The New York Times

Changing Course To Avert A Glut

November 19, 2006

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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.”