New Development: As the market cools

Condo development in New York City isn't what it used to be just last year; developers adjust as banks limit financing and buyers wrangle concessions

Taking the pulse of a changing condominium market in New York City can be a difficult proposition when so many livelihoods depend upon it. Promotion of properties spins endlessly, a process full of sound and fury, but not necessarily signifying anything.

Still, there are signs that the new development market is not as robust as it was six months ago. At least one condominium development in the city filed with the state Attorney General in February to cut prices on some units. The Beacon Tower at 85 Adams Street in Brooklyn’s Dumbo, being developed by Leviev Boymelgreen, saw prices reduced on about 24 of its 79 units.

But most developers prefer to avoid price cuts at almost any cost, brokers said.

“The market is cooling,” said Barak Dunayer, president and founder of Barak Realty, a boutique firm that will soon begin marketing its first new development. “What developers are trying to do is keep the price per square foot the same, but give concessions instead.”

Inducements and incentives

At the Avery, nearing completion on the Upper West Side, developer Extell Development Corporation was recently offering to pay closing costs equal to as much as 3.7 percent of the apartment purchase price for buyers. Other strategies that condominium sponsors use to entice buyers include upgrades, shelling out for more expensive kitchens, finishes, or appliances, Dunayer said.

Sometimes, developers of condominiums will offer to cover a year’s worth of high maintenance costs — but will tack those excess costs onto the asking price. That way, the developer gets a high price point for marketing purposes, and the buyer can effectively finance the maintenance costs and still have a lower monthly payment.

“Developers give all types of concessions, from paying closing costs to even giving buyer credit at the closing,” Dunayer said. “They can give you $20,000 or $30,000 credit at closing. They have all kinds of names for it. They’d rather do that than adjust the prices.”

Adjusting the prices can mean lots of paperwork at the state Attorney General’s office, which must approve any pre-construction changes. It’s something developers want to avoid. Real estate brokers now notice a number of adroit moves used by condominium developers in a slower market.

“I just sold a large unit at the Barbizon/63, which is the old Barbizon Hotel, and they claim their sales are very vigorous,” said Peter Schwartz, a senior vice president at Prudential Douglas Elliman. “They’re releasing six or eight apartments at a time for sale, which is typical of these developers. And every time they release some, they try to put about a 5 percent price increase on the group.”

For that reason, the records filed with the state Attorney General have in recent years often shown a multitude of price increases for most condominium developments. It’s only in recent months that those filings have reflected price cuts.

The Big Apple factor

More speculative real estate markets, such as Miami and Las Vegas, have even recently seen some residential development projects cancelled. But the New York City market is somewhat different from those cities, experts said. Real estate pundits argue that the driving force in New York City’s residential sales market is users, not investors.

“Don’t forget that 80 percent of our product in New York City is co-operatives,” Dunayer said. “And co-ops require owner occupants, and they don’t let you speculate. But even in new construction here, people do buy to live there, if not as a primary residence, then as a secondary home.

“As much as things have slowed down,” he added, “it’s a strong market in a way, because it’s people buying their homes — and when you need a home, you need a home.”

While in other, more speculative markets, financing for residential developments is often made contingent by lenders upon a certain amount of presales, projects in New York City receive financing for construction. With financing received up front, projects here may languish and transform, but they’re rarely cancelled.

Thus, symptoms of a flagging market in New York City might be found in observing which projects have state-approved plans, but haven’t yet come out of the ground. The land under these proposed projects may even be up for resale.

Slowdown builds up

There are at least 10 projects that are in a state of suspended animation, said Andrew Heiberger, founder and CEO of Buttonwood Real Estate, which recently announced the 457-unit 88 Greenwich Street, to be developed in Downtown Manhattan.

“I know of 10 jobs that are just sitting, but I wouldn’t call them ‘cancelled,'” Heiberger said. “They’re just not started, and the reason’s definitely the market and the cost of construction. Construction costs have gone in one year from roughly $335 a foot to $400 to $425 a foot.”

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Heiberger said he wouldn’t be surprised if banks and lenders in New York City, which recently began limiting their financing to about 75 percent of new construction projects, down from about 85 to 90 percent, might eventually move toward a model where they made lending contingent upon presales.

“What we might see happen is New York City adopting Miami methodology, which is to pre-sell 80 percent of the development and then build,” Heiberger said. “It takes the risk out of the job. It never happened before here because it was never necessary.”

Andrew Oliver, managing director and principal of the investment banking firm Sonnenblick-Goldman Company, said some lenders have been shying away from financing new condominium developments.

“The market has definitely gotten more selective for a couple of reasons,” he said. “There is more product on the market, and construction costs have increased. Because there’s a lot of product coming on, a lot of lenders are full right now on their balance sheets. “They have a lot of these condo construction loans, so lenders want some of these loans to be paid off before they take on new loans.”

Figuring out what works

Market watchers have different ideas about which residential developments will sell the fastest. Heiberger, who has invested in apartments at the Orion developed by Extell, said that he believes the reason that units at the Avery have recently been sold at a rate formerly seen six months ago was that the developer lowered the price per foot by about $100 to $1,275 to $1,300 a foot.

Extell’s president, Gary Barnett, said the Avery’s far West Side location was a big reason for the price changes.

“I do think we could have priced it $50 more expensively,” he said, “but we had the room to lower the price, and we wanted to boost the velocity of the sales because this is the first of our projects [in that location].”

“We lowered from our originally intended pricing,” he added. “We never filed that pricing.”

Heiberger, who works closely with property developers, said he believes $1,300 is the “make or break” price that must be achieved by residential developers currently, and that smaller units priced appropriately are the ticket to success in the cooling market.

“From the plans that I reviewed, one of the mistakes that a lot of these new projects have made, if they actually get built, is they did not build the right-size units,” Heiberger said. “They’re not coming in at the right price point. They’re coming in over $1.5 million — and there’s going to be trouble there.”

The market is not a luxury market, he said. “One of the positive things right now is there is definitely a market here,” he said. “On conversions, it’s $1,000 to $1,150 a foot. On new construction, it’s $1,300 to $1,350 a foot. It’s studios, one-bedrooms, and two-bedrooms less than $1.5 million.”

Interest leaves questions

Interest rates will play a big role in the viability of that market in future months. Schwartz disagreed with Heiberger regarding which sector of the market will thrive, saying those units priced below $1.5 million are the most interest-rate sensitive. Those priced above that will continue to move, he said.

“Any apartments that are selling at about $1.5 million or less, which is a pretty good chunk of the market — that’s small two-bedrooms and under — are going to be affected by what’s going on with interest rates,” Schwartz said. “More people will be excluded from being able to buy as long-term interest rates go up.”

Those people may opt to rent instead. Either way, there will be fewer buyers for more units, which signifies a marketing shake-up. Already, attendance of open houses for resale apartments has shrunk, Barak said. And those brokers who represent buyers in the market say those buyers feel they have the upper hand — even if many sellers don’t yet want to acknowledge that.

Real estate agent Jared Wiener at Gumley Haft Kleier recently finessed his buyers through a three-month standoff over a furnished two-bedroom apartment at 40 East 61st Street. The sellers didn’t want to budge from the $1,995,000 asking price initially, and when they finally did, the buyers almost lost the deal over a difference of $12,500.

“We finally settled at $1,812,500,” Wiener said. “A year ago, this apartment would have sold instantly. It was amazing, because when we visited the apartment, the buyers were speaking directly to the sellers’ broker saying, ‘Have you read the newspaper articles about the softening of the condo market? This apartment is way overpriced.'”

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