The number of cranes above the Manhattan skyline – the unofficial barometer of construction activity in the city – could soon start to dwindle. That’s because after a three-year climb, the number of condo units proposed, under construction and on the market has plateaued, according to a new analysis by The Real Deal.
Moreover, the existing pool of condos could shrink even more as the tighter financing market weeds out projects deemed to be too risky in the current market.
“Here’s the harsh reality of where we are. Based on the capital markets, some very, very large percentage of the [pipeline] projects are not going to be financeable,” said Tim Crowley, director of new development for the residential brokerage CORE. “If you don’t have a construction loan today and you’ve acquired dirt, there’s a very good chance you’re not going to find [financing].”
Indeed, it’s become increasingly challenging for even the most established developers to obtain financing in a market with a glut of new product, particularly the large, expensive luxury units that have come to define this cycle in the Big Apple.
Some 14,500 units are expected to hit the Manhattan market between 2015 and 2017, which at the current absorption rate is between four and six years of excess supply.
The pipeline of Manhattan condo units has grown steadily for the past three years since bottoming out at 12,602 units in the third quarter of 2013. (TRD defined the pipeline as units in projects that were submitted to the New York Attorney General’s office and actively under development or those completed but less than 75 percent sold out.)
Meanwhile, the condo pipeline isn’t the only metric on the decline: The number of new residential permits issued is also dropping. Through the first half of the year, the city’s Department of Buildings issued construction permits authorizing just 634 residential units in Manhattan, according to a TRD analysis of DOB data. (The DOB data doesn’t distinguish between condos and rentals, but its numbers provide an overall gauge of residential construction.)
That’s a massive drop-off from the nearly 10,000 units permitted through the same period in 2015, which hit a 20-year high partly due to developers rushing to beat the expiration of 421a.
So what does that mean for the condo pipeline? The data suggests that it’s very possible the condo pipeline peaked in 2015’s fourth quarter at 16,458 units. But that’s still a far cry from the 25,986 units in the pipeline in early 2007.
Jonathan Miller, president of the appraisal firm Miller Samuel, said the reason is simple: Developers have been building bigger units in this cycle. “While the number of units is up since the financial crisis, it’s nowhere near the last boom,” he said. “My rationale is that the units that they’re building are significantly larger than the last cycle, on average. So you have fewer units and larger square footage.”
TRD’s pipeline analysis supports that assessment. At the end of last year, there was an average of 71.5 units in condo buildings planned in Manhattan. That compares to the average of roughly 88 units back in 2007 (see scorecard on page 126). Condo developers this cycle have moved toward four-bedrooms that average about 3,000 square feet.
But if lenders push developers toward smaller, more moderately priced apartments, the total supply of condos could actually rise.
CORE’s Crowley said that’s exactly what he thinks developers will do. “The cheaper an apartment is, the more people can afford it. If I take a $10 million four-bedroom and I make it $7 million, the $10 million buyer might still be out there, but I capture the $7, $8, $9 and $10 million buyer,” he said.
And where is the most demand? “Today, yesterday and the day before, it’s always the two-bedroom,” Crowley said.
Andrew Gerringer, managing director at the Marketing Directors, attributed the growth of the condo pipeline in the last cycle to the willingness of banks to finance new projects. Lenders are unlikely to shell out in the same way this time.
“Just prior to 2008, when the market fell apart, all you needed was a heartbeat and you’d get financing,” he said. “So you had all kinds of people in the market with projects.”
Miller said that this time, developers have focused on the luxury market. But the real demand is among mid-level and entry-level buyers. “There’s a perception that there are so many towers everywhere. But the devil is in the details,” he said. “It’s just very visible on the skyline.”
Adam Pincus contributed reporting