Developers thought the luxury condo prices would just keep rising. Now they have to think again
by Daniel Geiger
The pessimism centers on residential development sites amid concerns the city is overstuffed with high-end apartments.
Among the recent string of sobering reports is news that a 10-story building in Brooklyn Heights—one of three large properties being sold by the Jehovah’s Witnesses there and in Dumbo—will fetch a price 25% below the $300 million or more for which it was initially projected to sell. The parcels are considered prime places for both residential and commercial development.
Brokers said the decrease mirrors a precipitous drop in the value of land sites in the city by 20% to 25% so far in 2016. These brokers declined to speak on the record because several are marketing such properties and don’t want to openly disparage the products they are trying to sell.
Tumbling land values, which had reached $1,000 or more per square foot for prime sites, are a reflection of the growing weakness in the city’s high-end residential market. Developers had been willing to pay record sums for land as long as the apartments they built could fetch unprecedented sums. The payoff is no longer the same, according to the brokerage Corcoran Group, which reported that the average sale price for a luxury apartment fell from $8.1 million in the fourth quarter of 2014 to $6.9 million at the end of 2015, a 15% decline.
The rise of the dollar against currencies of countries whose citizens have been stashing their wealth in New York real estate has also hurt the market, according to a report released last week by the National Association of Realtors.
Brazil, China and Russia have been particularly hard hit by the stronger dollar.
“Foreign buyers are facing some headwinds,” wrote NAR economist Scholastica Cororaton last week, noting that from April 2014 through March 2015, they spent $102 billion on homes in the U.S., with Chinese buyers leading the pack.
“High-end condos are not being sold at the same rate as they were two years ago, when we were going through a sales boom,” said Jonathan Miller, CEO of real estate appraisal and data firm Miller Samuel. “We’re starting to see developers negotiate on price and the market [begin to] transition where it’s no longer a frantic selling environment for new development.”
Besides the falling sales projections and tapering interest among foreign buyers, developers must also worry whether they’ll be able to secure the loans to begin construction, as banks become leery of high-end residential development.
Developers Joseph Beninati and Bruce Eichner are both facing foreclosure in Manhattan after failing to lock up the loans needed to begin building. As many as 20 other sites may be unable to secure construction financing, and may stall and face foreclosure, predicted Dennis Russo, who leads the real estate practice at law firm BakerHostetler in New York.
In 2013, Eichner bought a long-vacant development site on the corner of East 125th Street and Park Avenue for $66 million. He planned to build a 330-foot-tall, 670-unit rental apartment tower there. Eichner, who has a history of defaulting when the economy turns, received a loan from Garrison Investment Group to buy the site but couldn’t secure construction financing to begin the project. The Durst Organization, a large New York City landlord, purchased the debt from Garrison and is now moving to foreclose after Eichner defaulted on the loan earlier this year. To extricate himself from the financial jam, Eichner in recent months has tried to sell the project for an asking price of about $150 million.
The growing talk of falling prices and foreclosures stands in stark comparison to the bullish mood of the market even just a year ago, when developers were seeing a nearly 18% year-over-year gain in the average price per square foot among new developments.
“Until the middle of last year, no one was fearful, but today a higher percentage of people are,” said Bob Knakal, Cushman & Wakefield’s chairman of New York investment sales. “Markets are psychological, and as the fear builds you get a herd mentality that comes into effect.
“It’s harder to get deals done—buyers and lenders are being more cautious, and it’s harder to get equity together,” Knakal added.
Cushman & Wakefield projects that 175 to 200 development sites citywide will be sold in the first quarter of 2016—as much as 37% fewer than in the first quarter of last year, which was a record quarter for sales.
Although there has been little definitive data to show that the high-end residential market is tanking, there is growing evidence that the direction of prices and the pace of sales are pointing downward.
Builders change strategies
In its quarterly earnings call in February, Vornado Realty Trust declined to disclose recent sales figures at a superluxury tower it is building along Billionaire’s Row at 220 Central Park South. The omission stoked speculation that sales, after starting strongly, have fallen off in recent months.
Developer Gary Barnett has been unable to sell a block of 38 rental apartments at One57, the high-end condo tower he built on Billionaire’s Row. Barnett also has slashed prices at a condo tower he’s building on the Lower East Side, cutting his projection for the total value of the apartments by about $200 million, to almost $1.9 billion.
Kevin Maloney, the developer of a luxury condo building at 10 Sullivan St., is carving the 17-story building’s three-level, $45 million penthouse into two units more modestly priced because of a dearth of buyers actively looking for such expensive apartments. Builders Harry Macklowe and CIM Group recently decided to cut in half the full-floor units on floors 91 to 95 of the 96-story superluxury condo spire that is nearly complete at 432 Park Ave.
Brooklyn’s soaring market for residential development sites has also been thrown off this year, though the culprit is not a market glut or the global economy, but the failure of the real estate and construction industries to reach a deal to extend a tax break.
The expiration of the 421-a tax-abatement program this year has thrust the land market into a precipitous decline. Ofer Cohen, founder and principal of Brooklyn-focused commercial brokerage firm TerraCRG, estimated that land sales would drop by 70% this year.
Developers viewed the tax break as essential to their bottom lines when building rental housing, Cohen said, and few if any development sites have traded hands since it expired. The abatement offered developers a break on their real estate taxes if they included affordable units in their projects.
“Around 80% to 90% of the market for development sites was for rental-housing construction,” Cohen said. “The only rental development sites that are trading now are those that already qualified for 421-a because they got their foundations poured. And there’s not that many of those on the market.”
Arrested development
Bruce Eichner hoped to build luxury apartments on an East Harlem lot across from Metro-North’s Harlem-125th Street station. Now he’s trying to sell the land.
The Jehovah’s Witnesses are struggling to sell parts of their former Brooklyn headquarters, including these buildings in Brooklyn Heights as demand wanes for luxury development sites.