New residential development in the five boroughs is ebbing amid concerns over a housing market slowdown and rising construction costs. But don’t expect a drastic drop-off in fresh construction — this is, after all, New York City, where housing still sells for more than $1,000 a square foot on average.
Such was the assessment by an expert panel at The Real Deal’s 2006 New Development Forum. More than 1,100 people attended the early March forum at the Cooper Union in the East Village. Steve Cuozzo, managing editor of the New York Post, moderated the forum’s main event, a panel discussion, excerpted below, between Michael Shvo, founder of Shvo Marketing; Jane Gladstein, principal of Gladstein Development; David Wine, vice chairman of the Related Companies; Veronica Hackett, co-founder of the Clarett Group; and Jeff Levine, principal of Douglaston Development.
The panelists shared an optimism about the city’s housing market and also consistently cited its uniqueness. None, however, predicted a 2006 — or a 2007, for that matter — full of the record-breaking prices and sharp jumps in sales activity seen in recent years.
Steve Cuozzo: Jeff [Levine], you have a project at 555 West 23rd Street in West Chelsea, which began selling in August — it was initially conceived of as a rental. In your marketing for the project, one of your marketing people acknowledged it got off to a slow start, although, you told me that it was 75 percent sold within six months. What is your global take of the alleged slowing of the condo market?
Jeff Levine: Well, it’s not allegedly slowing. It is moderating. But it’s certainly not a bubble bursting, so if that’s something you wanted to hear, you just heard it. The reality of it is that, as of September [to] today, there has been a moderate downing of the market to a tune of 5 percent or 10 percent, depending on the type of product. The answer is that we had a market that was on steroids, and now we are back to a reality market. What I like to believe is that if you know your business, you can make a real good living as a developer in a reality market. You can build real projects with reasonable expectations. As we did with 23rd Street, if you focus on the unit mix and size that your market wants to buy for that neighborhood and location, I think you can achieve great success going forward.
Cuozzo: Now, it hasn’t happened yet in New York, as far as we know, but we have heard of the cancellation of projects in other places around the country. Can you foresee anything like that happening here?
David Wine: Well, the structure of the condominium market here is completely different than it is in the rest of the country. Here in New York, in order to bring a condominium to the market, you need an offering plan, you need a building permit. You need to bring a development very, very far along before it begins to take on a personality and a being, before it’s something that’s solvent. That’s not true with the rest of the country. In the rest of the country there are ideas and schematic designs. People are pre-selling in order to get their financing. A company like Related puts together a deal in New York, and we have already bought the land and we already have the money when we start selling a property. It’s a very different situation in New York than it is in the rest of the country, so I don’t see it happening here.
Cuozzo: Maybe we are not going to see the cancellation of projects in the pipeline. It appears we are headed to a situation with a large surplus [of new condos]. Veronica, you are building the Chelsea House on West 19th Street. The Real Deal did a survey which showed 500 units approved for sale in that immediate neighborhood last year, which is twice as many units available there since any year from 2000 to 2005. Does that pose any concern for you as the project moves forward?
Veronica Hackett: No. I think that one of the things that’s interesting is when you look at the amount of supply and the percentage of the total marketplace, it’s rather small, unlike the rest of the country. And the reason why you have so much supply coming in on the market in Chelsea is because we had so little supply for so many years. I mean, it’s still an extremely supply-constrained market. It’s very tough to get a deal together. If you look at the proposed pipeline that you talk about and if you really look at when it’s coming online, many of those numbers are three, four, five years old. I think it’s very normal absorption. I think my friend here, Mr. Levine, said it best — I think we are back to a normal absorption pattern. Since January, sales have clearly picked up. Traffic has picked up dramatically, and sales are being made, and we are back to a normal absorption rate.
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Michael Shvo: I am in slight disagreement with a few of the things that have been said here already. The first thing is that there’s a slowdown, but it’s not across the board. I think we are seeing a market change from a market where everything you put on the market went up and it sold. It didn’t matter whether it was good or bad, it just sold. And we have a lot of the brokers here who will tell you the same — didn’t matter what the price or the quality. With the amount of product coming to the market, the consumers are becoming smarter. There are going to be a tremendous amount of projects that are not going to sell. They are going to have to lower their price. Some are not going to sell, and they are going to become rentals. On the other hand, you have product that’s a unique product. We have David [Wine], who built the Time Warner Center. That’s a unique product. You are not going to be able to find that product anywhere else or replace it, so if you want it, you are going to have to pay for it. We are doing something on 20 Pine with Armani/Casa. Again, that’s a unique product.
Wine: I think, in West Chelsea, people are excited about different development opportunities there and the buildings there are attracting a lot of interest. We did two ads for the Caledonia, which is the first high-rise on the High Line [park], and we received 600 inquiries from those two ads. That says a lot to me. It’s the first location on the High Line. It’s very educated. It’s very astute.
Shvo: The unique thing that you are selling [buyers] there is the location. What if there was a hundred buildings going up there? You would have to do something different.
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Cuozzo: In 2003 to 2005, if someone bought a pre-constructed unit, they were guaranteed to make a profit on that investment by the time the project was finished. Today, if someone buys a pre-constructed unit they are not guaranteed to see an increase of value. Is that buyer entitled to the new lowered price or will they be reprimanded for buying early?
Levine: If you buy a stock and the value of that stock subsequently diminishes, do you get a refund? But, with regard to buyers and their investment, the cost of buying a unit — the transfer taxes, the reporting taxes — are all such that there was built-in cost in buying a unit. In addition, as a result of globalization, commodity prices in the form of construction material have literally increased the cost of housing as much as 20 to 25 percent over the last two to three years, that’s unquestionable. I think the continued increase in costs of construction, coupled with limited land which we have available in this city, protects the buyers of properties in New York.
Cuozzo: Jane [Gladstein], you have a conversion under way at 505 Court Street in Brooklyn. Do you agree with Jeff and his analysis of the underlying strength of the market, which not only protects the developers, but also protects the buyers as well?
Jane Gladstein: I do. I do believe that our market is modulating back to the basics. It’s not about to see the fuel of speculation. There is a truer dynamic. The reality is that construction costs have increased dramatically — perhaps, I would say, [to] 40 percent even. The cost of money is increasing, so your carrying costs on any deal are higher. Your selling duration is longer, which increases your marketing cost. Land costs have got to go down in order to create a more viable environment where developers would want to create more supply. A lot of projects you see coming online today are being done with parcels which were purchased six, 12, 18 months ago. Something is going to have to give.
Cuozzo: Aren’t some developers today still buying pieces of land at insane prices of $400 to $500 a foot?
Gladstein: Some of them are. Correct me if I am wrong, but I think what we are all saying is that the market in many respects is back to basics. Which means you have a great location. You have actually studied the plan and demand curve. You are not behind some speculative population thought. It has to be viable.
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Cuozzo: What sort of bonus bubble are we seeing right now? Because I am hearing different things from different people.
Shvo: Well, you are always getting the Wall Street guys with the bonuses. You have developments in December that sit and wait for the bonus. That is not happening. New York is not this crazy, cyclical [place] that you are selling 100 apartments this month and two apartments the next month. It’s a very steady market. The guys buying half-million, million-dollar apartments, they are not in the Hamptons for the entire summer. So you got to know exactly what you’re talking about. Twenty Pine Street, we have apartments starting at $600,000, so the entry-level Wall Street guy could afford it. It’s a walk to work, it’s probably the most impressive building, with Armani/Casa design. It gave them a reason to live next to work. So we did get a lot of Wall Street bonuses, but, believe it or not, we probably got more people from other neighborhoods in the city — the Upper East Side, Upper West Side, Chelsea, every neighborhood in the city. We got probably more people percentage-wise from other neighborhoods in the city than from people who work or live in the Wall Street area.
Cuozzo: In terms of new residential building in the city, does there come a point when there is an upward arc in the costs where you may reach a point when [new construction] simply ceases to be viable?
Hackett: I think what’s happened in the last year is that we’ve seen developers build smaller units. I think, four or five years ago, when we all sort of started in this, it was all pretty simple. When you looked at the numbers, you got larger prices per square foot for larger units, it didn’t take being a brain surgeon to say, “I think I’ll build more bigger units than smaller units.” As the market has changed and has become more expensive, there starts to be a price point issue. And, so, more buildings in the last year have more smaller units.
Shvo: I think, for most developers, there is no rental fall-back today.
Wine: That’s one of the things we’ve been dealing with at the Real Estate Board [of New York] — our inability to create new rental housing, which we can all agree is important to the future of this city. Many people come to New York City, have a job and are experiencing New York for the first time, they’re not in a position to buy and own a home. So, the rental is the beginner home for the people internationally and nationally who come to New York. So, if we don’t have that first step, we may be choking our future.
Gladstein: I think every developer on this panel would prefer to build rental buildings if the models of the market allowed us to do that. They don’t. We’re all going to keep building for-sale housing.
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Shvo: Nobody really knew until recently who builds the building. In our marketing materials now, we really emphasize who the developer is, what’s their history, because I do think it makes a tremendous difference to buyers who’s building a building. That’s a product they’re buying. When you go buy a car from Mercedes, you’re buying it because you know what the value is. You’re not buying a Toyota because it’s a different kind of a brand. In real estate, all buildings are not created equal, and all developers are not equal.
Wine: You’re only going to get to build a building once. And all the mistakes that you make can haunt you for the rest of your life. So, my philosophy is to try and do it right the first time. If you do make a mistake, you do what you can, immediately, to fix it.
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Cuozzo: Back to the “C” word — commissions. If the market sags, how are broker commissions going to be affected? The answer seems obvious, but are there going to be a lot more splits?
Gladstein: I was at Citibank from 1990 to 1996, dealing with a troubled portfolio of condominium properties. The brokers were critical to reviving that market, and it happened because developers started paying attention to their pricing, paying attention to their product. The bankers were putting a lot of product into the market and inviting the brokerage community to be their partner at a far more generous commission structure.
Hackett: Steve, you keep saying [the market] is going to collapse, but none of us are agreeing with you.
Shvo: Everybody here thinks the market is taking a turn in the sense that product that is not quality product is not going to sell. And product that is quality product is going to be easier to sell. If anyone disagrees with me, it’s now or never.