< All Press

Manhattan Rentals, Left Out in the Cold

As developers continue to push the story line that New York’s luxury residential market is a high-end utopia that shows no signs of slowing, you might consider one seldom-discussed factor that is driving their decisions to build for the wealthiest buyers.

Lost amid the record-breaking condo sales in 2012 was a scramble for land not seen since at least 2006, during Manhattan’s last real estate bonanza.

Last year property owners sold 158 development sites in Manhattan, up 51 percent from 2011, according to Massey Knakal, a New York property sales company. Of those, owners sold 69 sites in the fourth quarter alone. In dollar terms the volume was $3.12 billion, up 128 percent from 2011,with $1.73 billion sold in the fourth quarter, the company said.

The bidding wars behind those sales figures sometimes involved as many as 40 developers battling over a single site, said Bob Knakal, Massey Knakal’s chairman.

The ballooning prices are giving developers little choice but to focus on building — or in some cases, converting to — high-end condos. Doing anything less, in most cases, would be too risky, brokers said.

“The fact is, the way the free market is working today, land is just too valuable, so developers can’t afford to do anything but build super luxury product,” Mr. Knakal said.

That may be good news for wealthy buyers, many of them foreign, who are demanding the best of the best that New York real estate can offer. But it is not great news for a city starved for affordable housing and more rental units. And it has some real estate experts concerned about how far the legs of the housing resurgence will extend.

“I worry that if this is all we can develop, how deep is that market?” said Jonathan J. Miller, president of Miller Samuel, a property appraiser.

Land in New York is worth more today than at the peak of the market in 2007, Mr. Knakal said. While the average price per square foot for a building lost 38 percent of its value from that time, the average price per square foot for land fell only about 18 percent, he said. Why the discrepancy? Not much land was for sale in 2009 and 2010, as sellers decided to ride out the market downturn and hold on to less sought-after sites, he said.

That has changed rather drastically in the past year with the surge in the number of development sites being sold. The big sales have not been confined to Manhattan. Last year Mr. Knakal brokered the $54 million sale of a 2.19-acre South Williamsburg site zoned for residential units. The buyer was the government of China, in what Mr. Knakal said he believed was the first such transaction by a foreign-based buyer outside of Manhattan.

Earlier this month, in one of the largest land deals in years, the billionaire Sheldon Solow sold a parcel of land spanning a full block along the East River, between 35th and 36th Streets at First Avenue, to a consortium led by JDS Development group, for $172 million. The land is zoned for residential use.

The developer plans to build two towers, one with 47 stories and the other with 37, for a total of 830 apartments. It is likely they will be mostly rentals, and the conferral of a tax abatement will require 20 percent to be affordable housing units, said Michael Stern, the managing partner of JDS. “This particular deal might be an anomaly because of its size and limited bidder pool,” he added. “It has become almost impossible to do rentals in Manhattan at these land prices.”

Developers’ struggle to build rental units doesn’t bode well for a New York in need of more “work-force housing” for teachers, police officers and fire fighters, Mr. Knakal said. “There are so many millions of people that keep the city functioning,” he said. “If you earn $40,000 a year, where do you live? We need new housing for those folks.”

Mr. Miller said the tightness in the property market made the proposed rezoning of Midtown East to allow more tall towers “very important to the future of real estate development in the city, at least as an international location, both for commercial and residential.”

With luxury towers like One57 and the approved 432 Park Avenue, under construction on the site of the former Drake Hotel, there has been a renaissance of residential development in Midtown. “We need to create other ways of bringing supply, or making potential development sites viable by making them taller,” Mr. Miller said.

Mayor Michael R. Bloomberg has fast-tracked the proposed zoning changes and is hoping to get them passed before he leaves office at year’s end.

Facing limited options, some developers have turned to converting buildings into higher-end properties.

A joint venture between the Extell Development Company and the hedge fund Angelo, Gordon & Company plans to convert the former Helmsley Carlton House at 680 Madison Avenue into luxury apartments, despite the complications of the building’s having a land lease.

Gary Barnett, the president of Extell, said that Thor Equities, which bought the 35,000 square feet of retail space at the bottom of 680 Madison for $277 million, has “all the obligations to pay the full ground rent,” which is on a lease of 150 years. Mr. Barnett said the building would be developed as luxury co-ops with condo rules.

Harry Macklowe is converting two Upper East Side prewar rental buildings he bought in 2011 into luxury condos. He paid $70 million for the 12-story building at 150 East 72nd Street in June 2011, and $253 million for 737 Park Avenue, at 71st Street, two months later, raising eyebrows among some appraisers who thought the prices were high.

“There are very few remaining rental prewar buildings on Park Avenue,” Richard Wallgren, executive vice president for sales and marketing of Macklowe Properties, said of 737 Park recently while giving me a tour. “So this opportunity to purchase one of those lone buildings was extremely competitive, and we are delighted to be successful in purchasing it.”

Mr. Wallgren declined to say whether the company felt market pressure to create high-end condos. “We believe we committed to a program that brings out the very best of each building,” he said.

Macklowe is combining the former rental units into much larger apartments. At 737 Park, the 100 or so apartments are being converted into about 50 condos. They will range from 3,000 to nearly 6,000 square feet, and will cost an average of $4,000 a square foot. The developer plans to offer a 5,600-square-foot penthouse with a 4,000-square-foot roof deck on the 21st floor for $39.5 million. Formerly two apartments, it will have at least two fireplaces and a somewhat obstructed southwest-facing view of Central Park.

Since sales started in January, more than 15 percent of the units have gone into contract at 150 East 72nd Street, more than 30 percent at 737 Park, Mr. Wallgren said.

To Mr. Miller, the move to high-end conversions shows the lengths to which developers will go in the brutally competitive market for development sites. “It’s complicated,” he said. “You competed with 30 other people, so you are pressed for what you need to get out of the project. You have to position it as being very upper-end and keep the construction costs in check, to be able to make this a viable conversion.”

Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007