Hunky-dory for new housing? Not yet

If there’s one thing that residential real estate experts agree on, it’s that there’s demand for new development condos in New York City. But that demand doesn’t mean that everything is hunky-dory in the new condo market again.

In this month’s Q & A, The Real Deal talked to new development brokers, heads of new development marketing companies and industry analysts about the strength of the new development market and the challenges that still exist.

They all said there are encouraging signs in the sector and exciting new projects — like the Stahl Organization’s Laureate on the Upper West Side and the Related Companies’ MiMa on 42nd Street — that could be bellwethers for the market.

But buying a new condo remains complicated for buyers.

For starters, even if a buyer is interested in a new condo, banks are still not jumping to issue them a mortgage. In fact, one source said that the disparity between getting a mortgage in a new condo and in a resale is still the biggest he’s seen in his 25-year career.

And while confidence is up, buyers are demanding more information, including details on the financial solvency of the project.

Meanwhile, though some condo projects, including several that stalled during the downturn, are logging strong sales, developers are still negotiating, albeit far less often than they were during the worst of the downturn (think more on the order of 6 percent than 25 percent).

For more on which buyers are in the market for new condos, how the strong luxury rental market is ironically helping convince banks to lend developers money to build more condos, and how FHA financing is helping move units, we turn to our panel of experts.

Stephen Kliegerman

Executive Director of Development Marketing, Halstead Property

New York City’s new development condo sales were obviously hit hard during the downturn. What’s going on with sales in that sector of the market today, now that the market has recovered somewhat, and how does it compare to three months ago, six months ago, a year ago and during the boom?

New development sales are doing very well and have been since the beginning of 2010. With limited new inventory and all of these properties still offering 10- to 25-year 421a tax abatements, the pace of sales and prices has been very encouraging. Markets like Williamsburg, which many reported as being “overbuilt,” have come back. [For example], 80 Metropolitan has gone from 50 to 93 percent sold in nine months, and 58 Met is already over 30 percent sold in six months.

What are price discounts like at new development condos these days, and how does that compare to six months ago?

Prices are beginning to edge up. At 88 Morningside and 80 Met we recently raised prices. Overall prices are very stable and slightly higher than three to six months ago. If demand keeps the pace … I believe we are going to see further price appreciation until more inventory comes to the market, which won’t happen in any significant volume until 2013 or so.

What are the biggest challenges to selling in new development condo buildings in New York City today, and how is that different than it was last year at this time?

The biggest challenge is timing, because buyers now want to touch and feel the product before committing, except on rare occasions. The other biggest challenge is the requirement that a building be 51 percent in contract — or 30 percent for FHA — prior to closing. Buyers want to know when you will reach that threshold, and it’s impossible to put a date on something like that when you first open sales.

We’ve written a lot about how once-stalled new development projects have restarted construction and launched sales or leasing. But what’s going on with brand-new construction for residential buildings in New York?

I don’t think it will be like the early 2000s for a while, but some very savvy developers and financiers are going to be announcing some new developments in the next 12 months. That said, unless the city and state come up with a new real estate tax-incentive program, the only housing that will be built will be condos, because the development for rental housing does not pencil out well.

Tricia Hayes Cole

Executive Managing Director, Corcoran Sunshine Marketing Group

What are price discounts like at new development condos these days?

Nearly all developments have adjusted pricing to be in line with the market, and today’s buyers are savvy and have access to real data, so they are able to recognize that asking prices reflect market realities. With both parties on the same page, discounts from asking prices are currently in the range of 3 to 6 percent, with few extra concessions being offered. In some very recent cases, sponsors aren’t accepting below asking price. Compare this to immediately after the downturn, when we were seeing discounts of up to 20 to 25 percent, which was generally a combination of a reduction in sale price and other concessions.

How long is it taking to sell in new buildings today, and how does that differ from the recent past?

Developments in neighborhoods with strong demand and little supply are again selling with great velocity. One Rector Park in Battery Park City was reintroduced to the market in the third quarter of last year, and has sold more than 60 residences in seven months. [Also], 123 Third Avenue entered the market in the fall and now has just four penthouses remaining out of 47 residences. At Manhattan House, we’re projecting 2011 absorption levels 50 to 60 percent higher than 2010, which was in itself a successful year, augmented by recent Fannie Mae approval. However, we still see disparity in sales velocity at developments across Manhattan. The most significant reason is price, and how well asking prices are calibrated to the market.

In 2006, new development sales made up 58 percent of Manhattan sales. During the low point it dropped to about 16 percent. What percentage of the overall residential market do new development sales make up in Manhattan today?

New development market share remains at around 16 to 18 percent in terms of closings, but we expect 2011 to be a very strong year for the category. Contracts signed during the first quarter of 2011 brought new development market share up to 25 percent — the highest it has been since the downturn.

What are the biggest challenges to selling in new condo buildings today?

Financing [for buyers] remains one of our biggest obstacles. However, the environment is vastly improved over where it was 12 to 18 months ago.

We’ve reported on restarts at once-stalled projects, but what’s going on with brand-new construction for residential buildings in New York?

For all of 2011, we expect less than 800 new units to enter the market, and in 2012 we’ll see fewer than 500 units introduced, mostly in smaller boutique buildings. Compare that to a “normal” Manhattan market, when there should be 2,000 to 2,400 new units introduced each year. However, with construction financing unlocking and development sites trading again, the outlook is strong for new development in the next two to five years.

How much inventory of new development condos is there in New York, and how is that impacting the market?

Our analysis shows about 5,500 unsold new development units in Manhattan, including all of the “shadow” inventory that’s not yet listed. However, much of that inventory is concentrated in specific areas like Upper Manhattan, so it’s really a tale of two cities. On the other hand, some neighborhoods have a much tighter market and we are approaching or [experiencing an] undersupply, like the Upper West Side.

Other than a project you’re connected to, what new developments are you eyeing?

I am really interested to see how Related’s MiMA [at 450-460 West 42nd Street] takes shape. I’m excited to see the impact a mixed-use development like that has on West 42nd Street.

Steven Rutter

Executive Vice President, Stribling Marketing Associates

What’s going on with sales of new development condos in New York today?

Compared to the boom, the market is off, but I’d say in the last 12 months sales have been strong in new developments. Prices are down depending on the development, but there’s far less for a buyer to choose from, so that is leading to the really active sales activity.

What are price discounts like at new developments these days?

So many of the developments are in the home stretch. A lot of them are well over 50 percent sold and some only have a handful of units left. Those developers are not negotiating as aggressively because they have paid off the bank. They have a little more patience since there is not as much pressure from their lender. [However], many developers are still paying closing costs, transfer taxes and attorney fees [as incentives].

What kinds of buyers are looking at, and purchasing, new condos today?

We’re definitely seeing more Wall Streeters than we had a year and a half ago. I think the Wall Street bonuses had some impact, maybe not as strong as some people anticipated because a lot of those bonuses weren’t paid out in cash. We are seeing more foreign buyers in developments from all over — South America, the UK and Asia. We have a project at 456 West 19th Street where we sold three of our more expensive units to people from Brazil. We are also seeing more empty nesters.

What’s going on with brand-new construction for residential buildings in New York?

We are starting to see a number of projects come out of the ground. The project that Related is doing on West 42nd, [called] MiMA, has about 40,000 square feet of amenities. It’s got a hotel, along with rentals and condos. Gary Barnett is working on his 57th Street site and is working on the conversion of the Carlton House on 61st and Madison. Some developers are able to get construction financing now, but that’s still a big issue for a lot of developers. There are developers holding sites that are trying to get construction financing. But it’s starting to loosen up.

So many of the new buildings on the market are rentals. Do you expect that trend to continue?

I don’t, because developers are paying big numbers for the few new development sites or existing buildings [that are available]. So I don’t think a lot of these buildings are going to work as rentals. I think you’ll see some in Brooklyn because acquisition costs aren’t as high. In Williamsburg there have been a number of new rental buildings opening. In West Hudson Yards there have been a number of rental buildings, but most buildings coming online will be condos.

What’s the most worrying trend you’re seeing in new condo sales in New York?

While people are feeling better about things, there is still an underlying concern about the overall economy and jobs. I think they are also concerned about interest rates because that has been a big driving factor in terms of people buying. [Also], developers are paying a lot for some of these new sites, so I think that’s a little worrisome. We’ll see how that translates into selling prices. No longer having the 421a tax abatement will have a big impact as well, because all of a sudden monthly costs are going to be dramatically higher.

Steve Goldschmidt

Senior Vice President, Warburg Marketing Group

What kinds of buyers are looking at, and purchasing, new condos today?

We are seeing investors that are thinking they can get product at a discount and rent them out in a market that is still pretty active. If you buy your apartment at a steep enough discount [and] … you can actively rent that unit out, maybe even at a loss, it matters less because you sense that in a couple of years the market will come back.

What kinds of issues are buyers concerned about today that they weren’t concerned about last year when it comes to buying in a new building?

Who their neighbors are going to be. The one thing you didn’t have to worry about when the market was hot was that you wouldn’t have any neighbors. Now, in some new developments where the pace is slow, you don’t want to find yourself the loneliest buyer in town.

What is the most worrying trend in new development in New York today?

What concerns me is developers who are purchasing more out of speculation than true development intent. There is a speculative nature to some activity where people are trying to buy properties low and begin their career as a developer. We have backed away from a couple of them.

What new projects are you going to be watching in the coming months?

The Laureate on the Upper West Side. The Wilfs are developing 79th and Third. Toll Brothers has announced plans for a development on 65th and Lex. Also, I want to see how Lower Manhattan develops, and I’m curious to see how developers view the Upper Manhattan/Harlem market in the next five to 10 years.

Richard Cantor

Principal, Cantor Pecorella

What are price discounts like at new development condos these days?

When the market reached its low, [units were discounted] as much as 20 to 25 percent. Each quarter since then, prices have improved or firmed. We have now reached the point on some of our buildings where the developer is not negotiating prices. While we’re not selling as many as if they were discounted, we are able to sell at full asking price again. I think that pattern will continue.

What’s going on with financing for new condos today?

It’s still not easy to get construction financing, particularly for larger jobs. We are doing a new project in Tribeca that has over 200,000 square feet, and I think the developer, who has a first-rate pedigree, is still struggling to put together the necessary construction lending. If the loans are in the $10 to $30 million range, banks are beginning to lend for condos. Large loans of $100 million are very hard to put together, but slowly we are seeing more condo construction as banks begin to lend again. One of the things that’s helped is the tremendous increase we’ve seen in the luxury end of the rental market, since most banks will evaluate a condo as a rental project if it fails, and you see rents averaging $75 a square foot and more. That does make it easier to generate condominium financing.

Rae Gilson

Director of Sales, Classic Marketing

What are the biggest challenges to selling in new condo buildings today?

Financing is the first challenge that comes to mind. … Prospective purchasers need to ensure their credit score is as high as it can possibly be. Buyers should be prepared to make larger down payments: as much as 20 to 25 percent.

What kinds of buyers are looking at, and purchasing, new condos today?

We’re finding more parents helping their young professional children as they are starting out, especially in the $400,000 to $600,000 range. We are not seeing so many Wall Streeters recently.

Jonathan Miller

Principal, Miller Samuel

What are the biggest challenges to selling in new development buildings today?

The most important challenge is the availability of mortgage financing. The disparity between obtaining a mortgage for a resale and a new development sale is the largest it’s been in my 25 years of following the market. Mortgage lenders are risk-averse now and are looking just as closely at the building as they are at the unit itself. The demand seems to be there, but without the mortgage piece providing reasonable consistency, sales will be restrained. As much as it is telegraphed in the public domain, the “all-cash” buyer market is not nearly deep enough to absorb all new development.

So many of the new buildings now on the market are rentals. Do you expect that trend to continue?

As construction lending slowly — and I mean slowly — thaws, I think we will see development activity expand again. But for now, the majority is going to be rental, not condo. The rental market is much larger and can more readily be absorbed.

How much inventory of new condos is there in NYC right now?

We estimated over 20,000 units in the five boroughs last year. That number is slowly shrinking as product gets repurposed as rental, or repriced. I continue to be amazed at how much “pretend and extend” continues, where lenders do nothing for fear of damaging their balance sheet and impacting their ability to lend.

What’s the most positive trend in the new development sales world?

Developments in markets that are priced low enough to qualify for FHA are getting better traction than anyone anticipated. Long Island City is a good example of this.

What’s the most worrying trend in new development sales today?

I worry about the mortgage component since Fannie Mae and Freddie Mac are basically insolvent, and the federal government is talking about moving emphasis away from housing with a new agency. One thing markets do not like is uncertainty.