World Trade Center siteAfter a rocky few years during the downturn, New York City condo conversions are starting to make a comeback, and some of the city’s marquee developers are getting in on the action.
Conversions are currently underway in Harlem, the Upper East Side, Times Square, Dumbo, the Lower East Side and Brooklyn Heights, to name a few neighborhoods. And several of those plans have been solidified over the past six months, adding a new sheen to the condo market that for the past several years appeared to be in a state of self-induced penance.
According to the New York State Attorney General’s office — which signs off on condo conversion plans — the number of plans filed so far this year is on the rise.
In the first two quarters of 2011, 18 plans were filed for condo conversions under Part 23, the state regulation that governs rental-to-condo conversions. That was nearly three times as many as the seven plans submitted over the same period in 2010 and almost as many as the 20 filed for all of last year (see chart).
While those raw numbers are not earth-shattering, the fact that they have jumped is significant.
“The time line to get to market by purchasing a rental, rehabbing it, and selling it as a condo is significantly shorter than buying raw land and having to start from scratch,” said David Behin, a partner at marketing and sales firm MNS and the president of the investment sales and consulting division at the company. “So the opportunities that provide the quickest returns, if financially feasible, will go first, as you are seeing.” And it’s not just residential buildings being converted. Office buildings are also in developers’ crosshairs.
For example, in June, Crain’s New York Business reported on the planned conversions of 93 Worth, a 165,000-square-foot Downtown office building, to condos, and 1450 Broadway, which the Zar Group purchased for $204 million. In the latter case, Zar is planning to lease the building to office tenants in the near term, but is reportedly considering converting it into residential units in the future.
Since Part 23 filings cannot move forward until 15 percent of a building’s available units have been sold to residents planning to move into the building within 15 months, the plans submitted to the AG clearly show some appetite in the market for new product.
Many of these new conversions are being done by high-profile developers like Aby Rosen, Douglas Durst and Harry Macklowe.
Rosen and his partner, Michael Fuchs of RFR Holding, have set their sights on a rental building at 530 Park, which they intend to turn into high-end condos, while Macklowe is converting a 108-unit rental building that he bought in May, at 737 Park Avenue for $255 million, into luxury condos. (The Real Deal published a detailed breakdown of the latter project in the June issue.)
Similarly, at 1212 Fifth Avenue, Durst Fetner Residential is converting a 16-story prewar rental building, which it bought from Mount Sinai Hospital back in 2009, to condos. Prices there range from $735,000 to $7.99 million, according to the New York Post.
All of this comes as some newer conversions that were conceived of several years ago — and weathered the downturn — are now hitting the market.
In April, sales launched at the 45-unit Kirkman Lofts, a Dumbo condo project once home to the Kirkman & Sons soap factory building (construction is scheduled for completion this summer). Meanwhile, in Harlem, sales have been brisk at PS90, where L+M Development Partners recently completed the conversion of an old elementary school into 75 condo units. Eighty percent of the available units have either sold or are in contract, according to Stephen Kliegerman, president of Halstead Property Development Marketing, which is overseeing sales and marketing at PS90 and the Kirkman Building.
“I have one or two meetings a day with developers who are looking at a property to convert [to condos], or one that they are bringing to market,” said Kliegerman. “Without a doubt, the developers and investors see an opportunity, and a hole in the market to take advantage of.”
There are a host of reasons why developers are starting to turn to conversions again: An increasing absorption rate in the current housing inventory is one, while a lack of financing for new product makes conversions easier to finance than ground-up construction.
Also, land prices in New York remain high, and the two- to three-year turnaround time for conversions is much shorter than the four- to seven-year turnaround time for ground-up development, sources say. The quicker turnaround time cuts the project risk and helps avoid long-term construction costs.
But until recently, well-known condo conversions were floundering.
Midtown’s Sheffield57, for example, was sold in a foreclosure auction in 2009, and Downtown’s Rector Square went back to its lender. Both projects have since been revived under new ownership.
“In the summer of 2008, when the economy fell apart, things dropped a lot in new construction, and a lot of developers that were building condos turned them into rentals and waited,” said Mary Ann Rothman, executive director of the Council of New York Cooperatives & Condominiums. “And now, as things are looking better, we are seeing three years’ pent-up demand for condo units.”
Stuart Saft, chairman of the global real estate department at the law firm Dewey & LeBoeuf, added another explanation as to why there are more condo conversions in New York today.
The mortgage market has been rocky for potential homeowners since 2008, when quasi-government entities began requiring a condo building to rack up substantial sales before backing a homeowner’s mortgage. For the Federal Housing Administration, that hurdle has been a 30 percent “presale” (meaning that at least 30 percent of the building’s available units must be sold), while for Fannie Mae it’s ranged from 50 to 70 percent.
But according to Saft, those restrictions have loosened, at least in New York, because of the housing shortage here and the ability to resort to rentals if the market craters again.
“Even though they have had these requirements in place for three or four years, we can negotiate around them. On occasion I have been able to arrange for a debt analyst to meet with one of my clients about a project — and even though they didn’t comply with the requirements, they were able to bend the regulations based on the narrative that housing in New York City is different than in the rest of the country,” he said.
Saft predicted that the appeal of conversions will continue for at least another few years, as the risks associated with large, ground-up condo projects linger.
Certainly developers remain enthusiastic.
Craig Nassi, CEO of BCN Development, is converting a pair of onetime rental buildings — the first on East 16th Street in Manhattan, the other at 184 Joralemon Street in Brooklyn Heights — into condos.
“Both work great as rentals,” he said. “But both are fabulous as condominiums.”