The New Dev Problem: Standardizing The Listing System

Posted by urbandigs

Mon Sep 20th, 2010 09:57 AM

A: I encourage all brokers and followers of this market to try to read this post in its entirety; as it touches a very important structural issue in this market. It is somewhat Inside Baseball, so consider yourself warned. At this point in development, I know the broker sharing system inside and out. I know all the flaws, all the tricks, and all the strange things that occur in the listing system. It all has to do with the system structure and the brokers/developers that maintain their listings. In the end, the data is only as good as the broker/developer that maintains it - my only wish is that BROKERS PLEASE UPDATE THE TRUE STATUS YOUR LISTINGS REGULARLY!!!! If old listings were never updated, then guess what, UPDATE THEM NOW top the proper status! This makes measuring market activity accurately quite a cumbersome task. Trust me. The only other people I know that understand how hard this task is are the folks at Realplus, OLR, BrokersNYC, Streeteasy and Propertyshark.com. The last final hurdle I see is to somehow standardize the listing system in order to solve what I will call, The New Dev Problem.

Have you ever wondered what the real Active Inventory is in the Manhattan marketplace? You can't just count every listing preset to Active; why, because think about how many of those have not been recently updated by the listing broker. There needs to be quality control to filter out the stale listings and other poisons that otherwise would affect a good measurement. When you think back to the development boom, a whole new problem arises: LACK OF INVENTORY RECORDS. If you are at all a follower of this market, I am sure this popped into your head at one point or another. How do we accurately measure something if there is no data for it?

Imagine its 2006, right at the start of the euphoric phase of the most recent boom and a new 254-unit development finally got the approval to begin marketing. Naturally, the developer will release a batch of units first, try to sell those out, file a new amendment with the attorney general's office if prices are to be changed on unreleased units, and then release a new batch of inventory at a different price point then the first batch. This 'developer model' for lack of a better phrase, created a sense of urgency in the mindset of consumers as buyers rushed to buy in before the next phase of higher priced units were released. This model also has consequences from a listing system point of view which ripples to a consequence for any system trying to measure the market.

Taking our example, we have a hypothetical 254-unit development all ready to go. So, the developers sales team goes ahead and creates a listing record for 30 or so units representing their first batch; their first offering to the public. The developer decides not to release all units to the public likely because:

a) they dont want to 'flood' the market with new inventory and the consequences of having 254 units competing with each other at the same time...

b) simple confusion..it requires their sales team to be more knowledgeable of all the different floorplans and little things associated with each and every unit right off the bat

c) they want to secure the 'developer model' of creating a sense of urgency for consumers by raising prices on later phases of unit release...

d) the sponsor may decide not to sell all units, and perhaps hold some units or rent out some units depending on product demand, the developer's financial situation/loan terms, or general market conditions...the sponsor has every right to make these kinds of decisions

The important thing is that no one can deny the developer of a large new development the right to keep some units OFF MARKET or withhold some units from ever being for sale in the first place. In reality, I believe the main reason developers withhold units is "explanation C" above as its my opinion the sponsor of the project would prefer to sell all units, make their money and move on. It is when the market does not co-operate that alternative decisions must be made.

Back to the problem. How is anybody supposed to accurately measure the Inventory Side of the Manhattan marketplace when units that in reality are available for sale, have no history records and are being held back for various reasons? The public calls this Shadow Inventory:

Shadow Inventory = New Dev Unreleased Units
But there is a solution to this problem and its very simple. All that is required is a listing system that makes it mandatory for a New Project (any kind of new development) to create an initial history record for ALL UNITS included in the first approved offering plan once the first phase of marketing begins. That is, the Schedule A of the offering plan that lists all units in the offering should have a unique record created right off the bat. The sales team for the developer has every right to place how ever many units they want to FUTURE, a status update that is in our listing system, and only release the pre-determined set units to ACTIVE to maintain the exact model they used in prior years. But every unit in the new building now has an initial record, with an initial history that can be measured. The public will see no change at all and will continue to only find released units chosen by the developer and their sales team.

WHY ITS A PROBLEM: In reality, unreleased units were for sale; they just were not released to the public and had no record created that the unit ever even existed. Therefore, what we have is a situation where the sales teams uploaded a batch of signed contracts in one swoop (for ease) well AFTER the actual contract signed date and leaving us with a new unit whose first history record is set to CONTRACT SIGNED. Ask yourself, how can a unit go to contract if it was never a part of ACTIVE inventory? It can't? In reality, this unit was on the market and available for sale. It had to be if a buyer signed a contract for it and ultimately closed on it? The result is that anyone trying to measure both active inventory and pending sales will have a problem as a result of how these new developments handled the maintenance of their inventory:

Problem w/ Active Inventory: It fails to capture the New Dev's shadow inventory that was never released but in reality was there; Active Inventory for 2005-2007 was greatly under-inflated

Problem w/ Pending Sales: Timeliness is sacrificed as sales teams for developers fail to update systems as contracts are signed PLUS you can have a surge in pending sales and see no relationship in Active inventory trends; because there was no active inventory in the first place. This causes a flaw between pending sales and ACRIS public record sales, where pending sales SHOULD lead actual closed sales caught by ACRIS.

This is the reason why you see plenty of new development sales on Streeteasy but see no associated listing for the unit. Clearly there should be one.

The Solution: Design the broker sharing system to make it mandatory for new developments to create a record for ALL units at the time of first marketing based on the Schedule A of listed units in the first offering plan filed with the attorney general's office.

I don't care if a 254-unit takes 220 units and places them in the FUTURE or OFF MKT category right off the bat; listings they can activate at a later time. That is the developer's decision and right. But if they did it this way at least we can measure it as a surge in off market inventory, knowing that when the unreleased units become active, off market trends will reflect the shift. Furthermore, for new devs only, a safety mechanism should be put in place that makes it necessary for sales teams to ACTIVATE an off market listing prior to updating the status to CONTRACT SIGNED. It should be impossible for a unit to go directly from off market to contract signed. Rather, the listing should be updated to ACTIVE and then allowed to be changed to contract signed. This is an easy structural safety mechanism that would reflect reality and solve a very big problem when measuring this markets changing trends without changing a thing for the developers wishing to control unreleased units.

As it is now, we have to pull out all new devs with no prior ACTIVE state from our data so as to not poison all the efforts we made to enhance accuracy for measuring the existing resale marketplace in Manhattan. It won't affect active inventory because units were not released in the first place. For pending sales, it will only affect new dev listings whose status was first set to contract signed, with no prior ACTIVE state declared - data we deem as inaccurate and big time lagging. I checked thousands of these listing records with the 'image' documents recorded in ACRIS to find out that in reality these contracts were signed some 12-24 months earlier; the poison that screwed up the charts. So, we willfully but reluctantly removed the poison.

In the end, pulling these flawed listings out will make the data significantly more accurate. Not perfect, but a more accurate measurement of the markets. That's what its all about, measuring this fast moving markets inventory as listings go from one state to another. The good news is that for the most part these listings have closed and if re-marketed, will be a part of existing resale inventory which our platform measures quite well. Its a future new dev boom that will not be captured if nothing is done ahead of time; although the likelihood of new boom in the coming years are low.

If you read this far, props to you and hopefully you understand a bit more about how difficult this Manhattan market is to accurately measure - this is just one issue. I truly believe change will prove helpful for everyone that follows this marketplace; brokers, firm execs, and the consumers they service! Even the developers will benefit. Transparency is GOOD!

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