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Despite Oversupply, Developers Say Time To Build Apartments Is Now

Apartment rents are flat or down in New York City in 2017, and banks have been wary for more than a year about giving developers construction loans. While conventional wisdom might suggest it is time for developers to shy away from building, there are some in New York who say the market is ripe for new apartments.

Anbau President Stephen Glascock and Alchemy Properties found Kenneth Horn
Anbau President Stephen Glascock and Alchemy Properties founder Kenneth Horn

“Experienced developers realize now is the time to develop,” Alchemy Properties founder Ken Horn said at Bisnow’s New York City State of the Market event last week. “Hard costs are coming down now and contractors are a little hungrier. Building permits have gone down in the last two years about 70 to 80%.”

The number of construction permits pulled is expected to dip even lower this year. Horn said because any projects that start construction in the near-term will not open for at least three years, anyone using today's rent and supply numbers to make decisions is making a mistake. 

It just so happens that the stakeholders focused on those data points are commercial lenders, who developers like Horn need to finance new projects.

"The difficult part of the market is the folks like us [developers] realize that, but the equity folks don’t have the wherewithal, spirit or gumption to jump in the development cycle now," Horn said.

Concerns about overbuilding and rent growth have spooked lenders. Rents have fallen by nearly 2% in Manhattan this year compared to 2016, and in places like Downtown Brooklyn, where thousands of units are coming online at the same time, fears of a glut have developers offering high concessions.

Besen & Associates Senior Director Shallini Mehra, Ariel Property Advisors President Shimon Shkury. Rose Associates Chief Operating Officer Brian Peters
Besen & Associates Senior Director Shallini Mehra, Ariel Property Advisors President Shimon Shkury and Rose Associates Chief Operating Officer Brian Peters speak at Bisnow's 2017 New York State of the Market.

"There’s a great deal of talk about oversupply in the rental marketplace and that’s particularly acute in some areas, like Downtown Brooklyn," Rose Associates Chief Operating Officer Brian Peters said. "The oversupply is going to prove to be temporary, and the time to start developing to deliver into the market in three years is now."

The lack of lender appetite for new construction loans is just one of the factors that have cut into New York City's apartment pipeline. A lack of available land, and the cost to buy the parcels that are on the market have hampered developers aching to build ground-up apartments. Rent stagnation has also put the brakes on building sales as investors do not anticipate being able to raise rents — and therefore profit — on buildings they acquire.

The exceptions to that logic lie in New York's less buzzy areas, like Queens, the Bronx and Manhattan north of 96th Street. Besen & Associates Senior Director Shallini Mehra said Queens' stable middle class and robust population growth makes it an appealing investment. Ariel Property Advisors President Shimon Shkury put Queens at the top of his New York investment power rankings.

"No. 1 is Queens, No. 2 is going to be Upper Manhattan, No. 3 is the Bronx," Shkury said. "I think the boroughs have much room to grow in terms of rental growth."

For developers who cannot find land to build on or an apartment building that can be easily upgraded to capture higher rents — Mehra said adding simple amenities like a bike room and package locker could net as much as $300 more per month in some buildings — there could be another avenue: taking a bite of one of New York's thousands of outdated office buildings.

"As the megaprojects come online, a lot of office product is going to be functionally obsolete, and there’s going to be a lot of opportunities for conversions to multifamily and mixed-use," Peters said. "We’re shifting focus away from out-of-the-ground development, and we’re really looking toward adaptive reuse."