In today’s unforgiving real estate market, being a residential developer is no longer as simple as securing a plot of land and announcing plans to build a condo project. Characteristics that prospective buyers once considered small imperfections, like a long walk from the subway, an extra $100 a month in mortgage payments or even a steep flight of stairs, are now major liabilities for developers that could mean extra months, or even years, on the market.
This month, The Real Deal goes behind the scenes at three projects to find out how developers who envisioned their buildings in the pre-crash financial markets are tackling the downturn.
Some, like Downtown Brooklyn’s BellTel Lofts — which made headlines when MTV’s “The Real World” announced plans to tape a season on site, and again when that plan was abandoned — are now renting out some units while working feverishly to sell the rest.
Others, including the Dover condominium in West Harlem, are offering rent-to-own leases to potential buyers, hoping the extra time will help them get mortgages or accumulate down payments. And, finally, developers of the chic Tempo condominium in Gramercy, which has high-end amenities as a legacy of the boom times, are simply crossing their fingers and hoping the market will be in better shape by the time their building is out of the ground.
Here’s a look at how these three New York City developments are dealing with the slowing market, and the need to move to Plan B.
Targeted marketing misses bull’s-eye
For many developers, the new landscape means renting out units originally intended for sale.
But the developers of BellTel Lofts, the Downtown Brooklyn condo conversion once slated to house the MTV television show “The Real World,” never thought their meticulously restored Art Deco tower would be one of them.
Still, that’s exactly what has happened, according to J.J. Bistricer, executive vice president of BellTel’s Brooklyn-based developer, Clipper Equity. Roughly 20 of the 250 apartments in the building are being rented out, while the developers hope to sell the rest of the units.
“When we started, it was moving at a much faster pace,” Bistricer said. “Obviously, no one was expecting this kind of market turmoil to happen. Everyone’s getting hit.”
Only 50 percent of the condos in the tower, the former headquarters of New York Telephone Company, have been sold.
Bistricer stressed that only a small portion of unsold units are being rented, and that the company’s main focus is still sales. Rentals “are not something that we want to do in a big way,” he said. And, Clipper has pulled out all the stops to drive sales, from switching sales teams to handing out free iPods to an ultimately unsuccessful attempt at courting a television show to film in the building.
“We’re doing everything we can to make this profitable and make this work,” Bistricer told The Real Deal.
A Downtown detour
It all started in 2004. Bistricer and his father, David, the principal in the family business, were looking for a condo conversion in an up-and-coming area.
In the past, Clipper had focused mostly on large rental housing complexes, like Flatbush Gardens, a complex of 59 six-story buildings with 2,496 rental apartments in East Flatbush.
While Clipper had done condo conversions in New Jersey, BellTel was still fairly new terrain for it. And the company had never worked on a historic landmark.
“The family business is more multi-family,” Bistricer said. “That’s more our expertise. This was different for us.”
The BellTel building at 365 Bridge Street was designed by Ralph Walker, known as one of the forefathers of the Art Deco movement, and completed in 1930. That architectural pedigree was an attractive draw for Bistricer. “It’s an Art Deco masterpiece,” he said.
Moreover, David Bistricer saw opportunity in Downtown Brooklyn, which at the time had very little residential development.
“We want a neighborhood that will have upward value,” J.J. Bistricer said, noting that his father “likes to get into areas that haven’t reached their fullest potential.”
At first, homes in the building sold steadily, if slowly, said Matthew Pope, a senior associate broker at Corcoran who sold units at BellTel when they were first offered. He estimated the project sold roughly 20 units per month.
Some prospective buyers, however, didn’t like the interior “home occupancy” rooms, which aren’t technically bedrooms because they don’t have windows. “Most of the buyers would have preferred a more open space,” Pope said.
The neighborhood, with its bargain retailers and vacant storefronts, also proved to be a problem. While some buyers liked the idea of the up-and-coming area and “felt like pioneers,” others had concerns about safety, public schools and the lack of a grocery store, Pope said.
Enter ‘Real World’
In June 2008, BellTel had what seemed like a big break that could help boost sales: It announced that a two-story penthouse in the building would host a season of MTV’s “The Real World,” which follows the lives of a group of young, hard-partying strangers.
“We felt it would be an interesting cross-branding opportunity,” Bistricer said. “We figured we could try to get a hipper, younger crowd.”
Over the summer, BellTel’s advertisements began playing up the connection, while the developer hosted rooftop parties targeted at young professionals.
But “The Real World” presence was met with concern from some existing residents, who worried that the cast’s notoriously rowdy ways would be disruptive for the families in the building, said Terry Naini, an associate broker at Prudential Douglas Elliman who lives in the building. Naini sold units in the building for three months at the request of the developer but quit shortly after “The Real World” arrangement was announced. She was replaced by powerhouse broker Ilan Bracha of Prudential Douglas Elliman’s the Bracha Group.
“It was really mixed,” Naini said of the show’s announcement. “Some people thought it was a great thing, especially since it would bring more attention to the building. Some were unhappy.”
Naini also said many of the available units in the building were too large for the young professionals who would be attracted by the star power of the show’s cast. “Everything that was not sold was of the size that would easily accommodate families,” she said.
The point turned out to be moot. In July, “The Real World” announced that it would film in Red Hook instead, a change Bistricer said occurred because of “technical difficulties.” Rumors swirled that the move was made because of the slow pace of construction at BellTel.
It was just as well, Bistricer said, acknowledging that “The Real World” ads may have been too targeted. “It was more important to market broadly,” he said. “If you target one demographic, some people may start to say, ‘I don’t belong here.'”
Mark Austin, an accountant who moved into BellTel from Chelsea a few weeks ago, said he and his partner were “rolling [their] eyes” at the possibility of “The Real World” being in the building, but appreciated the show’s marketing potential.
“It was good that it was getting some recognition,” he said. Austin said he was disappointed, however, when he learned there would be some renters in the building.
Since coming on, Bracha has initiated an aggressive package to lure buyers’ brokers to BellTel. Personal invitations have gone out to 80 brokers, offering them a free iPod pre-loaded with a video of BellTel. The developer is also offering to pay buyers’ brokers 4 percent commission, and they will receive some of the commission up front. The developer is hoping the incentives will create buzz among brokers.
But there is no denying that the downturn is having an impact on sales and prices. For example, unit 8B is now listed at $870,000, down from its original asking price of $891,750.
Rachel Patrick, a Prudential Douglas Elliman broker and member of the Bracha Group who is selling units at the building, said there have been 13 “transactions” in the last two months. “That’s a lot for this market,” she said. She would not, however, say how many were sales, as opposed to offers or closings.
With the economic downturn, BellTel now faces the reality that Downtown Brooklyn’s retail and residential development will likely be slowed.
Naini said she initially expected to wait five years for the neighborhood to improve. “Now I’m expecting 10 years,” she said.
Bistricer is taking the long view. “I’m a strong believer in Downtown Brooklyn,” he said. “Will it expand as quickly as they thought? Of course not. But there’s still a tremendous amount of growth that is happening and will happen in the future.”
“Real estate always comes back,” he added. “It won’t stay down forever.”
In the first week of sales at the Tempo condominium in September, developers accepted a buyer’s offer of more than $3 million to combine three apartments in the building, delighting brokers at the Gramercy luxury tower.
But then Lehman Brothers collapsed, and the buyer, who worked at Goldman Sachs, backed out, recalled broker Bertrand Buchin, a senior vice president at Prudential Douglas Elliman, which is handling sales and marketing at the 19-story condo.
“He said, ‘I don’t know if I’m going to keep my job,'” Buchin said.
For months, those fears have become the norm amidst the deepening financial crisis, and only one of Tempo’s 103 units has gone into contract.
Tempo, with its rooftop putting green and outdoor movie theater, in many ways epitomizes the amenity-laden glory days of New York’s recent real estate boom. And with sales starting just as Wall Street began its meltdown, the project also typifies many of the problems developers are now facing, from buyers’ reluctance to purchase homes in a declining market to pricey high-end features that may no longer appeal to cost-conscious consumers.
“These would have been flying off the shelves two years ago,” said Buchin, who has shifted his focus from making immediate sales to developing relationships with future buyers.
“You can’t be pushy. It’s a very different way of doing things,” he said.
High-end holdout
Even for Manhattan, Tempo’s sales office is impressive. Geometric red-and-black banquettes greet visitors on their way to a revolving three-dimensional model of the completed project, a Star Wars-style hologram that can be viewed from the street at night.
“We didn’t want to do a normal, run-of-the-mill model of the building,” said Bennat Berger, director of development at Quantum Partners, Tempo’s developer. “We wanted it to stand out.”
And stand out it does, especially in this far-flung corner of Gramercy, where the bulk of the nearby apartment buildings were built in the 1960s, said Buchin. Tempo, which is slated to be completed in 2010, is being built on a site previously occupied by walk-up tenements and a temple on a 100-by-100-foot parcel that Quantum purchased in December 2007.
The building is designed to feel like a boutique hotel, which is no accident. The co-sponsor, the Menolly Group, is known for independent hotels in its native Ireland, including the Dunboyne Castle Hotel & Spa, a restored mid-Georgian mansion, and the Dylan, a five-star boutique hotel in Dublin.
Among Tempo’s features are a Unitone security system with a color monitor for screening visitors, wallpaper that is being installed by Belgian craftsmen, and terrazzo marble in the bathrooms that is flecked with bits of mirror so it twinkles in the dark.
The sponsors were so committed to the high-end market, Buchin said, that it took some convincing to get them to lower prices to the current level.
Units in the building are now priced from $1,100 to $1,450 per square foot for penthouses. Originally, the developers had wanted to price it about $150 per square foot more, but Elliman’s Buchin was concerned that was too expensive.
“You can’t go out at $1,400 per square foot,” he said. “You can’t consider this Park Avenue South.”
The least expensive unit available at Tempo is a one-bedroom for $836,312, and the most expensive is a 17th-floor three-bedroom for $2.165 million.
Even at the current level, Tempo is “by far” the highest-priced building in the vicinity, said Danelle Snider, a sales agent at Fenwick Keats Goodwin who specializes in Gramercy Park and the surrounding area.
Home prices in Gramercy have fallen 10 to 12 percent from the 2007 peak, she said.
Snider added that Tempo is one of the only luxury buildings being built in the area. “It’s totally different than what’s available in Gramercy,” she said.
That’s a point of pride for the developers. “We really believe in quality, even in a down market,” Berger said.
Loyal, but uncommitted
Despite all of the extras, the economic turmoil has made sales virtually nonexistent.
Berger said out of the 250 visitors to the sales office, roughly seven offers have been made. “I don’t think anybody [was] in a rush to sign contracts before the end of 2008, and that’s not a surprise to anybody,” he said.
Buchin said the development has earned a loyal coterie of potential buyers — including the Goldman Sachs employee who backed out of his deal in September — who frequently attend events at the site but seem hesitant to commit.
However, the building may face challenges beyond the Wall Street meltdown. The pace of sales at Tempo “is slow, even in this market,” said Jeffrey Jackson, chairman of the real estate appraisal firm Mitchell, Maxwell & Jackson.
For one, buyers in the current market are extremely reluctant to purchase units under construction, because of the perception that prices will drop or even that the building will not be finished.
“It’s very hard to sell from floor plans today unless you’re seriously discounting,” Jackson said. “Twelve-hundred per square foot sounds pretty good, but that may not be enough of an incentive, given that there’s no product right now.”
Tempo’s location three avenues from the nearest subway stop, at Park Avenue and 23rd Street, could also be hurting sales. “If you were on Gramercy Park or Third Avenue, demand would be greater,” Jackson said. “Being far from the subway is not the most convenient.”
Moreover, the building’s flashy amenities may no longer appeal to buyers looking for value in a down market. The spa and the putting green, which will have real grass that must be maintained through common charges, are particularly out of sync with the market right now.
“It doesn’t make a lot of sense to me to have that kind of amenity in this kind of market,” Jackson said.
That disconnect has been reflected in some lowball offers, including one that was 14 percent below the asking price.
The sponsors didn’t counter, Buchin said, adding that they are “very reluctant” to negotiate or offer additional incentives because they feel the units are already competitively priced.
Berger said he’s confident in the building’s ability to sell out without taking such measures. “We’re not offering any sort of blanket incentive to bring people into the sales center,” Berger said. “We’ll make sales happen, but we won’t bend over backwards for anybody.”
The developers are “comfortable with the current schedule” of financing from Bank of Ireland, and don’t have a backup plan in case the units don’t sell. “The building’s not going to be finished for another year,” Berger said. “In that time, we see the market getting better.”
Barry Gottehrer, the president of Manor Properties Group, had high hopes for the Dover, located in two restored brownstones at 252 and 256 West 123rd Street.
He was fresh off the success of the 18-unit Casa Loma on West 116 Street, which sold half its units before construction was completed.
So the company, which owns several hundred rental apartments citywide, jumped at the chance to revamp the two vacant brownstones on a pretty stretch of West 123rd Street into floor-through condos.
“I liked the block,” said Gottehrer. “It’s very special.”
Many of the elegant brownstones on the block that the Dover sits on between Frederick Douglass and Adam Clayton Powell boulevards had recently been purchased and upgraded. Located just around the corner from the A train and the newly sold out Dwyer condo, a 10-story hexagonal glass tower, the area seemed to be at the epicenter of Harlem’s real estate boom.
Manor renovated the two 16.5-foot-wide, five-story, walk-up brownstones, updated them with washer-dryers, granite countertops and marble bathroom fixtures, and put the units on the market in the spring of 2007. In the process, Gottehrer made two decisions that turned out to be detrimental.
First, he decided to forgo installing an elevator because it would have cut into the size of each unit. Second, he installed spiral staircases in the duplex garden apartments, which later proved to make the units harder to sell, he said.
Harlem hype
When the Dover first went on the market, Harlem real estate was so hot that those decisions didn’t seem to matter, and six of the 12 units were sold.
But just as it became clear that two types of apartments in the buildings — the garden apartments and the higher-floor apartments — were harder to sell, the market began to cool.
“By the time we were ready to push these, we started getting an inkling of the downturn,” Simon Shamilzadeh, the vice president of marketing and sales for Manor, said of the fifth-floor “penthouses,” which have skylights and private rooftops that look out over a patchwork of Harlem rooftops, but are a hike without an elevator.
The spiral staircases in the garden duplex apartments were also proving to be problematic, with prospective buyers worrying about safety and convenience.
In response, Gottehrer started offering the buyers different options for the staircase in the spring.
For $7,000 to $10,000, he offered to replace the staircase with traditional steps, and for $45,000, he would add an elevator. Still, a buyer failed to materialize, and Gottehrer eventually replaced the spiral staircases with regular steps out of his own pocket.
There are now three top-floor units left, along with one fourth-floor unit, which has seen its price reduced from $685,000 to $665,000.
“As a market weakens, like this one clearly has, the higher floors in walk-ups become very difficult to sell and have to be heavily discounted,” said Jackson of Mitchell, Maxwell & Jackson. “In a strong market, they sell much more easily because buyers don’t have much choice. They’re willing to put up with it.”
Also, neither of the Dover’s two-bedroom garden apartments has sold. The prices have been reduced from $840,000 to $830,000.
Todd Stevens, a senior vice president at Prudential Douglas Elliman who handled sales at the nearby Dwyer condominium, said the Dover has “excellent homes.” But the lack of an elevator is an impediment, especially with comparable units on the market.
According to StreetEasy, a two-bedroom condo at Graceline Court, a nearby elevator building at 106 116th Street, for example, is available for $675,000 — not much more than the Dover.
“If I can buy a two-bedroom in an elevator building, I’m not going to buy one in a walk-up,” said Stevens.
Gottehrer said the lack of an elevator is “certainly a drawback,” and the choice of staircase was “a terrible mistake.” He faults himself for not consulting more with brokers.
But walk-up or not, the Dover would have done much better if it went on the market two years ago, Stevens said.
“Absolutely, it would have sold quicker and it would have been very successful,” he said.
Financing fiascoes
Meanwhile, the credit crisis made it harder for Dover buyers to get mortgages. Contracts went out to two buyers whose offers had been accepted, but they found they couldn’t get mortgages, Gottehrer noted.
Two other interested buyers, one from Pennsylvania and one from New Jersey, said they need to sell their homes before committing to a new purchase, but can’t because of the depressed market, Shamilzadeh said.
In a last-ditch attempt to combat slow sales, the Dover is offering rent-to-own leases. The option, which is also being offered at other developments throughout the city, allows potential buyers to temporarily lease units, with the rental income going toward the purchase price. They must also put down a deposit, which
is refundable if they choose not to buy
the unit.
“For someone who is trying to sell their home and can’t, this addresses the problem,” Gottehrer said, adding that several potential buyers have expressed interest.
Gottehrer said renting the apartments will not cover the full debt service on each unit. As a result, Manor must come up with the difference.
“Ultimately, it will cost us a few hundred thousand dollars more than we anticipated,” he said.
Luckily, the company’s rental buildings provide enough income so that it is poised to ride out the downturn without selling the units at “fire sale” prices.
“I am certainly disappointed,” Gottehrer said. “Nobody likes to shell out carrying costs.”
Still, he’s taking a philosophical approach. “I was very happy to have sold the first six units,” he said. “I’m not happy that we have a banking crisis, but we’ll just live with it and get through it.”