Market Answers

By Josh Guberman


 If the economic fundamentals of a project are sound, it will ultimately succeed.

In this volatile market, real estate is a major concern for everyone: investors, families, buyers, and sellers. As a major New York real estate developer, friends, family, and reporters often ask my opinion on the current state of the market and my predictions for the future. With the recent reports of widespread downturns, prospects can seem daunting, when, in fact, there are a number of silver linings. Quality and educated investments have time-tested value. In today’s climate, it is key for buyers and developers to keep that in mind. For this month’s column, I have decided to answer the questions that have been weighing heavy on many people’s minds.

Q: How would you describe the climate for residential development right now?

A: The outlook is optimistic for luxury real estate projects that are being built according to the innately successful methods practiced by top developers throughout the country. It starts with the obvious: location, location, location, which, now more than ever, is dictating the viability of projects. After location, elegant design and quality construction, lush amenities, proper unit mix, affordable common charges, and reasonable pricing are important. Projects with those elements will spend the least time from release date to closing, create the most marketing buzz, and have the most favorable results.

Q: How would you describe the conditions for new developers and novice builders?

A: There are many first-time or inexperienced developers that are now shying away from the marketplace. Just like anyone could pick an ascending stock issue during the dot-com period of the mid- to late-1990s, in the equity market five years ago, anyone with money and the willingness to take a risk and work hard was pretty much guaranteed a profit in real estate.

This is simply not the case anymore. A tightening of the belt and more stringent loan requirements by lenders; national and regional economic fears; a shaky marketplace outside of the prime building zones; dramatic and rapidly rising construction costs; a glut of inventory; the overdevelopment of secondary marketplaces; a more selective buyer profile; and poor project and financial planning by fledgling developers have made the “new breed” of developers shy away from, abandon, or sell some projects.

Q: Given the current market conditions, are new constructions or condo conversions more popular?

A: As a rule, new construction is the most efficient way to plan a project and insure adherence to projected costs and planning. Conversions and renovations of existing structures always carry the “X factor.” Unforeseen conditions, increased construction costs, project delays, and surprises are more often the rule than the exception. Additionally, when the sales market is slow, rental values increase. The result is higher prices for residential rentals.

Q: How would you compare the market today versus a year or two ago?

A: 2006 could be seen as the “last bloom on the rose” with what appeared to be the high point of residential condo pricing and new starts. I think that the market was artificially bolstered by the false optimism that whatever was built would sell.

Q: Is there a silver lining in all of this volatility?

A: Interesting periods, like the one we are in for, invariably have the effect of insuring the survival of the fittest. While the bar has been raised and natural selection will leave some behind, it is a good thing when the marketplace demands better quality and product for the consumer. We will all ultimately benefit.

Q: Can you give some examples of how this dynamic has shown itself in the New York market?

A: The rise in value of secondary markets is very interesting. Projects like our Legacy Condos on 84th Street between Lexington and Third Avenues have proven that an area that was not considered viable can indeed work when the product is right and meets the needs of a certain sector.

Q: What is the market teaching us about projects that are failing?

A: If the economic fundamentals of a project are sound, it will ultimately succeed. If the numbers at the outset were unrealistic in terms of projected sell-out, underestimated construction, or soft costs, it was always doomed to fail.

Q: Several years ago it seemed that everyone wanted to be a developer. What has happened to the first-time and novice developers?

A: They have fallen prey to the standard template for any business failure. Unrealistic expectations and uneducated risk-taking in secondary markets that are flooded with similar projects have made many of those developers shy away.

Q: What is happening with the typical buyer profile and how is that impacting on luxury offerings?

A: We are seeing more families looking for larger units. An example of this was seen in our Lux 74 project (at 74th Street and First Avenue), which went from a basic 30-unit boutique building filled with a mix of units to 12 large family-style residences with five or six bedrooms. We have already gone to contract on three units. With sales launching this week, we are thrilled that we followed the voice of the marketplace.

Q: How has the lending climate changed for both developers and homebuyers over the past year or two?

A: The climate for lending has indeed changed dramatically. There are stricter underwriting standards, more scrutiny, higher lending rates, a cutting back of non-recourse loans, and the movement out of the luxury real estate sector.