Speculative building is a risky endeavor almost anywhere. From the initial land purchase to the process of obtaining permits, hiring an architect and overseeing construction, building a home before you have a buyer is not for the faint of heart. In tony spots, like the East End of Long Island, where the price of land has gone up seven-fold in the past 10 years, it can be an even bigger risk.
And a year after the subprime mortgage crisis, it can be downright dangerous.
“I can’t imagine why anyone would go into speculative building right now,” said Walter Molony of the National Association of Realtors.
Nationwide, building is down. Though spec building isn’t broken out from the stats, new housing starts dipped 27 percent from 2007, which was itself a drop of 24 percent from 2006.
However, Michael Davis, a longtime developer of high-end properties in the Hamptons, argued that, “the Hamptons is unique.” Davis, who has already sold one spec home in Southampton this year for $5.9 million, has two others in the works. “If you’re in the right location in the Hamptons,” he said, “demand exceeds supply, even now.”
Still, market watchers are aware that even the Hamptons have not been completely immune to the fluctuations of the national market. In Southampton, for example, the number of new dwelling permits issued so far this year is just over a third of what it was in 2005. Between January and June 2008, the town handed out 62 permits — down from 88 last year, 130 in 2006, and 175 in 2005.
“Speculative development has slowed basically all over,” said Enzo Morabito, a longtime broker with Prudential Douglas Elliman’s Hamptons office. “But that’s not a bad thing. Why keep adding to the inventory?”
He continued, “the Hamptons is a lifestyle, so the speculators came out here, but our real estate market was never meant to be like that. There’s realistic profit, and then there’s greedy profit.”
Rick Hoffman, regional senior vice president in Corcoran’s East End office, put it this way: “Developers can’t be overambitious right now. In days gone by, you could rack up a major profit on spec building, but now you really have to treat it like a business. You have to have the right materials, the right design and the right price.”
Though there are no numbers tracking spec homes specifically, Morabito said there are “quite a few sitting on the market.”
According to Michael Daly, a broker with RE/MAX Beach Properties who also blogs about Hamptons real estate, a select group of developers and builders (including Michael Davis) have been betting on the Hamptons market for decades — and though they may be adjusting their expectations, they certainly aren’t packing it in. Instead, said Daly, some speculative builders have begun marketing their new homes pre-construction, thereby reducing the, well, speculation.
“More and more builders are putting out their products with sophisticated renderings and floorplans, seeking to gauge the level of interest before they start building,” Daly said.
He estimates that there are about one-third fewer “new construction” homes currently on the market in the Hamptons than there were last year. Of those approximately 135 homes, Daly said that about one-third are being offered “pre-construction.” He said that pool of inventory includes 60 percent of the homes on the market with asking prices above $10 million and 42 percent of the homes currently listed between $2 million and $5 million.
In Bridgehampton, for example, one 6,000-square-foot oceanfront property is listed for $22.9 million “total turnkey,” or alternatively for $15.9 million “as is with plans and permits.” In Quogue, a 9,600-square-foot bayfront property with a wine cellar, gym and tennis court on 4.1 acres is being offered pre-construction for $15.5 million.
“Builders are trying to mitigate a bit of their exposure,” said Daly, who points to 35 homes in the area that have been built but not sold.
Bernard Markstein, senior economist and director of forecasting for the National Association of Home Builders, said “mom-and-pop speculators, the people who got in during the housing boom, have largely shaken out or are licking their wounds trying to figure out what to do with their property. The long-term players, on the other hand, are simply trying not to overextend themselves.”
Custom homebuilder Joe Farrell is one of those long-term players. Farrell, who Daly called “one of the most successful builders in the Hamptons,” said he’s sold eight speculative homes in various stages of pre-construction, at prices ranging from $2.1 million to $18 million, in the last six months.
“One house [is] sitting a little longer than usual, but we ended up renting it for $600,000 for the summer,” Farrell said.
Still, he does admit to being a bit more cautious in the new market. “I’m only buying land if I can get a great deal,” said Farrell.
For his part, Davis said that about one-third of his current business is speculative construction and that the volume of spec homes he’s working on hasn’t changed much in the past year.
“Last year when subprime hit, it sounded as if the real estate market as a whole was going down the tubes,” said Davis. “But I think it’s unfortunate that the press tends to generalize.”
Don Sharkey, the chief building inspector for the town of East Hampton, said building permits overall are “definitely down about 10 percent.” But, he notes, they don’t have data isolating new construction.
Meanwhile, Don Louchheim, the mayor of the Village of Sagaponack, told The Real Deal that the village is currently considering four subdivision proposals, representing about 100 acres total.
The right location, said agents and builders, is key, as are views.
“If you’re south of the highway, that’s considered an amenity,” explained Morabito. “If you’re close to the ocean, that’s another. If you’re north of the highway and border an agricultural reserve or have a water view, those are amenities.”
Jeffrey Colle, who has been building and restoring high-end homes in the Hamptons for 30 years, said he is “absolutely as busy” as he was two years ago.
Colle is currently at work on a $40 million spec home in East Hampton, on which he is sparing no expense — from 18th-century fireplaces to bathtubs carved in Italy. The 12,000-square-foot home on Georgica Pond abuts a meadow reserve and will boast an infinity pool, six bedrooms, seven fireplaces and “sunsets that’ll knock your eyes out,” he said.
Colle said he’s already had brokers from Sotheby’s come by, as well as potential buyers from as far away as California and Australia. “I’ve been out here 30 years, and I’ve never seen the top of the market go down,” said Colle.
And that’s good news for other high-end developers like Robert Gianos, who has spent several years preparing to construct a Southampton subdivision that some have dubbed “Billionaire’s Corner.” Nothing like your typical suburban tract home, Gianos’ Olde Towne is reportedly inspired by the look of the village from when it was originally settled in the 1640s. Lots are reportedly priced at between $18 and $22 million.
“He’s building for untouchables,” said Daly, who reasons that since Gianos’ potential buyer won’t care what the price of gas is, the developer needn’t fret over market fluctuations either.