As Seen In Crain’s New York Business

So many Manhattan apartments, so few for sale

May 2015

By Joe Anuta

When Adam Elbaz was looking to buy his first apartment in Manhattan earlier this year, he had a plan: Go to as many open houses as possible in the dead of winter, when they would be the least crowded.

"At first, I was very optimistic," said Mr. Elbaz, who was looking for studios for less than $450,000. One January weekend, he visited 16 apartments, making offers on four. "But each day, hearing back that the offers weren't accepted, it started to feel like I was never going to find something," he said.

If Mr. Elbaz's story sounds familiar, that's because it is. Despite a construction boom, the inventory of Manhattan homes continues to hover near the record low set in the last quarter of 2013. And unlike the last construction peak, in 2008, when developers generated more supply to meet demand, a number of factors have converged to warp the economics of owning and selling a home in Manhattan—and in the rest of the boroughs—making it more expensive for businesses to retain the highly skilled workers who can keep the city's economic engine humming.

"Recruiting talent to support our leading institutions and our universities is increasingly difficult because they can't afford to live or find suitable housing in Manhattan," said Kathryn Wylde, president of the Partnership for New York City.

Let's start with the number of apartments in Manhattan: 850,000. Of those, only about 5,200, or 0.6%, were for sale in the first quarter of 2015. That's 26% below the historical average and just 25% above the low of 4,164 in 2013.

One reason the figure is so low is that Manhattan is a renter's town. More than 75% of the apartments in the borough are rentals. The rest are co-ops and condos.

Imagine this:

This chart represents all the apartments in Manhattan. More than 850,000 all told. The red buildings represent the number for sale. That's just 0.6% of the total, or around 5,200.

Unlike the last boom

But one would think owners of existing homes would be scrambling to get them on the market. After all, the median sales price is nipping at the heels of 2008's $1.025 million high. A sale would give owners cash to upgrade to better digs. But because there are so few listings, sellers are nervous that they won't be able to find another home. Even if they do, those apartments one step up will be pricier as well. As a result, they're holding on to their apartments, further subtracting from the potential number of listings.

"Resale inventory is stagnating," said Jonathan Miller of appraisal firm Miller Samuel. "And going forward, that is probably going to keep pressure on prices."

Normally, the best way to keep prices from skyrocketing is to add supply. But in Manhattan, building new apartments has served to only further escalate costs. That's because with some apartments priced at $100 million or more, New York residential real estate has become a place for the global rich to park their cash, which is affecting the market for everybody else in the process.

"Individual units have become investments," said Nancy Packes, chief executive of her namesake consulting firm. "This is the beginning of a secular change."

Though this is an admittedly small portion of the market, it is nevertheless altering the underlying economics of how buildings get constructed on the island, she argued. Landowners know how much condos sell for, and they boost the price tags on their plots accordingly. That price of land, combined with escalating construction costs and property taxes, has made it exceedingly difficult to make a profit on apartments that sell for less than $2,000 per square foot, according to Ms. Packes. That translates to about $2 million for a 1,000-square-foot condo.

Here's how those numbers play out: Last year, developers across the city spent an average of $585,370 to build a single apartment. That's more than triple what it cost during the last boom, in 2008, according to data released last month from the New York Building Congress. So although residential construction spending has doubled since then, the city has added a third fewer units.

Building in Manhattan, though, has always been expensive. After all, they're not making any more land. That's why developers in previous years have often used a third way to add middle-class apartments to a starving market: conversions.

Converting a rental building to condos is a way to tap into a hot sales market without plunking down a fortune for land and construction costs, which would then be passed on to the buyer. Because these apartments often have lower ceilings and smaller layouts, they can't fetch top-tier prices in the sale market anyway, so they often end up as entry-level condos, which would be below $750,000 for a one-bedroom or less than $350,000 for a studio, for example.

In 2006 and 2007, for instance, developers converted about 7,600 rental units to condos, according to data from Ms. Packes and Corcoran Sunshine Development Marketing.

This time around, that number is far lower, despite a slew of high-profile conversions—Ziel Feldman's plan to convert the stately Belnord Building on the Upper West Side and Sam Zell's Equity Residential's rumored sale of RiverTower. In 2013 and 2014, data from Ms. Packes show, there were about 4,000 converted units, a little more than half as many as in 2006 and 2007.

Hope on the horizon

Several theories explain why landlords are not taking advantage of the pent-up demand for condos. Many rental buildings that make good conversions may already have been converted, according to Steven Schleider, president of Metropolitan Valuation Services. In the great cooperative conversion of the 1980s, for instance, the attorney general approved plans for 321,858 apartments, compared with just 71,000 during the 2000s.

Others believe Manhattan landlords have been enjoying a sustained period of near-record rents, which rose to $3,395 last quarter, and don't want to convert at the moment. A lack of supply helps landlords keep rents high. Buyers are likely to look for a home if they can own an apartment for what they are paying in rent. But credit remains tight. Underwriters continue to require hefty down payments, which can make million-dollar mortgages difficult to get even if the monthly costs are affordable for homebuyers.

Either way, a crucial, private-sector source for bringing nonluxury condos to the Manhattan market appears to be operating at a trickle.

"So what happens to affordability? It goes out the window," Mr. Miller said. "The economics of creating market-rate housing for more modest consumers just doesn't work."

There may finally be hope in the offing. While the underlying economics of new construction make it difficult to build nonluxury condos, the conversion market could be in for a jump-start in the coming years when thousands of buildings lose lucrative property tax breaks, chief among them an abatement known as 421-a, which exempts owners of new buildings from property taxes for up to 25 years.

The rise of high-end rental buildings in Brooklyn and Queens provides another incentive for Manhattan conversions, since they will siphon off a certain number of would-be Manhattan tenants.

Last summer, developer Ben Shaoul's Magnum Real Estate Group paid $270 million to buy two buildings that were coming off their tax abatements: the 199-unit Post Toscana on the Upper East Side and the 138-unit Post Luminaria at First Avenue and East 23rd Street.

"Those buildings are examples of when the tax benefits have run out and the return on investment becomes much less attractive as a rental," Ms. Packes said. "At the same time, there is an opportunity to sell for a much higher price to fulfill the demand for entry-level condos."

The Related Cos. own many such buildings and have already been applying to convert some of them. "They have more 421-a buildings than anybody in the city that are burning off," said Andrew Gerringer of the Marketing Directors consulting firm. "And so they are either going to sell them or convert them all."

The potential is enormous: In the next five years, approximately 15,000 rental units will lose their tax-exempt status in Manhattan, according to a database complied by the Municipal Art Society. In another 10 years, more than 40,000 units will follow.

Of course, Mr. Elbaz doesn't want to wait that long. After looking at about 30 apartments, he finally found a 550-square-foot studio in Murray Hill. It's in contract, so, with a little luck, he may finally own his piece of Manhattan.

Correction: There are 850,000 apartments in Manhattan. This was misstated in an earlier version of this article, originally published online May 10, 2015.

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Steven J. Schleider, MAI, FRICS

LEED Accredited Professional BD+C


Metropolitan Valuation Services, Inc.

44 East 32nd Street, 11th Floor

New York, NY 10016

Tel: 212-213-8650