Most real estate developers agree that it’s taking longer to sell out residential projects, and that
can spell trouble for a less-than-well-capitalized developer.
If a condominium project takes just a month longer to sell out than anticipated, it means a developer has to make an extra interest payment on any loans and shell out for any real estate taxes and maintenance or common charges. Additional marketing expenses add to the financial burden.
Since developers are reporting that some condo projects are taking as much as twice as long to sell out as they were two or three years ago, that can end up being a big chunk of change, or even threaten to derail a project.
Developers declined to point fingers at any particular projects, but news reports have indicated that there are at least a handful of projects selling more slowly than expected. In Harlem, which has seen a spurt of new development during the real estate boom of the past few years, such projects as the Ivy on Second Avenue and the Lenox Grand are reportedly struggling.
In the Riverdale section of the Bronx, the sluggish real estate market prompted one developer, L&M Equity Partners and
affiliate Hudson Arlington Associates, to take the Arbor, a 127-unit condo at 3260 Henry Hudson Parkway, off the market to sell it to Columbia University for faculty and graduate student housing.
There are reports that sales at some
condominium conversions are lagging. At one, the Manhattan House at 200 East 66th Street, sales were slow enough to
lower prices.
“At the Manhattan House … they were having trouble meeting the number of sales they needed to make to have their offering plan declared effective, so in order to do that, they lowered the prices for the free-market and rent-regulated tenants,” said attorney Adam Leitman Bailey, who specializes in condominium and tenant representation, among other areas of real estate law.
“For people who are highly leveraged or who have expensive mezzanine debt, it’s starting to get problematic,” said Gary Barnett, president and CEO of Extell Development. “There are projects out there that have stalled out at maybe 40 or 50 percent sold, and those situations … you have to start worrying about the bank.”
Yet Barnett said that Extell has been having few problems selling units in the many projects it has around the city. The Lucida at 151 East 85th Street only has a few units of its 110 remaining, he said, while Avery Condominiums at 100 Riverside Boulevard has sold about 98 percent of its 274 apartments.
Barnett said that the torpid real estate market may have affected sales a bit at
Ariel East and West, two glass towers at 2628 Broadway and 245 West 99th Street, with 137 units between them.
“There, we’re about 85 percent sold,” he said. “Maybe we would have been 100 percent sold at this point if the market had had better velocity, but actually, we’re selling very well there.”
Because the project was not overleveraged, the issue of lagging sales in the Ariel buildings hasn’t been as devastating as it might be for a highly leveraged development, Barnett said.
“In the Ariels, where we’re better than 85 percent, we’re out of the bank on that number,” he said. “So while we’d love to get our equity out and ultimately get the profit, it’s not as critical.”
Jeffrey Levine, chairman and principal of Levine Builders and Douglaston Development, said developers should avoid getting into a situation where slower-than-anticipated sales can cause a project to flounder. Besides starting sales early and managing marketing expenses wisely, they should set up an “intelligent interest reserve” based upon a realistic absorption schedule, said the developer, who has only a penthouse left at the 21-unit Zinc Building at 475 Greenwich.
While that loft condo building sold out on schedule, for condo projects that are taking longer to sell, lower interest rates on London Interbank Offered Rate (LIBOR)-based loans are working in favor of developers, Levine said.
“Most of the construction loans are
LIBOR-based adjustable on a periodic
basis,” he said. “LIBOR has fallen, so in many cases, interest reserves have a longer time allotment than what would have been originally projected. To some degree, the lower interest rates wind up offsetting the slower absorption.”
But even that boost may not be enough for developers who underestimated their absorption schedule, he said.
“Those projects might have to go back to the market for some type of mezzanine or bridge financing, which, quite frankly, can be very expensive,” Levine said. “So you’re far better served in anticipating what your costs are going to be in advance than having to deal with them on an ad-hoc basis when you’re at that precipice.”
Levine said his project, the Edge, in Williamsburg, with more than 575 units, has sold almost 100 apartments in the first three months of marketing at the projected price of more than $900 a square foot. Still, in the current sluggish market, other developers may be in jeopardy of losing their projects, he said.
“Then it comes down to the lending
institutions, and how determined they are to do the smart thing or to do the expeditious thing,” Levine said. “Doing the smart thing may entail renting some of these
facilities up till such a time as there are willing buyers. Or they may choose to just cut and run by doing some sort of distress auction for units.”
Barnett said there may be a sprinkling of New York City condo developments that won’t make it.
“There are projects that are either in trouble, or the banks are shopping the debt, or there are cases where they’re actually taking back the fee,” he said, though he would not name specific developments.
However, Barnett said that he believes the market slump is having more of an impact on projects in the planning phase, which ultimately could assist developers struggling to pay growing carrying costs on existing condo projects.
“There are quite a few projects that are not going to get off the ground, which is actually probably good for the overall market,” he said.
Luigi Rosabianca, a managing member of the law firm Rosabianca & Associates, which specializes in real estate, said he believes relatively few New York City developers will lose their condo projects, if any.
“Because of how the offering plan system is set up, once they have construction bonds in place, you’ll see very few developers losing their projects,” he said. “By the time they get to that point, they’re in too deep not to make it work. They’ll just make less and less and less profit, and a project that might have been lucrative will no longer be.”
To get their apartment inventory moving, developers will come up with ingenious concessions, he said.
“They’ll do everything from [encouraging] the brokers with higher brokerage commissions to [encouraging] purchasers with some financial incentives, i.e. closing costs,” Rosabianca said. “I’ve started to see all sorts of really interesting proposals. I saw one building offer a year’s worth of butler service to a penthouse buyer.”
On the front end of projects, developers have begun to extend incentives to contractors to get construction work done within certain timeframes, he said. Also, they are beginning sales earlier than ever.
“We’re seeing a lot of pre-, pre-, presales,” Rosabianca said. “We’re seeing, even before the sales office is open, 15 or 20 percent sold, simply because developers are starting early and are making these tremendous concessions.”
For developers with condo projects coming out of the ground who are seeing sales lag, that may be the time for a marketing shakeup, he said.
“Developers will get new marketing agents, or new sales companies,” Rosabianca said. “We’ve all seen various buildings change their entire marketing strategy, where a building will be very sleek for a year, and then suddenly, it becomes very family-friendly, because they’ve tapped into that market.”
Developers can also try to reach other different market demographics — for instance, foreign buyers versus domestic buyers, he said.
An example of where that technique was used successfully was at the William Beaver House at 15 William Street.
“It was originally being marketed in a very different way than it is today, towards the young Wall Street purchaser,” Rosabianca said.
Now, a lot of their marketing materials are ‘It’s a wonderful family neighborhood.'” It’s served them very well.”
But if even a marketing shakeup doesn’t work, developers can, as a last resort, begin selling units in bulk, and even hold non-distress condominium auctions, Rosabianca said.
“Since the better units are easier to sell — those with the better floorplans and fantastic views — then you’ll often have the awkward layouts and darker units left, and you can always package those as part of a bulk sale,” he said.
If a condo project is struggling, “we see that at the late stages, where, for example, a developer will say, ‘If you take these eight units, we’ll give you a 12 percent discount.'”
But, though these types of luxury property auctions are increasingly being held throughout the country, Levine said that he doesn’t believe the New York City market is at a point where developers will have to hold them — nor will it get to that point.
“That’s something that happens in depressed markets,” he said. “What’s that Mark Twain saying? Contrary to reports of our demise, the New York City housing market … is stronger than virtually any other market in the country. There will be willing buyers again, whether it’s this month or next month when the housing market senses a bottom, and developers just need to wait it out.”