Failure to launch

As luxury market cools, developers hold back units

In one of the strongest signs yet that developers sense headwinds in the luxury condo market, the sales office at 111 West 57th Street is quiet these days. In March, developers Property Markets Group and JDS Development Group confirmed that the once-imminent sales launch at the 60-unit tower would be pushed back for at least a year.

The development, located at the landmarked Steinway Building, is not alone. Despite off-the-charts construction activity in New York City’s residential sector, new development inventory plummeted a whopping 44 percent during the first quarter of 2016, according to a report from Douglas Elliman and appraisal firm Miller Samuel. According to the report, there were 753 new condos for sale at the start of 2016, compared with 1,345 units a year prior. By comparison, Manhattan’s overall inventory level inched 5 percent higher during the first quarter, with 5,506 properties for sale during that time. “Developers continued to either pull units from the market or were slow to replenish them in order to keep marketing [time frames] at lower levels,” wrote Miller Samuel President Jonathan Miller. “The pace of contract absorption remained well below years-ago levels, as the weak U.S. dollar and increasing competition reset demand to a lower level.”

Jonathan Miller

Jonathan Miller

Miller said new development inventory has dropped for three consecutive quarters. “That’s a tangible indication of when contract volume cooled off and when the market changed,” he said, adding that the cooldown coincided with a weakening U.S. dollar and more inventory in the high-end condo market (at least initially). “Developers don’t want product sitting on the market for a long period of time and ending up being on the market for 450 days.” 

Michael Falsetta, executive vice president of Miller Cicero — the commercial real estate appraisal arm of Miller Samuel — estimated that north of 1,000 units that were set to launch in 2015 were held back for those reasons.

There are several competing high-end condos in the market along Billionaires’ Row, including Vornado Realty Trust’s 220 Central Park South and CIM Group and Macklowe Properties432 Park Avenue. Extell Development is still looking to sell off remaining units at One57, and the developer announced plans to market 38 luxury rentals in the building as condos, instead. Holdings units off the market could help nearby projects, said Steven Rutter, director of Stribling Marketing, which is spearheading sales and marketing for World Wide Group and Rose Associates’ 252 East 57th Street, where several units got price chops earlier this year. But Rutter also pointed out that developers hold back inventory in both good and bad markets. “If it’s a good market, they don’t want to sell too fast or too cheaply,” he said, adding that most developers wouldn’t put more than 20 percent of the building’s inventory online at once. “But that’s not where we are right now.”

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More so than holding back units, Rutter said some developers are reconsidering their projects altogether. “If they’re already selling, they’ll keep at it,” he said. Developers who haven’t started construction, particularly if they paid a lot for the land, will consider “waiting or selling the site,” he said.

Despite developers’ jitters, new condo closings gave the residential market a big boost during the first quarter, pushing the average sale price to a record $2 million, up 18.4 percent year over year. During the first quarter, the number of new condo sales doubled to 621 from 320. But in a sign of what’s to come, new development properties also spent longer on the market, averaging 162 days, compared with 146 days during 2015’s first quarter.

Miron Properties’ Jeff Schleider said when developers release a large number of units, they essentially are competing with themselves in a particular submarket. “In the top of the market frenzy, that’s OK,” he said. “But in markets that have cooled off a bit, you want to create an artificial sense of scarcity.”

At the same time, not all developers are holding back. In Brooklyn, new development inventory jumped 9 percent between the fourth quarter of 2015 and 2016’s first quarter — to 755 units — according to Halstead Property Development Marketing’s latest quarterly market report. “The Brooklyn market is finally starting to see some condo inventory come to market,” said HPDM’s president, Stephen Kliegerman, who offered one caveat: Most of the inventory gains can be attributed to Greenland Forest City Partners’ 550 Vanderbilt, with 278 units. “Inventory in Brooklyn is still pretty tight,” he said. Kliegerman dismissed the notion of Manahattan developers holding back, instead characterizing a 5 percent drop in new development inventory during the first quarter as “healthy absorption.”

He said new projects that have hit the market in recent months, as well as projects in the pipeline, reflect the size and price point that buyers are craving.

“The middle market is doing very, very well,” Kliegerman said, noting that 78 percent of new development units that went into contract during the first quarter were $5 million or less.