It’s one sign that the condominium boom is over in parts of New York City: In up-and-coming, newly hip neighborhoods in Brooklyn and Long Island City, developers who originally planned to make millions by selling new condominiums are instead now renting these units.
They’re making the switch because condos aren’t moving quickly in a credit market where the rules of the game have changed since last summer. In neighborhoods like Dumbo and Clinton Hill, where the noise of new condo construction has been constant in recent years, developers are opting to sell their units later when they hope the market, and their profit margin, will be better.
Also putting more pressure on developers is a ticking clock. Tax abatements that were implemented to encourage development will be scaled back this summer. If developers have their projects’ foundations in place by then, buyers will still be eligible for the city’s 15-year tax abatement. If developers don’t, they’ll be out of luck and will probably have to lower their sale prices.
“It’s inevitable,” says Roslyn Huebener, principal broker and owner of Aguayo & Huebener Realty in Brooklyn. “Especially for projects that went up in outlying areas. The borders were pushed a little further because of demand, and now the supply has probably caught up with current demand. So we’re going to see how this all shakes out.”
Condos in prime areas such as Park Slope and Brooklyn Heights are still in high demand, she says. Fortunately for developers, in other, less-established neighborhoods that are a few steps behind on the gentrification curve, such as Clinton Hill, the rental market is still strong.
Hipsters are keen to rent in neighborhoods such as Williamsburg, says Prudential Douglas Elliman new development broker Christine Blackburn, who manages dozens of North Brooklyn listings.
“A lot of people have changed strategies,” she says. “There is a huge demand for luxury rentals, and rents are through the roof. But there’s no inventory.”
The developer of what was originally a 72-unit condo project at 756 Myrtle Avenue near Bedford-Stuyvesant decided to hedge his bets before units even went on the market, says David Maundrell, president of the Brooklyn brokerage Aptsandlofts.com. About 75 percent of the project’s units have been rented for between $1,650 a month for a one-bedroom and $3,500 for a three-bedroom.
“If you believe that the neighborhood is going to mature, and your property will be worth more later than it is today, it’s better to rent the units today when the rental market is very, very strong, if you can carry your mortgage and financing,” Maundrell notes.
Gregory Todd, an associate broker with the Corcoran Group, says he was immediately curious when work began on a 60-unit, mostly one-bedroom condominium project near Sterling Place and Rogers Avenue in Crown Heights. The sign in front reads Sterling Place Condo LLC. But when he called the developer, Alfred Thompson, to find out when units would be ready for sale, the owner said he’s renting them instead.
Even in hot neighborhoods such as Dumbo, developers are renting condos that weren’t selling in a slow market.
The 88 units at 99 Gold Street had been on the market for a year and only about 30 had sold, Maundrell says. Now, the units are being rented from $2,100 a month for a one-bedroom to up to $5,600 for the two-bedroom penthouse.
“The developers completely shifted gears,” Maundrell notes. “They’re waiting for the market to rebound.”
The developer of 133 Water Street, another nearby condo project, is using the same wait-and-see strategy, Maundrell says. Instead of selling the projects’ 52 units as originally planned, they are now all being rented as apartments, with rents ranging from $2,900 a month for a one-bedroom to $4,900 for a two-bedroom.
Plenty of condominium projects are still under way along the waterfront in Long Island City. But in less prime areas of the neighborhood, condo developers are also renting their units rather then selling them.
The owners of Manetta’s Italian restaurant at 10-76 Jackson Avenue in Long Island City had planned to develop several condo projects along 50th Avenue, said Rick Rosa, a broker with Prudential Douglas Elliman. Now they’ve to decided to develop rental properties there for about $2,500 a month.
“They didn’t want to take any chances,” Rosa says.
Sometimes other considerations cause developers to change condo projects into rentals. As a young, female developer, Reina Andrade says she struggled to get her very first project at 5-12 51st Avenue in Long Island City off the ground.
Financing was almost impossible to get for an inexperienced developer, she says, even back in 2005. Eventually, she found someone willing to lend her the money to buy the property for $750,000 and build a four-story condominium project called 512 Lofts.
Now, her dream is still a cinderblock-and-steel skeleton exposed to the elements. But Andrade says she’s already decided to rent at least two of the project’s five units for about $2,500 a month rather than sell them when it’s finished next fall, despite the objections of her broker, Rosa.
Andrade has become so attached to the project that she says she doesn’t want to let go completely. And she likes being a landlady; she’s rented out apartments in Astoria for years.
“It’s a huge accomplishment for me,” she says.
But for most developers, how they financed a condo project is probably the biggest factor in deciding whether to rent units in a slow market, says Susan Hewitt of the Cheshire Group, a Manhattan-based real estate investment firm.
If a developer owes millions of dollars on a loan, and planned to pay off the debt using proceeds from condo sales, renting may not be possible, Hewitt says. If a developer financed a condominium project without a loan, renting the units until the market improves might make more sense.
Banks are increasingly cautious about loans these days and are making sure that developers have a plan in place to rent units if their condos don’t sell, Hewitt adds.
Brokers and developers say they predict that more developers in Brooklyn and Long Island City will decide to rent their condominiums after the scaling back of the 421-a tax abatements on June 30.
That means developers are rushing to finish their condominium projects before the deadline, Maundrell says. But then they’ll have to sell the units in markets already glutted with condos, which could create serious financial problems for some developers.
“People are going to barely get by,” he says.
Joseph Escarfullery, a Long Island City developer who has worked with Andrade, has several condominium projects in the works. Some of the projects will meet the deadline, and others won’t, he says. So he and his partners are looking at cost analyses to decide if it would be better for them financially to rent units in projects that won’t meet the deadline, rather than sell them.
“But we’re going to continue building,” Escarfullery says. “That’s for sure.”