The Real Deal New York

This ain’t 2015: Insiders say new 421a program will take time to impact market

Market fundamentals, ability to finance projects are much different than when tax abatement expired

From left: Marion Jones, David Schwartz and Bob Knakal

When 421a expired in January 2016, the city’s investment-sales market had just wrapped up a banner year: $77 billion worth of commercial property traded hands – nearly 24 percent higher than the last market peak in 2007.

Sure, buyers were groaning that the price of land was getting out of hand and it was harder to make multifamily projects pencil out. But the city’s uber-luxury condo market – while showing cracks – hadn’t yet become unglued, and the rental market was still on the cusp of recognizing a glut of new supply. To boot, construction financing in late 2015 was plentiful.

Then the program expired, and like flipping off a switch it immediately had a chilling effect on the sales market.

The lucrative tax break’s replacement – now christened “Affordable New York” – is officially back, but developers will be facing an investment-sales market that hardly resembles the good ol’ days of 2015. Industry observers are skeptical that the reinstatement of the program will move the needle alone, at least in the near future.

“Most of the investors that we’ve spoken with think [421a] is a positive development, just not necessarily one that’s going to have an immediate and dramatic effect on land pricing or the volume of development deals,” said Marion Jones, managing director in the investment-sales group at Ackman-Ziff.

One clear impact of the new law is that developers can press reset on projects they mothballed when the program expired.

Slate Property Group’s David Schwartz said the firm has several developments that were put on hold when 421a expired, and he’s just now starting to have conversations with lenders about construction financing.

“We were so relieved when it came back because there were so many times that it was coming back, and then it didn’t,” he said. “There was no way to gauge if it would come back or not. There was some uncertainty up until the very end.”

Schwartz added that he thinks developers will begin cautiously dipping their toes back in the land-sales market, but that it will be at least three years until the backlog of sidelined projects will be delivered.

“I think the silver lining is that the lack of 421a really stymied supply significantly,” he said. “You’re not going to see any new 421a units until the end of 2020 [or early] 2021.”

The Durst Organization, too, is getting back on track with plans to develop the remaining buildings at its $1.5 billion Hallets Point project that was iced early last year.

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Durst broke ground in January 2016 on the first building at its 2,000-plus unit megaproject, but says it couldn’t get financing for any of the remaining phases without the abatement in place.

“[T]he passing of ‘Affordable New York’ unleashes approximately 4,000 units of rental housing for The Durst Organization, including about 1,000 affordable units,” a spokesperson for the company said.

What remains less clear is how the new 421a will impact the city’s slumping land-sales market. The market limped through the first three months of the year with just a little more than $7.1 billion worth of transactions in the first quarter, down more than 50 percent from the same time last year. And while the number of properties trading hands is way down, pricing is still going up, a clear sign that the market is in transition and there’s still a disconnect between buyers and sellers.

Still, some took the news on the new abatement program as a sign to test the market.

Alma Realty, for example, recently put the development site for its 2.2 million-square-foot Astoria Cove megaproject in Queens on the market only after the owners became convinced that 421a would be back.

Cushman & Wakefield’s Bob Knakal, who is listing the property, said many of the potential buyers who would purchase a large site where the tax break is essential to making it pencil out, have already started underwriting 421a into their calculations. “Based upon what we’re seeing, we expect to see a decent increase [in sales activity] in the second half of the year,” he said.