Coming Soon! The Zombie Condos That Ate New York
As those who read my piece "Running Off The Cliff" know, the changes made to the 421a tax abatement program resulted in a perverse rush by developers to begin construction on new condo projects in New York City in the face of a declining Wall Street economy. It's an amazing testament to the distortion of behavior that subsidy programs can have. The chart from that piece was so striking I am reprinting it here (but slightly gussied up).
Note that building permits for single family homes and 2-4 family homes peaked in 2006, lagging the US overall - as New York typically does - but falling off precipitously and quite rationally since. However, as a result of so many developers trying to "get into the ground" to secure their 421a tax abatements, the number of permits for buildings with more than 6 units continued to rise in 2008 (with YTD numbers through August actually ahead of full year 2007 numbers), despite market signals that it probably wasn't a great time to reach for new heights in condo building. I thank Christine for her recent piece "New Dev Buyers: "What Are You Going to Give Me?" about condo developers finally getting down and dirty with deals. As I mentioned in my prior piece, in order to retain their tax-advantaged status, these buildings must be built without "undue delay" and I noted that city planning specified that "We would deem completion within 36 months from commencement as a guideline for construction being completed without undue delay."
So despite the struggles of projects in later phases of development, we can expect delivery of several thousand condo units starting around December of next year - 18 months would be a typical construction period for a project that's not too elaborate - with deliveries being completed before June 2011. Of course, developers will be out marketing these projects well before they are completed, causing further competition for those units in buildings now being completed that continue to linger on the market.
Now, perhaps, the unkindest cut for developers has come. According to a recent Real Deal article,
lenders are becoming wary of making mortgage loans to those buying condominiums in buildings where fewer than 51% of the units have already been sold.
"There are certain buildings that some lenders just won't lend to, period," said Allan Trub, a senior vice president at GuardHill Financial. "There are a lot of buildings with very low presale numbers, far below the numbers that lenders typically require. It's become much more challenging to get them approved."
These lenders aren't dumb, they do not want to lend money on an asset that is potentially going to face not only severe competition from competing properties, but potentially competition from duplicate units in the same building. The marks to market could come fast and furious. Additionally, buyers of units in condominium projects that fail face significant problems - the likes of which have not been seen since the early 90s.
Craig Delsack, a Manhattan-based real estate lawyer, spoke with me about some of the issues. He opined that in a tough market "the sponsor may do bulk sales of units to another entity. That entity will be on the hook for common charges for that block of units. If they then have trouble selling the units common charges could go unpaid". He noted that "the condo association could foreclose on the units which are not paying common charges, but it's a drawn out and expensive process and could lead to assessments on current owners to cover the common charges and legal expenses." For a lender to owners in a busted condo building this can be a risk in and of itself. Some buyers may be so upset with conditions that they walk away from their units and loans. Another alternative is for the condo sponsor to rent out unsold units. This can result in the building having a very different demographic than some buyers may have expected and, let's face it, renters don't care as much about the upkeep of a building as owners. Accordingly, Delsack suggests, "banks are going to look at units owned and occupied by owners, not investors or even foreigners who use the unit as a pied a` terre, before they commit to lending to buyers in new developments. One way to avoid these issues is not to buy a condo in a new development."
There will likely be bargains aplenty for those inclined to take the plunge in a new condo development, particularly if you have the wherewithal to pay cash. Being the buyer who puts the development over the 50% mark may warrant an even greater discount. But be careful out there, there is no doubt we will see some busted deals, where sponsors go bankrupt and common charges go unpaid as a result of the current climate. Here come the Zombie Condos....don't get eaten alive!
Posted by Christine Toes
Thu Nov 6th, 2008 04:37 PM
Hi Jeff! The first casualty I heard of that resembles your post is 75 Ridge Street on the LES. The developer couldn't sell all of the units, so they started converting the remaining units to rental. I met a couple who bought in the building and decided to pull out because they had no desire to live in a building that was half rental.
I hear that Northside Piers has started renting out some of their apartments as well.
Buyer beware! If you are buying in a new development, make sure the developer is well known and has deep pockets!
Posted by jeff
Thu Nov 6th, 2008 06:53 PM
Thanks Christine,
Back in 1995 my wife and I almost bought a condo in a building that had been a zombie of the early 1990s. It was a beautiful place on the East River, but they had been through the whole scenario above. The developer went under, there were rental tenants in the building for quite a while and some number of condos had still been vacant due to bulk buyers sitting on them, etc. Owners in the building were supposedly very unhappy. The situation had only just cleared up a year or so before we looked into buying there, but I would say the stigma had pretty much worn off. Turns out it would have been one of the best investments I ever made....but we moved to San Francisco instead. It might have been a much more perilous plunge had we bought a unit in the building a few years prior. Either way we would have made a lot of money. The point being, in some circumstances it is definitely going to pay to be careful, but some big money will also be made by a daring few who find the best condo firesales to take part in, or get the timing just right.
Posted by brenda
Thu Nov 6th, 2008 07:34 PM
Jeff, I think the most important phrase for those of us who don't have excess cash is get the timing just right. Gambling.
Posted by jeff
Fri Nov 7th, 2008 08:23 AM
Brenda
Unfortunately for now the way of the world remains that to get a bargain, you have to take on big risks. Maybe thats a staement about the downside that still left to come. I am still a believer that eventually apathy (the hating) will set in, and prices will remain a bargain even after the great risk of further downside has subsided. It should take a while yet.
Posted by brenda
Fri Nov 7th, 2008 11:00 AM
Jeff,
I guess patience IS a virtue.
Posted by Nobi
Fri Nov 7th, 2008 11:31 AM
Jeff, Brenda,
Any thoughts as to WHEN?
Posted by brenda
Fri Nov 7th, 2008 12:26 PM
Nobi,
I can't begin to predict. I've been targetting 2010ish, but as Noah remarked somewhere, the fall is usually much faster than the rise. It is hard to fathom what is going to be done with the last 20-30,000 condo units, which probably won't be ready until 2010 or 11. What I think you don't have to worry about is catching the bottom. I think it will be apparent, and lasting.
In another post Noah mentioned a 50% cut would put us at the levels in the 2001 market. That sounds about right to me, with $600-700 psf being the norm for an average apartment, with a premium for new construction in "safe" buildings. I bought a 1300 sf condo loft (went into contract late 2000, closed early 2001) for $800K, with combined monthlies of $800. Thought it was expensive at the time.
Posted by Chris Bentley
Fri Nov 7th, 2008 01:44 PM
Great site Noah. From the frontline, I'm looking at new build condos in prime Chelsea (23rd to 16th between 8th and 6th). Seeing a lot of $50k to $100k price chops and closing cost concessions being thrown in) but no crazy 20% to 30% cuts yet.
Posted by Nobi
Fri Nov 7th, 2008 03:37 PM
Thanks Brenda,
I guess I'll be buying in 2010.
Posted by brenda
Fri Nov 7th, 2008 03:59 PM
Just to clarify, I have no idea if Noah was predicting the 50% cut, or just remarking on what it would look like. I was using his numbers as a time/price reference. Sorry if I misrepresented you Noah.
Posted by Brian
Fri Nov 7th, 2008 06:36 PM
Brenda:
With the huge amount of over supply of condos hitting the market, tightening credit markets, less high paying jobs, less people that qualify for mortgages, I can help but think your 50% decline is a reasonable estimate. In the early 90's, Condo prices dropped about 38% with new condos falling more. Its not hard to imagine that a circumstance like this would come up this time around also. Case/Schiller futures are pointing towards an additional 10-20 percent drop in national prices. Our desk and others on Wall Street are also predicting more of a fall in prices. We still don't know what the new congress will do with this talk of Judges being able to modify loans, if it goes through, I think it will become very hard for non prime borrowers to get a mortgage and it has a good chance of pushing rates up for everyone. If rates go up and unemployment keeps increasing, then a drop of that magnitude is not unforeseen.
Posted by Brian
Fri Nov 7th, 2008 06:38 PM
Brenda:
With the huge amount of over supply of condos hitting the market, tightening credit markets, less high paying jobs, less people that qualify for mortgages, I can help but think your 50% decline is a reasonable estimate. In the early 90's, Condo prices dropped about 38% with new condos falling more. Its not hard to imagine that a circumstance like this would come up this time around also. Case/Schiller futures are pointing towards an additional 10-20 percent drop in national prices. Our desk and others on Wall Street are also predicting more of a fall in prices. We still don't know what the new congress will do with this talk of Judges being able to modify loans, if it goes through, I think it will become very hard for non prime borrowers to get a mortgage and it has a good chance of pushing rates up for everyone. If rates go up and unemployment keeps increasing, then a drop of that magnitude is not unforeseen.
Posted by Brian
Fri Nov 7th, 2008 06:42 PM
Just one other comment. I believe that in the early 90's downturn, total inventory hit somewhere between 10K-11K. Im pretty sure inventory levels will go above this level during this downturn.
Posted by jeff
Fri Nov 7th, 2008 10:19 PM
My guess is that a lot of the condos currently in the pipeline will not get built. Some will remain half built as the developers and banks go through the foreclosure to bankruptcy dance...which can take quite a long time. Many others will go straight to apartments, in the process it may also change hands.
Posted by brenda
Sat Nov 8th, 2008 07:59 AM
Jeff, I have been wondering about that myself. But many developments that start get finished, even as fundamentals are destroyed. Look at Miami, with its unrelenting construction even in the face of oversupply. Or the 1980s in Manhattan.
It is difficult to stop the process once the land has been bought, the foundation laid and the building begun. This time, however, the steel may not be available, although I think the Baltic Dry will probably show improvements after the beginning of the year.
NYC certainly does not need this many overpriced luxury condos, but we will not need that many (if any) more overpriced rentals as well. With the city's decision to build far fewer schools, we may need fewer.
Posted by Rich
Tue Nov 11th, 2008 12:33 AM
Problems in NYC are just getting started. Prices will likely decline for 5 years.
Posted by Josh
Tue Nov 11th, 2008 08:38 AM
I'm afraid that the future of NYC is bleak. Eventually, Bloomberg is gone and replaced by some hard-core leftist (Sharpton?) who wants to remake the city as it was in the 1970s. There is already talk about income tax hike so local taxes will go up. Property taxes go up too and crime rates will go up with the new policies. Wall Street employment will never be the same again, and the probability of massive terror strike - possibly dirty nukes - is real.
Even 50% price cut is not enough in the new NYC, with sky high murder and tax rates and dwindling employment options.
Posted by anonymous
Tue Nov 11th, 2008 10:52 AM
900,000$ condos are selling 250k in Chicago. Premier buildings included. If this is not happening in Manhattan, it will soon enough. This will be a long lasting bottoming process. The incomes just dont support these prices. The europeans, russians, and middle east have stopped buying in NY as they have their own problems.
Posted by anonymous
Tue Nov 11th, 2008 10:53 AM
900,000$ condos are selling 250k in Chicago. Premier buildings included. If this is not happening in Manhattan, it will soon enough. This will be a long lasting bottoming process. The incomes just dont support these prices. The europeans, russians, and middle east have stopped buying in NY as they have their own problems.
Posted by anonymous
Tue Nov 11th, 2008 10:53 AM
900,000$ condos are selling 250k in Chicago. Premier buildings included. If this is not happening in Manhattan, it will soon enough. This will be a long lasting bottoming process. The incomes just dont support these prices. The europeans, russians, and middle east have stopped buying in NY as they have their own problems.
Posted by anonymous
Tue Nov 11th, 2008 10:53 AM
900,000$ condos are selling 250k in Chicago. Premier buildings included. If this is not happening in Manhattan, it will soon enough. This will be a long lasting bottoming process. The incomes just dont support these prices. The europeans, russians, and middle east have stopped buying in NY as they have their own problems.
Posted by anonymous
Tue Nov 11th, 2008 10:53 AM
900,000$ condos are selling 250k in Chicago. Premier buildings included. If this is not happening in Manhattan, it will soon enough. This will be a long lasting bottoming process. The incomes just dont support these prices. The europeans, russians, and middle east have stopped buying in NY as they have their own problems.
Posted by The CAT
Tue Nov 11th, 2008 01:52 PM
This market is way overpriced. For some time now developers and property owners have been reaping the rewards while buyers have been bullied into either paying these ripoff prices or staying renters, it's justice that the tables have turned. New York is severly overpriced in all 5 boroughs. Prices don't reflect the income or economy of the buyer.
Once upon a time New York had a great job market and people working here were paid a premium to afford these overpriced properties. Today, New York's job market and quality of life is not what it was yet developers and property sellers are still living in a dreamland believing that this state still has these qualities. I have family in Pennsylvania who make nearly as much as us New Yorkers yet they rent an entire 4-bedroom house set on one acre for $1000 while I pay $1200 for a 2-bedroom apartment in Queens so where's the advantages of living here? Time for you property owners to start taking a bath with us serfs!!!
Posted by The CAT
Tue Nov 11th, 2008 02:05 PM
Also, as far as price is concerned, I believe that Manhattan is still around 30% overpriced on average whereas the other 4 boroughs are definitely 60% overpriced. Houses selling for $500K in Queens are actually worth half that in my opinion.
There's a zombie condo right around the corner from me in Queens with no tenants at all. I called the agent and he had the nerve of quoting a price of $450K for a 2-bedroom unit and $600 a month maintenance. I countered that for an empty building, I'd be willing to take the risk if he offered the unit to me for $100K and no maintenance for one year, after that maintenance should be cut down to $250 a month since there is no grounds and only a building to maintain. He said my offer was insulting.
It's 9 months later and there are still no occupants in his building, renting or owning. Hopefully the building will fall to banruptcy and the bank will start dishing off unit cheaper than my offer as I expect because this market is only getting worse. In about 3-5 years sellers will get the hint and realize that they bought into a suckers market and position their tails between their legs like they deserve.
Posted by Noah
Tue Nov 11th, 2008 06:20 PM
Just a great and timely piece...I agree with Jeff's statement, "My guess is that a lot of the condos currently in the pipeline will not get built"...
especially smaller developments in between avenues and in undesirable locations. The downturn will reveal these weak players and that will feed the cycle. Its all about timing here as those new devs that are 90-100% sold out, barely made it!
Those who committed to a project because of the deadline, well, you got some major challenges ahead!
Posted by Homes Pinecrest for Sale
Thu Apr 29th, 2010 08:08 AM
Good thing you have done here, Thanks! This is a pretty up beat post about real estate that I am quoted in.