Second wave of pain for condos

Slowly, Manhattan’s residential real estate market is coming back to life. When the city’s major brokerages released their fourth-quarter market reports last month, they revealed a clear jump in activity. The number of sales in the fourth quarter grew 8 percent from the same period in 2008 and almost 11 percent from the previous quarter, according to Prudential Douglas Elliman’s report.

But thanks to the lingering grip of the credit crunch, the vast majority of those sales were resales in established buildings, not new developments.

Only 19 percent of closed sales in the fourth quarter were in new condos, according to Elliman, down from 38 percent in the fourth quarter of 2008. By contrast, some 58 percent of closed sales in 2006 were in new developments. Meanwhile, Elliman estimated that the “shadow inventory,” or not-yet-released new development units, may total more than 6,000.

The glitzy new multimillion-dollar condos — once the pride of the Manhattan market — were the first victims of the real estate slump. But now that the rest of the market appears to be recovering, new developments don’t seem to be sharing in the success. That’s causing a buildup of new (and almost-new) condo units in the market, unleashing a second wave of fallout on the industry.

New condos still face the severe financing hurdles that have dogged them for over a year. But now that the crisis has dragged on for a while, bringing prices down with it, new developments have another problem resales don’t — the near-total departure of short-term investors from the marketplace.

During the boom, towers full of new development units were quickly snatched up by investors, who planned to sell or rent their units rather than living in them.

Now, individual buildings that were popular with investors are seeing those same buyers try to sell en masse. Even buildings that sold out quickly years ago — like the Orion and the Plaza, where the developers made out well — are now watching resales mount and their values fall as investor-buyers struggle to unload their units.

Sometimes, these investors were real estate agents who had access to early insider prices or were allowed by developers to flip their contracts before even closing on the units. Now that the market has turned, however, brokers are discovering the perils of buying units in the buildings they represent, including possible conflicts of interest.

Since investors have learned they can no longer turn a quick profit by flipping units in Manhattan, much of the demand for new condos has evaporated, especially in Midtown, where many large buildings were aimed specifically at international buyers and other investors more interested in a central location than a desirable residential neighborhood. A huge number of units in the neighborhood are on the market, competing with each other for purchasers.

And while a new wave of international buyers is now shopping for homes in the city, they are unlikely to put a dent in the glut of new condo inventory. That’s because, in an about-face from the boom, many of these foreign purchasers are shunning new development high-rises for established condos, townhouses or even co-ops.

Falling fortunes for buyers

Flipping out over condo flipping

Midtown’s post-speculation glut

Foreign buyers back — but no more ‘Irish carpenters’