 11, according to Gordon Golub, Citi Habitats’ senior managing director of Citi Habitats.

But some developers are also persevering with their condo plans.

Earlier this year, Veronica Hackett, the managing partner in the Clarett Group, bought the lot where a supermarket

once stood at West End Avenue and 70th Street. Clarett is building nearly 200 condo units there now.

Ms. Hackett said that the deal seemed right because she paid an affordable price — less than $300 a square foot

for the land — in a location where buyers will be willing to pay a premium.

The Hypo Real Estate Capital Corporation, which has avoided projects in the financial district, wrote the loan for

Ms. Hackett’s deal because it had confidence in the site.

“We liked the family location,” said Evan Denner, Hypo’s deputy chief executive. “We liked that it had a long history

of being a stable neighborhood. We’ve done no residential development in the financial district. We were

concerned because of the lack of services down there. We have not been able to get comfortable that that could

be a sustainable market.”

For the most part, Ms. Hackett said, she says no to the weekly calls and e-mails she gets from other developers

trying to sell her their problematic condominium projects.

“I think today people are having enormous difficulty getting their costs in line,” she said.

One important factor is the price of land.

The record number of new condos planned in Manhattan is making developers far more cautious about buying

any new parcels for projects that won’t be finished until 2009. While they will pay record amounts for prime locations,

developers are paying 5 percent to 20 percent less than they did a year ago for any land that is not in a

prime location, said Robert Knakal, the chairman of Massey Knakal Realty Services Inc.

He defines prime as “on the park, the waterfront, West Broadway in SoHo, Midtown, on one of the major avenues.”

Developers are considering other sites only if they can profitably use them for something other than condominiums,

Mr. Knakal said. As he put it: “Some developers are not willing to build condos anymore unless they really

get a great deal on the land.”

Still, there are developers who are continuing to build for the highest end of the market, which they say buyers

will always covet. In many cases, developers are paying more than ever just for the land in the most desirable

locations.

Data collected by Real Capital Analytics Inc., a real estate research company, shows that developers paid an

average of $428 a square foot for sites to build on in Manhattan, far higher than the average of $297 a square

foot they paid in 2005 or $260 a square foot in 2004. That means developers are going to have to add these high

prices to increasing construction costs, making new projects much costlier over all.

In one case, Macklowe Properties paid $655 a square foot for the site of a combination hotel and condominium

project at 53rd Street and Madison Avenue. That price doesn’t include construction costs or any other expenses

associated with building. Now the developer has decided to put up an office tower instead.

High-end developers are betting that the current streak of job growth, record Wall Street bonuses and high

hedge-fund performance will continue well into 2009. If Wall Street runs into any problems in the next few years,

Mr. Barnett of Extell predicts that retirees and foreign buyers will have enough money to make up the difference.

“It’s not just Wall Street,” he said. “There’s a tremendous pool of buyers from the business world, the financial

world and empty nesters.”

Mr. Naftali of El Ad Properties, which is redeveloping the Plaza Hotel into 182 condominiums and 125 condo-hotel

units, is now betting only on the most expensive condos, with prices starting at $1.5 million for a one-bedroom.

He says that the roughly 125 condominiums that have been sold at the Plaza are commanding $3,500 to $6,000

a square foot, and many buyers have paid cash.

But he said that it had been harder to sell one-bedroom condos at $800,000 to $1 million because there is far

more inventory. Based on that experience, Mr. Naftali paid $142 million for 250 West Street in TriBeCa, a price

that translates to $355 a square foot.

He plans to turn the office building there into condominiums that cater to buyers who will pay for Hudson River

views. The project won’t be completed until 2009.

“The top end of the market is extremely, extremely strong,” Mr. Naftali said. “You clearly see a slowdown in properties

that are in the lesser locations.”

Banks are now more inclined to use their leverage when it comes to what gets built.

Credit Suisse First Boston has become so cautious that it is generally not lending to developers who want to

build condos on midblock sites in Manhattan or on sites that do not have a supermarket or dry cleaner within

three blocks. The loans it makes are typically on projects that have already been submitted to the attorney general’s

office, and when the developers have already assembled a construction budget and sold a significant

percentage of apartments.

“We’ve turned down several projects based on their location, whether it’s a certain part of town or a certain location

on the street,” said Robert Brennan, a managing director.

Some real estate brokers are encouraging uneasy building owners to abandon the condominium market entirely.

Mr. Forrest of Marcus & Millichap was hired last month to advise the seller of a 20-story office building five blocks

north of Madison Square Park who was considering selling the building and marketing it for potential condominiums.

But Mr. Forrest quickly saw that there was too much competition from other projects: developers are building

nearly 4,000 condo units within a three-block radius of Madison Square Park, according to Cushman & Wakefield.

“I’m telling him to sell it as an office,” Mr. Forrest said.

In the financial district, Mr. Forrest finds few buyers for building sites. One of his clients — a developer who

was buying a five-story office building on Stone Street — wanted to sell it before he even closed on it. After six

months of shopping the location for $16.5 million and not getting offers he liked, the owner decided to convert it

to condos himself, although he’s entering a neighborhood heavy with inventory.

“He paid a price that won’t allow him to keep it simply as a five-story commercial building,” Mr. Forrest said. “He

will lose money if he doesn’t build.”