A string of developers attempting to replicate the success of trophy residential towers like Extell Development’s One57 and Macklowe Properties’ 432 Park Avenue are placing increasingly ambitious price tags on their properties, sending buyers into a tailspin.
The trend is partially the result of today’s historically high land prices, which are prompting some developers to push the envelope on pricing to justify their land purchases. But the willingness to pursue projects that must achieve such high price-per-square-foot sales is also evidence of inexperienced builders falling victim to market hype, sources told The Real Deal.
While the number of units slated to come to market over the next several years is relatively low, some question whether there will be a sufficient number of über-luxury buyers to sustain developments asking in excess of $3,000 and $4,000 a foot, particularly in secondary locations.
“A lot of people are seeing what [Extell CEO] Gary Barnett, did, and they’re going to attempt to duplicate it,” said Stuart Saft, chair of law firm Holland & Knight’s New York real estate group. Barnett made an investment to acquire the development rights for One57 “long before the moment in time he was going to need them, and he’s benefiting from that now.”
This month, TRD ranked all of the new Manhattan residential projects that have come onto the market in the last 12 months by average asking price per square foot, along with recently launched projects with units remaining. (Click here to view the chart.)
Of the 47 projects, 22 are asking over $3,000 per square foot, while only 10 ask less than $2,000 a foot.
The priciest project with units on the market is 432 Park Avenue, where the average price per square foot is $6,894.
Not far behind is One57, where a small number of units are still left, and where the average asking price is $6,888, according to an offering plan obtained by TRD. Next up is the Elad Group’s 22 Central Park South, asking $5,607 per square foot, and Related Companies’ One Madison, asking $5,061 per square foot, according to data from listings website StreetEasy.
While those price-per-square-foot figures are exceptionally high even for today’s luxury-driven market, sources say developers shooting for anything above $3,000 could take a serious financial hit if the market turns, especially if they bought their land at a high basis.
In other words, while Barnett’s profit margins are large enough to withstand some market turmoil, given that he bought his land before values shot up, that’s not the case for everyone. Developers who forked over serious cash for land don’t have the same financial cushion — and shouldn’t expect the same profit margins.
“You get these amateur developers saying, ‘A unit at that building sold at $5,000 a foot.’ But that’s one unit at the top of the building, not the average of the whole market,” said Scott Alper, a principal at the Witkoff Group, at an event hosted by the Young Jewish Professionals last month.
In addition, while entry-level and mid-range buyers are dramatically underserved, luxury product is more available. In Manhattan, approximately 10,000 new condominium units are scheduled to come on the market over the next three years, according to data provided by the new development marketing company Corcoran Sunshine Marketing Group. Of those, the firm defines 60 percent as “luxury units” — asking in excess of $2,000 a foot. Little is being provided for buyers seeking units below $2,000 a foot. In fact, less than 30 percent of the 10,000 units fit that description.
New development construction clearly increased since the economic crisis. And while the 10,000 units coming to market over three years is an improvement compared with recent years, it’s still far from the 8,000 units delivered in 2007 alone.
In Brooklyn, the inventory shortage of for-sale product is reaching a crisis point, because developers there are building rentals in disproportionately higher numbers since the crash. Only 2,000 new condo units combined are slated to hit the market in the next three years in Brooklyn, according to Corcoran Sunshine’s data, compared with 20,000 new rental units.
“All of Manhattan and Brooklyn are in need of product right now,” said Kelly Kennedy Mack, president of Corcoran Sunshine. “The most significant need is for residences below $5 million, as listings in this category have dropped by 24 percent in the past year alone.”
Notably, some established development companies are limiting their risk by building smaller projects with only a few expensive units, ensuring that they cash in on the wave of market exuberance before interest rates rise or the pool of luxury buyers is depleted.
The cost equation
Developers who snapped up land or buildings for conversions before the boom in the price of dirt are now being rewarded. Those who navigated hairy deals to save money or waited out the recession are in particularly strong positions to sell out with high profit margins.
For example, the Rudin family purchased the St. Vincent’s Hospital site out of bankruptcy for $260 million in 2010 after a three-year quest for the property. It ultimately built the Greenwich Lane project, which includes five condo buildings and five single-family homes along West 11th and West 12th streets. And sales have been brisk. The project is already 40 percent sold after its fall launch. And StreetEasy pegs the average price per square foot for the remaining units at $3,098.
Mack, whose firm is marketing Greenwich Lane, said it is selling “faster than even our most optimistic projections.”
Another development poised to benefit from long-term planning is 50 West Street, a 63-story residential tower being developed by Francis Greenburger’s Time Equities.
Time bought the site in the 1980s. Greenburger said he couldn’t remember what he paid, and public records do not go back that far. It was surely little compared with today’s prices.
The company tapped architect Helmut Jahn to design a curved glass tower, which is set to be completed in 2016. Sales will begin this spring. Listing prices are not yet released.
Developers buying sites now will have to earn the same dollars per square foot being achieved today to make their transactions pencil out. And given the high land costs, they will be forced to hold firm on pricing even if the market shifts.
Nonetheless, those extraordinary land prices haven’t stopped developers and investors from picking up properties.
In fact, recent development site acquisitions have been breaking price records. The average buildable-per-square-foot price for a Manhattan development site was $445 in 2013’s fourth quarter, according to data from investment sales brokerage Massey Knakal Realty Services. That’s a 22 percent increase over 2012. In Brooklyn, the average price was $138 per square foot.
But in August, Peter Armstrong’s Rigby Asset Management paid $50.24 million, or $1,000 per buildable square foot, for a potential condo conversion property at 17 East 12th Street, a record for the highest price ever for such a site. Meanwhile, Toll Brothers is in contract for nonprofit United Cerebral Palsy’s Flatiron District headquarters at 122-130 East 23rd Street for $150 million, or more than $750 per buildable square foot.
“If you pay between $700 and $800 a foot for land and you’re looking at another $400 or $500 a foot for construction costs, another $250 a foot for soft costs and another $200 a foot for marketing costs, for the risk you’re taking, you need to sell that for at least $2,500 a foot or higher,” said Adrienne Albert, CEO and founder of the Marketing Directors, a residential sales and new development marketing firm. “There are very few sites available today that will allow you to bring product to the market at less than $2,500 a foot.”
In addition, broker-turned-developer Michael Shvo made headlines last year when he snapped up a development site at 239 10th Avenue for $23.5 million, or $800 per square foot.
Shvo has defended the purchase. “It’s not about the dollar per square foot. When you go buy a Birkin bag at Hermès, you’re not calculating how much you’re paying for every inch of your bag. It’s truly looking at real estate as a luxury brand,” he told The New York Times.
Still, the investment will require Shvo to charge buyers up to $3,000 a square foot, sources said, the top end of the market for Chelsea. Shvo is planning to build an art-themed boutique condo in partnership with developer Victor Homes.
“Land prices have [increased substantially] over the last year and construction costs continue to rise,” said Robin Schneiderman, director of new business development at Halstead Property Development Marketing. “As a result, many new development projects simply don’t pencil out. We get daily calls from our clients asking if we can achieve certain condo pricing, and we are often forced to hold our clients back.”
To justify paying exorbitant land prices, developers must build mega-luxury condominiums with price tags to match, marketers said. But often, the site location — whether it’s mid-block or on an undesirable street — may not warrant the hefty asking prices. Some sites simply won’t fetch $2,500 a foot. While the market for unique and very high-quality product has been proven over the past 12 months, buyers won’t pony up the same cash for lesser product.
“This is a very different market than the previous peak, and buyers aren’t making irrational decisions,” Mack said.
Where’s the supply?
Over half of the new units in the pipeline are located Downtown, according to Corcoran Sunshine’s data. And demand appears to be keeping up with supply. Downtown sales represented 48 percent of new development transactions in the 2013 fourth quarter, up from 34 percent year-over-year.
Still, there are many in the works in other areas. For example, the 57th Street corridor, from Second Avenue to the Hudson River, is in jeopardy of a super-luxury oversupply.
“A whole bunch of units are coming on the market aiming for a blended average of $4,000 or $5,000 a foot,” said Andrew Heiberger, founder of brokerage firm Town Residential. “It’s not a matter of the price being too high. The unanswered question is: How many buyers are there that can afford those prices? I don’t think anyone knows the answer.”
Among the projects set to come online on 57th Street is the nearly 1,400-foot residential “skinny” tower at 111 West 57th Street by Property Markets Group and JDS Development, the companies behind the successful condominium conversion Walker Tower in Chelsea. Recorded sales at Walker Tower have traded for around $3,300 a foot, according to StreetEasy, while the units currently available, including penthouses, ask an average $4,835 a foot. A penthouse sale at the building last month set a new price record for a Downtown condo, at $50.9 million.
Asking prices are not yet released for the 57th Street tower, but sources speculated they could go as high as $6,000 a foot.
Michael Stern, CEO of JDS, told TRD in October that the project made financial sense because he already owned one of the parcels of his site, which he bought on a “disciplined” basis before land prices escalated.
However, JDS and PMG did invest $177.8 million to acquire an adjacent building formerly owned by piano maker Steinway and its accompanying land lease, as well as $40 million for another nearby site. Sources said that kind of pricey buy-in means the developers must get top dollar in the 100-unit tower.
Other projects slated for the corridor are another Extell building with 233 condos at 225 West 57th Street and a 65-story tower with rental and condo units by development company the World Wide Group at 252 East 57th Street. While the Extell and PMG/JDS projects are expected to target the top of the luxury market, the World Wide building may be more mid-range luxury, sources said.
Saft said he’s confident that the 57th Street projects will be absorbed despite their price tags, even if sales take longer than they would in other neighborhoods.
“I think we’re still very early in the cycle,” he said. “I say that because of the number of contracts that are still being executed, and the speed at which they’re being executed.”
Some of the developers building mega-towers along the 57th Street corridor could also bifurcate the retail from the property and sell it off to make the numbers work. That’s not generally as viable an option for developers of smaller buildings on side streets, where retail is less valuable.
Unit shrinkage
The shrinking availability of Manhattan land and increasing luxury prices are leading some developers to build smaller projects with larger units.
All three new developments currently represented by Town are boutique condos with full-floor units, Heiberger said. Among them is the Charles, at 1355 First Avenue, where 27 full-floor residences are asking an average of $2,541 per square foot, according to StreetEasy. The website still has 13 active sales listings at the property.
Alper said Witkoff has shied away from building giant towers and instead focused on acquiring property with some kind of finite value proposition, like a view of a park or the river. Such a site is so desirable, he said, it’s partially isolated from market factors like inventory levels and interest rates.
“Other than one project where we have 125 units, it’s been 50 or 60 units,” he said. “What our strategy has been over the last four months is buying irreplaceable sites. We’re not assembling sites on side streets or even on avenue sites.”
Saft said the boutique condo play allows developers to justify paying higher land prices and to aim for higher-per-square-foot prices, because they can skip years of planning and turn the project around faster, thereby hedging against a declining market a few years out.
“If you look around town, there are no buildings with 200 or 300 apartments,” he said. A quick turnaround ensures that the developer gets to market while the going is still good and interest rates remain low.
“The whole history of New York has been boom-and-bust and boom-and-bust,” Saft said. “The guys who get in there first, and build and sell, are the ones that make the money. The ones that come in at the tail end of the cycle lose.”