What Threatens NYC Multifamily Development in 2015?
Berdon Press Release
Local developers, despite their "delusional optimism," are challenged by three key issues in the greater New York market: the high barrier to entry; uncertainty over regulations; and profitability in the development of middle-class housing.
That was the assessment by panelists who joined Berdon LLP partner Maury Golbert, CPA, J.D., LL.M., at Bisnow's 67th Annual Multifamily Summit on March 26, 2015. Joining Golbert on the panel were:
- Bruce Eichner, Chairman, The Continuum Company;
- Michael Stern, Managing Partner, JDS Development Group;
- Scott Alper, President, The Witkoff Group;
- Anna Zarro, Senior Vice President, Town Real Estate; and
- Mitchell Hochberg, President, The Lighthouse Group.
In contrast to the view that "Developers have a baseline of delusional optimism," voiced by JDS Development Group's Stern, developers in the greater New York area still have high hurdles to overcome. Highlights of their comments follow.
Maury Golbert, Berdon LLP:
- The City continues to see an influx of investors from Europe, Asia, and the Middle East buying property for their children here: "The branding of universities is tremendous."
- China isn't taking over as the primary source of capital, "although people think this is true."
- There is a need to provide affordable housing for teachers, police, and office workers - the lifeblood of the city.
Bruce Eichner, Chairman, The Continuum Company:
- The increase in construction costs by 20% to 30% from last year, coupled with other cost increases, result in apartment sales prices that are $2,000/square foot. More people are paying premium prices to reposition old product in "hot neighborhoods."
- For the first time in the city's history, over 50% of construction jobs are non-union.
- Within the next year, "someone needs to figure out a way to house the middle-class workforce, which is priced out of market-rate housing."
- There is so much high-end/luxury product on the market at a certain price point that a lot will likely be left vacant. The more successful developments will be in emerging markets, such as East Harlem and Greenpoint.
Michael Stern, Managing Partner, JDS Development Group:
- The #1 need for is regulatory clarity. The ambiguity over the 421a tax abatement "is paralyzing" and is the biggest threat to development right now. Developers can adjust to any regulatory limate, once they know the rules.
- Buyer demographics in this market are (1) primary residence New Yorkers or (2) "Domestic foreigners" who live elsewhere in the U.S. and are buying NYC pied-a-terres. "Helicopter buyers" from broad are a minority.
Scott Alper, President, The Witkoff Group:
- Land prices in Manhattan are so high, finding property is very tough, making urban markets on the West Coast and southern Florida more appealing.
- Uncertainty surrounding the 421a tax abatement adds up to "a logjam in the development pipeline: "Until they figure it out, you can't underwrite a deal."
- The market is healthy overall. The rental market in the outer boroughs is seeing growth, particularly in Brooklyn.
Anna Zarro, Senior Vice President, TOWN Residential
- New rental buildings in Manhattan will not be coming on-line for a while unless the developer owned the site for a long time, when land costs were not so high.
- Buyers want quality to justify the price in luxury, mid-market condos and rental markets. The extra touches add value for selling or leasing properties down the road.
- Design integrity affects buyers. People who are "really" in the market and plan to use it as a residence have different expectations.
Mitchell Hochberg, President, The Lightstone Group:
- The ongoing transformation of Brooklyn "as a destination unto itself" is a bright spot in the marketplace.
- The plan to house the middle-class workforce won't come from the city. The solution will be found by the private sector. "It's coming from someone in this room."