Will the residential market head south?

So will it turn or won’t it? Not surprisingly, developers and brokers are optimistic about the current real estate market.

Most point to growing employment numbers and the fact that the economy continues to grow as evidence of a strong market. Emerging New York neighborhoods appear to be fairly established, and there’s a broad consensus that overbuilding isn’t affecting any market sectors.

Asher Alcobi, co-founder and president of brokerage Peter Ashe Inc., predicts a recovering market for hotel construction if hotel occupancy numbers continue to be rosy. Industry analysts say the rise in New York occupancy rates is well above the national average, which climbed from 2003.

Interest rates remain the most critical unknown factor, and most market watchers predict they will continue to rise. Alcobi said as long as this happens gradually, it shouldn’t affect the marketplace.

“Interest rates will be increased due to a good economy and positive signs,” he said. If the interest rate for short-term borrowing “is increased gradually, it would not effect the market. It will just indicate that the market is strong enough to sustain it.”

Others were not as sanguine about interest rate increases.

“Everything is interest rate sensitive,” said Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College. “I think once it hits 7 or 8 percent, it has an effect: It simply raises the cost to the prospective buyer.”

Seth Weinstein, principal of Hannah Real Estate Investors, agreed that market segments could be negatively affected, especially the one encompassing units costing $1,000 to $1,500 per square foot and more.

“I think that as interest rates rise, which is what I see happening over the next 24 months, that market becomes somewhat vulnerable,” he said.

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Weinstein believes that certain segments of the real estate market may be slightly overbuilt, but there is no systemic problem.

“I’m not as concerned that we’ll have an overall or large-scale recessionary activity in the industry,” he said. Other developers believe that not only is there no excess inventory currently, but there is no potential glut of product in the pipeline in any market sector.

“I don’t think we’re going to see supply and demand dramatically out of sync,” said David Wine, vice chairman of The Related Companies. “We’ve seen in specific submarkets, like in Brooklyn, you have a lot of things on the drawing boards, but real estate is the kind of thing that it takes so long to develop and build and get to the market, that it’s never all at once.”

The consensus is that the market is cyclical, and a downturn is probably inevitable but not imminent.

“Real estate has always had a cyclical quality to it,” Hersh said, “And we’ve had a long upturn.”

Developers always have contingency plans for just such an occasion. Generally, they won’t cancel plans, but will go into hibernation until market conditions become more favorable. Other alternatives are to convert sales units to rentals, increase the density on a project by going from large apartments to studios, or even shifting from residential to commercial.

If their margin is large enough, developers can offer discounts and maintenance rebates, or, if things get really bad, they can offer financing.

Many like to hedge their bets by making most of their product for the broadest sector of a market.

“We have always been a believer in making more units built for the sweet spot in the market the one- and two-bedrooms because there’s just so many more people that can buy in that range,” said Andrew Gerringer, managing director of Douglas Elliman’s Development Marketing Group.


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