There has been talk of a Manhattan residential development slowdown since at least the beginning of last year, but recent data shows that the new development boom may (really) be coming to an end.
The number of new condominium offering plans submitted to the office of the state attorney general took a nosedive in the first two quarters of the year, according to an analysis by The Real Deal.
Developers submitted 50 percent fewer condominium offering plans to the attorney general’s office. Paperwork seeking approval for 2,305 units was filed in the first quarter, as compared to the whopping 4,874 projects in the year-ago quarter, when the development boom reached a peak.
In stark contrast to the robust 2006 market, 2007 started sluggishly and continued to lag in April and May, hinting at a further slowdown in new projects for the rest of the year.
“The heyday is over,” said developer Henry Justin of HJ Development. He is not opting out of the condo market, but he is thinking small. Justin recently purchased 211 East 51st Street, which he plans to turn into a 74-unit condo with units ranging from 500 to 1,200 square feet. His offering plan had not been filed by press time.
Data tracked by The Real Deal used initial submission dates at the attorney general’s office, rather than when projects were actually approved for sales or completed.
The figures are a good indication of what the development pipeline will look like 12 to 24 months out, when those projects first begin sales.
From January through May, developers submitted less than half the number of projects that they filed during the beginning of 2005 and 2006. There were only 3,340 projects filed in the first five months of this year, compared to 8,528 for the first six months of 2006 and 6,159 for the first half of 2005.
Mounting land and construction costs — and a scarcity of prime property — hampered development in the last 12 months, although Manhattan condo unit sales were still averaging $1.5 million in the first quarter of this year, according to Jonathan Miller, president of appraisal firm Miller Samuel.
“The land costs keep going in the upward direction. And construction costs are just spiraling. It becomes harder to make the numbers work for just a straight condominium,” said Jonathan Resnick, president of Jack Resnick & Sons, which is now closing sales at 200 Chambers Street, a condo in Lower Manhattan.
Concurrently, the rental and hotel markets heated up, inducing developers to focus on those markets or plan hybrid projects such as hotel-condos; developments with condos and rentals; and buildings that have both a hotel and condo units. (The Real Deal‘s data only includes condos).
Straight rental buildings are starting to garner more attention. Rents rose to an average of $2,515 for a Manhattan one-bedroom in May, according to Citi Habitats.
The Sheldrake Organization is one developer that’s banking on the resurgent rental market.
“I would be hard-pressed right now to do a new condo deal in a neighborhood that is not established,” said J. Christopher Daly, president of Sheldrake. His company is opening the Riverhouse condominium in Battery Park City this year.
Lenders said they are feeling the rental frenzy.
“We’re seeing more requests for rental financing than we have in the past,” said Steven Kohn, president and principal of Sonnenblick Goldman, although not necessarily more than for condos. Because of the stability of the multi-family market, “it’s a highly sought-after asset class for lenders.”
Asked about which sector of the market presents the greatest upside for investors as part of a Q & A by The Real Deal (see Q & A: Which area has greatest upside?), Andrew Oliver, managing director and principal at Sonnenblick, said the condo market is the least attractive.
“The condo residential market is the least strong,” he said. “It’s still good, but not as strong as these other markets. One reason is there has been more development [in condos] than everything else. There has been very little office, hotel, retail and residential rental development.”
Paul Massey, founding partner of Massey Knakal Realty Services, also said he has seen less interest in condo development sites.
“Land and buildings suitable for luxury condominiums were not in demand during the fourth quarter of 2006,” he said. “But now a lot of that product is being pursued by investors for affordable housing or hotel/office space.”
The potential impact of changes to the 421-a tax abatement program, passed last month by the New York State Legislature, made some developers gun-shy.
Market observers had speculated that the revamped 421-a tax abatement bill, which broadens the geographic area where affordable housing must be included in projects to qualify for long-term tax incentives, would result in a rush of market-rate condo filings with the attorney general’s office. The numbers do not bear that out; they mostly show a continuous decline since the beginning of last year.
In 2006, after a still-booming condo market peaked in the first quarter, the number of projects failed to match the high for the rest of last year. The numbers dropped to 3,654 in the second quarter and 2,152 in the third before creeping up a bit in the fourth quarter to 3,457.
If Gov. Eliot Spitzer signs the 421-a legislation into law, as expected — which he had not done as of press time — developers could still submit their plans and qualify under the old law, since the law would not expire until July of 2008 rather than at the end of this year.
Because affordable housing under the new 421-a legislation has to be included in market-rate buildings, developers contend that their costs will go up.
It amounts to a developer “not recapturing 20 or 30 percent of [their] building,” said Sheldrake’s Daly. As a result, developers of future projects are at an economic disadvantage compared to those of existing ones.
“Right now just to go head-to-head is very hard,” he said. “These deals are just not penciling out like they used to.”
Nationally, developer confidence dropped last month to its lowest level since 1991 due to concerns about subprime mortgage lending and rising prime mortgage rates, according to the National Association of Home Builders.
National totals for building permits issued in May rose 3 percent from April but dropped 21.7 percent from a year ago.
Housing starts dropped 2.1 percent from April and 24.2 percent from last May, according to data from the U.S. Census Bureau and the Department of Housing and Urban Development.
The number of condo plans could continue to dwindle.
Sheldrake’s Daly predicts that costs will force developers to consider more adaptive uses of their land, like adding a floor rather than tearing a building down and starting anew. Other developers are choosing to scrap residential plans in favor of commercial ones.
Kohn, of Sonnenblick Goldman, had a more optimistic perspective on the drop in offering plan filings.
“The condo market has moderated somewhat, but it’s still strong in New York,” he said.
Some market specialists say their experience does not reflect the trend found by The Real Deal.
“I’m not seeing any drop off yet,” said Andrew Gerringer, managing director of developments at Prudential Douglas Elliman. He works with developers before their offering plans are ready for filing.
In May, he said he had three new contracts for condos in Manhattan.
Nor is Extell Development Company’s condo business wavering, said Raizy Haas, a senior vice president at the firm. “We’re going strong.”
Go to graph: New condo units submitted by quarter, 2004 — 2007
Go to map and charts: Condo units added by neighborhood, 2005 — 2007
Go to chart: Manhattan condo projects submitted by quarter, 2006 — 2007