The Shadow Knows. Or Does It?

Many of the blogs and quarterly reports covering our New York real estate market continue to talk about “shadow inventory.”  This term refers to the backlog of unsold condominium apartments, many converted to rentals in the last couple of years, which developers built during the boom but were unable to sell when the market declined after the mortgage debacle. Clearly the shadow inventory issue is huge in Miami and Las Vegas. There, an unprecedented number of apartments were built for an anticipated market which, when the bottom fell out of the market, never materialized. But New York is different. So here’s why I don’t see shadow inventory as much of an issue here:

·        Manhattan is an island. The prime spots in the city which are available for development are few and far between, and most of the great real estate locations have been constructed already.  The same is true in downtown Brooklyn, and increasingly in Long Island City.

·        New York is an international business center. Of course, Miami has unique attractions for the South and Latin American markets, but EVERYONE wants or needs to come to New York. Plus, the dollar is still cheap and we are still seen as a financial safe haven. So foreign buyers are flooding our markets again.

·        Absorption is accelerating as the market improves. Much of the excess inventory which was converted to rental is gradually coming back onto the sales market. And it is being snapped up. We anticipate that within two years most of these units will have returned to the sale market and been sold.

·        The tax climate is currently not very friendly to new development.  Changes in the tax laws, followed by the decline in values, disinclined many developers to new condo projects in New York. So there is not much in the pipeline. And anything which is begun today will take at least a few years to come to the market.

 

In my opinion the bigger threat to our New York market is undersupply. We already have a dearth of inventory in many segments of the co-op market. As the four factors described above play themselves out, we are in real danger of running out of units to sell well before we run out of buyers to buy them. New York enjoys a  growing population. Tourism reaches new heights year after year.  We as an industry need to worry less about today’s unabsorbed inventory, and more about where tomorrow’s homes for our new residents and foreign visitors will come from!

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