Where Have All The Shadows Gone?

Housing is heating up! According to the Real Estate Board of New York, almost 10 times as many permits were issued for the construction of new housing units in Manhattan during the first five months of 2012 (1,422 permits) as in the comparable period in 2011 (146 permits). The 774 permits issued in Brooklyn represent a 42.3% increase over the number issued during this period last year. The much-discussed shadow inventory of unsold condo units (which, some feared back in 2009, would hold the New York market back for five years or more) disappeared, absorbed as a result of lower pricing and rising demand. The question is, will it happen again? Will supply outstrip demand again as both converted and newly constructed units move onto the market?

 

I think not. The economic intricacies of New York are considerable. We have an economy which is both improving and losing jobs – how is that possible? As the above paragraph demonstrates, the job situation in construction is ameliorating. New opportunities are being generated within the private sector. Businesses are, cautiously, expanding, using both cash and inexpensive (if still hard-to-obtain) financing to do so. On the other hand, the big banks are experiencing another round of layoffs as they continue to search for right-sized profit opportunities in the post-leverage era. In the midst of this uncertainty, the allure of real estate grows brighter for both American dollars and flight capital.

 

At one of my recent sales meetings, I asked my agents if they had seen a change over the last four years in the profile of the buyers they encounter in the marketplace. The answer was a resounding Yes. First, condos of every size are being snapped up by overseas investors, whether a one bedroom unit near NYU being bought by Chinese parents for their student daughter, a two bedroom pied-a-terre chosen by a South American or European with business here and an unstable currency at home, or a trophy purchase for a wealthy Russian, Indian, or Las Vegan! And whereas in 2006 and 2007 the substantial majority of our local purchasers were finance professionals, many of them at the big investment banks, those buyers now make up a far less significant portion of our pool. We are dealing with more doctors (surgeons in particular), more attorneys, more real estate investors, more mid-sized business owners. And when we do sell to finance people, they now tend to come from the hedge fund world.

 

One last point: The suburbs are still cheap, but people are not flocking to move there. To the contrary, we see more and more people in every age range and income bracket fighting to stay in the city. The enormous quality-of-life enhancements of the last decade, the convenience, the variety of experience, and the steady influx of immigrants with big dreams keeps our market tight even as other markets in the tri-state area still struggle to recover.

 

So what does this all add up to? In both the co-op and condo arenas, pent-up demand exceeds supply, even in the dog days of July. So we need to keep those new units coming ; even this year, with its enormous increase in construction starts over the preceding years, still represents less than half of the new units begun in 2008. We are a market starving for high quality inventory, and I am confident that if we build it, they will come.

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