Sunday, November 19, 2006
no demand for supply. are developers taking notice?
One of my customers, with an accepted offer on a new development in the West 40’s, asked me to comment on Christine Haughney's article 'Changing Course to Avert a Glut' in the NY Times. His concern was how all of the new apartments in the construction pipeline might affect the value of his purchase. A fair question, and it is all about the supply. Before recently, the complaint I kept hearing from customers was that there was not much to see, it went in a flash, and sold at over asking price. Supply was short. That changed. The new landscape of glass towers rising from the bedrock is at the heart of this story.
"experts say while an oversupply of apartments may be good news for condo buyers, they do not believe the oversupply will grow so large that it could actually drag down the overall housing market in New York City."
Writer Christine Haughney states that, “14,430 units are in buildings that have already broken ground, and 13,928 units are in buildings that are being planned." Yes, the 14,430 units which will come on market, mostly over the next two years, will be a significant bit of inventory and could cause a dip in the short term. The basic question Ms. Haughney asks is; will developers re-tool their next projects to other uses than condos, and avoid a damaging glut in housing supply? According to the article, the evidence generally points to yes. The banks may have something to do with it too. In an industry that relies on other people's money to build they will be scrutinizing condo development differently. The restriction of capital is bound to eventually help restrict supply. Sales are still brisk, even if off their manic pace of the past few years. The point is that the inventory being built is going to be absorbed, and not replaced all that quickly.
We are just seeing the market forces at work re-establishing values; and they don't seem to be that far off the mark. Markets are made up of people having thousands of conversations and making decisions about how to get the best deal. Markets are as responsive and as smart as the individuals that comprise them. People adapt. I've noticed sponsors not raising their prices aggressively, and bringing apartments on at very competitive levels. A few are even negotiating on closing costs, or more. In a strange sort of reverse logic, it can raise questions in a customer's mind about the project if they can get a reduction, or the sponsor is willing to pay closing costs. Clearly buyers are adjusting too, taking longer and being choosier.
Buyers helped cool the market this year. We are seeing fewer transactions in 2006. I think the lesson is that the perception of value changed. A lot of the sleek new finishes started to look all the same. The focus has shifted back to basics like location, views and unique features. The longer one holds a property, the less risky the investment. Prime property holds value best, and always has greater demand. With rents rising sharply on vacancy rate of .8% according to Corcoran affiliate City Habitats, the opportunity cost of not buying is getting steeper too. Ms. Haughney cites;
“this is probably a good time to buy in a second-tier neighborhood”
Neighborhoods like 'Clinton' may be some of the best deals out there today. My view is that the marketplace has already factored in some of the effects of the increased supply. The customer I mentioned in the first paragraph above, has an accepted offer on an outstanding property. It is a boutique loft conversion with original details, top of the line finishes, in a neighborhood being revitalized by many new developments bringing in new people, services; and for the moment, a supply pipeline that is causing competition and keeping prices bearable. With the fundamentals of a strong economy and low mortgage rates, they've reasoned that they will do fine. While the short term gains may be relatively flat, the upside potential is quite strong if they hold it for several years, the way people have traditionally held real estate. They are taking advantage by acting now. Smart move!