Once New York began to recover from the 2008 recession, a condo boom flourished throughout the City as the housing market was on the upswing and buyers were eager to boost the real estate market. According to The Real Deal around 6,500 condos were put on the market in 2015, which was a significant increase to the 2,500 in 2014. Developers bought buildings with the idea of converting them into condos, however, they did not anticipate it would take so long to sell the units or that there would be an over-saturated market by 2017.
The problem developers are now facing is that the number of condos in 2017 have increased since last year and the prices of these luxury units are decreasing; an issue that was unforeseeable several years ago. However, the problem of overdevelopment is not just impacting condo developers. For the past year, landlords have had a difficult time filling up rental apartments due to the excess development. In order to lure new tenants, they offer concessions such as low security deposits, a month’s rent for free, and luxury amenities. Developers have acted similarly by lowering unit sale prices and seeking inventory financing for blocks of unsold units. However, developers who tackle condo conversions are still facing a higher financial risk than landlords looking to fill empty rental units.
Although the economy is currently on a high and investors are investing in more property rather than securities, developers still need to pay off their debt for their empty condos to banks and private equity funds. Nikki Field from Sotheby’s International Realty told The Real Deal that the pressure for developers to meet deadlines to sell units has become cumbersome in the past year. “The longer [a project] goes, the more it costs developers. There’s a real sense of urgency to move product.” This is as developers have to carry the costs of maintaining buildings and paying off construction loans until enough units (usually 50 percent) are sold to offset those costs.
As the price of condos has decreased, developers are still focused on maximizing profits, which means selling the units at the highest price possible. However, while developers wait for the market to move in their favor, banks and private equity funds pressure developers to pay their debt on time to mitigate any financial risks. Unfortunately for developers these are two competing interests in today’s market. Halstead Property Development Marketing’s 2017 second quarter new development report states that in Manhattan, there are 5,936 units available, which is a 5.5 percent increase from the last financial quarter. Additionally, the price of new development units have decreased by 2.1 percent from the last quarter (although there has been a 2 percent increase since the second quarter of 2016).
How will developers adapt to this new market? They have the option of lowering sale prices per unit (typically around 20 percent) to meet their debt obligations, cutting into their profit-margin by a significant amount. Some developers try to wait it out, hoping that the market will swing upwards, but this “wait and see” ultimately means more in lost profit. Other developers have tried a hybrid approach, cutting unit sale prices around 10 percent and even leasing units to remain afloat. Whichever approach a developer chooses, the name of the game is speed, as the one universal truth remains that the longer a property sits on the market, the more profits decrease.