Shortly after the financial crisis of 2008, experts worried that the market was in even worse shape than it appeared. The culprit? Thousands of stalled and vacant condo units that were being held off the market — so-called shadow inventory — threatening to add years to New York City’s real estate recovery.
In today’s improved economy, many in the industry are wondering what happened to all that inventory. With sales picking up and some new condos morphing into rentals, everyone agrees that the number of shadow units has dropped. But no one knows by exactly how much.
“I don’t think there’s that much shadow inventory out there,” said Halstead Property executive director of development marketing Stephen Kliegerman, adding that he believes initial approximations may have been overblown. He said he thinks that New York City only has about 1,000 units of shadow inventory.
Real estate appraiser Jonathan Miller, the CEO of Miller Samuel and the preparer of Prudential Douglas Elliman’s market reports, has a different take. In 2009, Miller estimated that there were between 6,000 and 8,000 shadow units in Manhattan. Now, he said, the borough still has 4,000 to 5,000.
For New York City as a whole, he estimates that there are currently just under 20,000 units of shadow inventory.
“There certainly has been some erosion of [the 2009 estimate],” said Miller, who is also a partner in the condo conversion venture Condominium Recovery. The once-stalled, 597-unit Sheffield, for example, has sold over 100 apartments since changing owners during the recession.
Still, Miller estimated that it would likely be another two to four years before the city’s remaining shadow inventory is fully absorbed into the market.
Just because brokers “don’t see it, it doesn’t mean it isn’t there,” he said.
At press time, there were 9,114 units for sale in Manhattan, according to real estate data provider StreetEasy. Some 3,145 of those for-sale units are in new or recently converted buildings, but shadow inventory could mean that Manhattan’s new development inventory pipeline exceeds 7,000 units.
Shadow inventory is common in large buildings, where sellers hold off on listing apartments to create the appearance of scarcity and prevent flooding the market with hundreds of similar units. In some large condo conversions, units earmarked for eventual sale still have rental tenants living in them. Additionally, banks may hold properties off the market after a foreclosure to wait for conditions to improve. That’s especially common in today’s market, according to developer Josh Guberman.
“We’re seeing [it] more and more, where banks are basically taking back sales for stalled projects and selectively marketing the most sellable units,” said Guberman, the president and CEO of Core Development Group.
Many view the Financial District, promoted as an emerging market before the crisis, as the epicenter of the city’s shadow inventory. Miller said as much as 40 percent of Manhattan’s shadow inventory is Downtown, and that the majority of it is in the Financial District.
In 2008, for example, 99 John Street was converted from luxury rentals to a condominium known as the 99 John Deco Lofts. The 442-unit building is now 51 percent sold, according to Tali Berzak, the sales director of 99 John and a Nest Seekers International sales manager. But only 36 of the remaining units are listed as available on the building’s website, which means some 180 units could be considered shadow units.
Berzak said the building doesn’t stagger releases of the units, but is instead converting the units as renters leave, which has a similar effect.
Deborah DeMaria, a Warburg Realty sales director representing 20 Pine: the Collection, said some 93 percent of the units at the condo have been sold, leaving 28 units — eight of which are in contract. Of the remaining 20, DeMaria noted that only 10 are on the market.
Confusing matters further, brokers in some neighborhoods are complaining because they feel there’s too little inventory on the market to satisfy apartment-hunting clients. In Greenwich Village, the Upper West Side, Brooklyn Heights, Cobble Hill and Park Slope, brokers feel there is “no inventory,” Kliegerman said.
Even in some neighborhoods assumed to have high amounts of shadow inventory, like Williamsburg, prices are back up to 2007 levels, he said.
“Look at Williamsburg — everyone talked about how overbuilt it was,” Kliegerman said, but noted that Two Northside Piers is “selling in the mid- to upper-$600s to almost $900 per square foot. The Edge is even higher.”
As of press time, there were 434 new development units listed as available for sale in Williamsburg, according to StreetEasy, but Miller said there are likely a lot more. To see evidence of Williamsburg’s shadow inventory, “all you have to do is drive at night,” Miller said.
Highlyann Krasnow, a partner at the brokerage MNS who is heading sales at the Edge, said 57 percent of the building’s 565 units have been sold. That leaves around 243 units still available.
At Northside Piers, the first tower’s 180 units are completely sold, according to David Von Spreckelsen, a senior vice president at Toll Brothers, the building’s developer. The second tower’s 270 units are approximately 65 percent sold, he said, leaving around 100 units of inventory.
Yet from this combined unsold inventory of roughly 343 units, StreetEasy lists just 58 units on the market — 25 at Two Northside Piers and 33 at the Edge.
This perceived inventory shortage is partially responsible for driving prices back up in Brooklyn, particularly in Williamsburg, according to David Behin of MNS. “It’s not up to the peak [prices of 2008], but Williamsburg has gone a lot higher than anybody expected it to,” he said.
More confusingly, some of the shadow inventory is still being sold. Krasnow noted that though the building’s website lists only some of the available units, their team shows prospective buyers any available unit.
The uncertainty about inventory makes it difficult to plan for the future. The last phase of the Two Northside Piers development, for example, is for a third tower with 400 units. Though Toll Brothers had the option to develop this tower in their initial agreement, Von Spreckelsen said they have decided not to because of concerns about Williamsburg’s inventory levels. A third tower is also planned for the Edge, but development won’t begin until the second tower is completely sold, Krasnow said.
With so many factors in flux, consumers, brokers and developers will have to continue guessing how many New York apartments are really available.
Shadow inventory is “definitely one of the things that a buyer should be aware of,” said Sofia Song, head of research at StreetEasy. Unfortunately, the concept is, by its nature, “murky and nebulous and … shadowy,” she added. “If we really knew how much was out there, it wouldn’t be shadow inventory.”