Inventory crisis expected to last through 2015

New housing supply targets luxury market, squeezing the other 90 percent of buyers
By Hayley Kaplan | October 01, 2013 07:00AM

Recent years have seen some of Manhattan’s buzziest and most luxurious new developments — 432 Park Avenue and One57 among them. But these pricey new condo buildings are doing little to reverse the current Manhattan inventory shortage, experts told The Real Deal.

The number of new development units currently in the pipeline is too small to address the inventory shortage, experts said. Resales also remain in short supply; with credit tight and the economy still uncertain, many homeowners can’t afford a new, larger home, so they’re delaying putting their units up for sale. Due to these factors, experts agree that it will likely be several years before the city sees a noticeable uptick in the number of homes on the market.

If the economy continues to improve, more resales will return to the market in a “slow-motion scenario over the next two to three years,” said Jonathan Miller, president of the appraisal firm Miller Samuel.

In the meantime, many homeseekers may be out of luck, especially since most of the new construction units hitting the market are priced at or above $3 million, which makes them accessible to only the upper 10 percent of Manhattan buyers, he said.

“The new supply coming on is targeting the luxury market,” Miller said. “But what about the other 90 percent?”

Crunching the numbers

The current inventory crunch has its roots in the recession and credit crisis, which halted many under-construction residential projects and scuttled plans for new ones. As a result, the “pipeline [for new projects] ran dry by 2009,” Miller said.

At the same time, tight credit, job losses and reduced incomes have prevented many homeowners from putting their homes on the market, since they can’t afford to upgrade to bigger units.

“You have a lot of people [who] can’t trade up or make a lateral move because they no longer qualify for credit,” Miller said. “If you don’t qualify for credit, you’re not going to sell.”

As a result of these factors, inventory is at records lows: In mid-September, there were 4,342 Manhattan homes on the market, down 25.7 percent from 5,847 in the third quarter of 2012, according to data from Miller Samuel. By comparison, when inventory was at its height in the first quarter of 2009, 10,648 units were on the market.

New construction has recovered somewhat from the depths of the recession, but there are only about 6,200 new construction condo units due to hit the market over the next few years, according to data compiled for TRD by the brokerage the Marketing Directors. That’s up from 5,580 in the pipeline at this time last year, but it’s still not enough to meet the demand for New York City homes: The Marketing Directors estimated that some 5,300 new construction and resale condo were purchased in Manhattan last year alone. The absorption rate — the amount of time it would take for all units on the market to sell at the current pace — in Manhattan in the second quarter was just 4.6 months, Miller Samuel’s data shows, down 41.8 percent year-over-year from 7.9 months.

In addition to the overall lack  of available apartments, many of the new projects being built now do little to ameliorate the inventory shortage because they are targeted towards wealthy jet-setters rather than average New Yorkers. One57 and 432 Park, for example, have both made headlines for $90 million-plus contracts, and a penthouse at the new condo 56 Leonard Street is reportedly in contract for $47 million. In the second quarter of this year, the median sales price for a new development unit in Manhattan was $1.4 million, according to Miller Samuel, while the median sales price for all Manhattan apartments was substantially lower, at $865,000.

Despite the demand for mid-priced units, experts said, Manhattan’s sky-high land costs have made it increasingly difficult for developers to justify building condos that aren’t über-expensive.

“Once land hits a certain price point, it only makes sense to build with nicer finishes and higher-grade appliances, and all of a sudden you’re gearing yourself up for the higher-end condominium, and that’s the only product that is going to make it a viable product for you,” explained Neil Helman, an investment sales broker at the commercial firm Avison Young.

David Kramer, CEO of developer the Hudson Companies, agreed that “land costs are going up, which makes it very hard to do middle-class housing.”

Of course, the appetite for high-end product isn’t infinite, even in Manhattan. Eventually, Helman said, buyers will refuse to pay such high prices for new condos. “There’s going to come some point in time where people can’t afford to spend $2,300, $2,400, $2,500 a square foot for what was once $1,400 or $1,500,” he said.

That, in turn, could slow rising land costs.

“Land prices can’t go up at an astronomical rate forever,” Miller said. “At a point when it hits the ceiling, developers [will] start to cool on the prices being asked.”

But, Miller noted, the Manhattan market is currently early on in that cycle, and it will take some time before the demand for luxury product cools.

In the meantime, the few available mid-priced units in the city are seeing a frenzy of demand.

Andrew Gerringer, managing director of new business development at the brokerage the Marketing Directors, noted that the Jefferson, an 83-unit new condominium at 211 East 13th Street marketed by his firm, sold out in just a few months. He attributed that to the fact that the units were priced around $2,000 per square foot, as opposed to the more typical $3,000 per square foot.

Easing the pain

But now that the recession has passed, developers are working overtime to get new projects in the ground in hopes of tapping into the current demand for new product. Sometimes that means taking on projects in areas of the city they never would have considered in the past.

Gerringer said the Marketing Directors is now working on its second project in Staten Island: the Pointe at 155 Bay Street, a condo developed by Manhattan-based Meadow Partners.

“Five years ago, fewer people would have thought of Staten Island as an area they would build [condos] in,” Gerringer said.

Hudson, for its part, is currently developing Gowanus Green, a mixed-used rental and condo project in Brooklyn, and the condo conversion Cobble Hill Towers at 431 Hicks Street.

“We’re much busier than we were,” Kramer said. “It’s because of the economy and lenders getting back into the game of being construction lenders. It was very hard to do this three years ago.”

In order for more resales to hit the market, meanwhile, the economy needs to continue improving, Miller said. If salaries and home prices continue their gradual increase, he said, homeowners will start to put their apartments on the market in greater numbers.

But another crucial factor is the availability of mortgages for buyers, Miller said. Luckily, with interest rates now on the rise after several years of record lows, he said, banks have started loosening their lending guidelines.

All in all, Kramer predicted that it will take about two years for inventory to return to a normal level.

“Two years from now,” he said, “I don’t think people will be saying there’s an inventory crunch.”