Zombie Condos in Manhattan / Brooklyn...

Zombie Condos: Fat in the Middle
Posted by Jeff Bernstein on May 1, 2009 at 3.57 PM

Zombies.jpgSo I've been crunching away on my zombie condo data. It's tedious work, but as you grind through the data, pictures start to be revealed. Okay, I will admit to being a bit of a research junkie, something a lot of folks get no thrill from. But I get a charge out of finding out things other people don't know....or at least can't prove (it can make you money). So what have I learned about zombie condos?

First off, the city's database, as sub-optimal for doing large scale research as it is, has tons of great data; you just need to figure out where to get it. Want information about the debt on a property? Don't try to look at the mortgage documents; they are not necessarily all there (in my experience) and don't always have numbers in them. Find a unit that has been sold and look at the partial mortgage release. This is the document where the developer's bank let's you, Mr. Buyer, off the hook on the debt attributable to your little piece of heaven, while implying that the developer stays on the hook, for the rest of the units for the rest of perdition. As a service to you and the developer, the lender lists all the debt that has been heaped upon the stamp-sized parcel of land over the years as well as the various and sundry loans the developer took out to actually build the building.

I know, I know, you can't thank me enough for that nugget of wisdom. But bear with me, I do actually have a point to make. By actually looking at the documents for every lot in the building (every piece of land in the city has a block and lot that identifies it and when it goes condo the original lot is subdivided into as many lots as there will be condo units) you can find out how many units have sold and what they sold for (and even the size mortgages people took out....smaller lately). Combine this data with the debt data and you can get a pretty good feeling for whether the developer is going tapioca or not (assuming they don't have a ton of cash sitting waiting to be given to the bank to make up for shortfalls).

So if you are looking at buying a condo in a new development building (you will have to pay all cash if the building isn't 71% sold), you may want to go through this exercise or hire someone to do it for you. Having a bankrupt sponsor is not good for owner relations or property values.

By the way, your broker can look at their "MLS" system, which uses broker reported data to get at the same information. However, these data are stale compared to the city's data, probably because brokers are not good about reporting it in a timely fashion, whereas lawyers register your deed with the city promptly.

So what about the "zombie condos," those where they have not contracted 71% of the units and where people can't presently get mortgages to buy? I have found some interesting data so far. First, some buildings were built with reasonable enough loan to costs and enough upside in the sell out price, that even after selling only 50% of the units, they actually could pay off the principal on the loans outstanding....these guys are in a better position to bargain with buyers, although they still have all that accrued interest to pay (numbers which can only be guesstimated because they don't draw all the construction funds at once and often have reserve numbers in their budgets that can be reversed if things go smoothly).

Most interestingly, zombie condos are fat in the middle and skinny at the tops and bottoms. That is....and this is totally intuitive, but I have now seen the empirical data to prove it....the first apartments that sell out are in the middle of the building because no one wants the lower floors. The penthouse and upper floor sales also seem to be a bit less desirable because of costs. This may not be true all the time, but is likely being impacted by the collapse of the $5 million and above market as a result of this crisis. One of the big problems for developers is that much of the value in these buildings was locked in the ground floor retail units (which also are not selling well), that many built into the buildings and the upper floor apartments/penthouses. So in many cases they have sold out half the units or more, but a disproportionate percentage of the profits have not been realized. So if you go looking for a unit in a partially sold condo, you should push hard for a deal on any high floor or low floor units, there is a lot of unsold supply out there. Who knows, you might even have a floor to yourself for a while.

I will be putting together a list of "undead condos," those where there are still units that need to be sold, but the developer has cashed in enough dollars that they are probably not going to have to turn over the building to the bank. This is probably the least ugly place to go fishing for deals. It will take me a few weeks, so let me see how it comes together and if/how I can make it available to our readers.

This "fat in the middle" pattern is clearly visible in the condo at 74th and 2nd Ave, UES, at night. I am a little surprised that the lower floor units don't sell faster; that suggests to me that they must be overpriced. Ditto the highest apts. If units were properly priced, they should sell evenly up and down the building? Or am I overlooking something?

Riversider, thank you...info invaluable.

it's a great article. he's writing on Urban Digs on the issue. this is one to follow.

Riversider, while you are at it, could you do some focusing on the Rushmore?

Great job Riversider!!!!!

And possible exposure to the construction loan market...Hypo is involved in the financing of many prized Condos..

Hypo Real Estate: 600 billion in off-balance sheet assets
Posted by Edward Harrison on 20 February 2009 at 11:24 am
20
Feb

There is quite a buzz in the German press about Hypo Real Estate. But, what should really get one’s attention is its massive off-balance sheet exposures (hat tip Ulrich). The long and short of reports is that Hypo Real Estate has assets valued at 1 and 1/2 times its entire balance sheet in off-balance sheet vehicles. This would bring total exposure to German taxpayers to a cool one trillion euros (1,000,000,000,000).

While there have been numerous reports of HRE’s imminent nationalization due to the recent law enacted in Germany allowing such, these reports raise the stakes considerably. If you recall, HRE almost brought German banking to its knees during the Panic in October after Lehman collapsed (See my post “Germany: banking system collapse possible due to Hypo Real Estate“)

At the bottom of this post are a number of media sources in the German and Austrian press on this subject. Here’s how German blogger Egghat puts it:

So far, here and there, one could read that the balance sheet of HRE was a measly 400 trillion euros. This would make HRE, according to balance sheet assets at the end of 2007, the eight largest bank in Germany. The largest balance sheet total for 2007 belonged to Deutsche Bank, with a little more than two trillion euros.

Yesterday, according to the Hannoversche Allgemeine, several financial experts from the Bundestag confirmed that HRE credit and credit derivative transactions amount to one billion euros, especially in “off-balance sheet activities.” This would put HRE, when we return to the balance sheet rankings fom 2007, basically to 2nd place amongst the largest banks in Germany. Alleluia! Quite amazing that this message has received so little attention in the media so far.

Update 20 Feb 2008 1536EST: Hypo Real Estate has issued a press release in regards to the reports about its off-balance sheet derivatives exposure(hat tip egghat). The text reads as follows:

Hypo Real Estate Group clarifies facts regarding hedge transactions

Munich, 20 February 2009 – Hypo Real Estate Group has clarified facts regarding media reports on its derivatives positions. Hypo Real Estate Group said on Friday that these reports showed a misinterpretation of the Group’s derivatives positions. The Group explained that in fact, the clear majority of these derivative transactions had been concluded in order to hedge against credit and market risks, pointing out that such transactions were regularly disclosed in the annual report.

In line with current practice adopted by other banks and market participants, Hypo Real Estate Group uses derivatives to hedge against credit and market risks arising from fluctuations in interest rates and foreign exchange rates, for example. Such hedges are connected to underlying transactions: the purpose of hedging is to avoid risks, not to enter into additional risk exposures.

Hypo Real Estate Group currently has derivative transactions in its books with an aggregate nominal volume of approx. one trillion euros. In line with accounting standards, the market value (as opposed to the underlying nominal amounts) is carried on the balance sheet. Hypo Real Estate discloses nominal values of derivatives in its annual report. In accordance with accepted market practice, derivatives positions are backed by additional collateral. Only mark-to-market changes in value impact on liquidity; there is no need to refinance nominal amounts of derivatives. “

excellent post riversider.

http://www.hyporealestate.com/eng/pdf/PI-Deal_USA_Riverside_Endfassung.pdf

Riverside, but since then hasn't Hypo real estate been nationalized by Germany for it financial failure? And if so how does that effect its financing of the Extell projects? Does this mean that Extell is now financed by Germany? Just some more questions for your terrific tenacious analytic skills. Most grateful for them.

Fluter,
'This "fat in the middle" pattern is clearly visible in the condo at 74th and 2nd Ave, UES, at night.'
I am across from this building and under the impression that this building has almost completly sold out. Now as to closings I have no info. People move in as their apts. are ready. I thought this building has escaped most of the uglynession of the new construct market. Please enlighten me.

Seems to me, developers have tried to shift the economics of the "fat in the middle", by allocating lower common interest charges to the lowest floors. In older buildings the common charge allocations were strictly on a per square foot basis. At 200 West End Avenue, I've heard that this strategy was effective in getting buyers into units directly above busy West End Avenue Traffic.

And even back in 2006 the banks new the game was ending..
from the new york times

By CHRISTINE HAUGHNEY
Published: November 19, 2006

IN the last few years, renowned architects and enterprising developers have rushed to put their stamp on Manhattan with contemporary condominium buildings that have seemed far more inventive than the staid old co-ops of the Upper East Side. But now, they are looking at the horizon and fearing that there will soon be a glut. They are trying to figure out how to avoid flooding the market they once fought to build in.

There are currently 28,258 new condominium units either under construction or being planned in Manhattan, according to Cushman & Wakefield, the commercial real estate brokerage.

Of these, 14,430 units are in buildings that have already broken ground, and 13,928 units are in buildings that are being planned. If they are all built, the total will approach the borough’s current stock of 36,000 condo units and will be equivalent to a fifth of Manhattan’s 138,000 co-op units, according to census data supplied by the Real Estate Board of New York.

But with a softer real estate market in New York and a growing inventory of co-ops, condos and houses in the region, real estate experts do not believe that all of these projects will be built, or at least built as condos.

In some cases, developers are trying to sell their lots before they start construction. “I’m getting five calls a week from people who own sites and want to sell them,” says Michael Forrest, a senior associate who works in the New York office of Marcus & Millichap, a real estate investment brokerage based in Encino, Calif. “I’m surprised at how many developers are running for the hills.”

Many other developers are saying that they will go forward with buildings only in the parts of Manhattan that they see as fail-safe, like certain blocks in Midtown and on the Upper East Side and Upper West Side, and at the highest end of the market.

Real estate brokers are advising developers to turn some of these projects into anything other than condominiums: rental apartments, hotels or office buildings. And some major banks that lend to condo developers are cutting back on loans for proposed projects or for land that developers want to buy. Before granting loans, they are requiring developers to put more of their own money into their projects, to lower their prices or to sell more units in advance.

Some condominium projects already on the market have been shifted to other uses. The developers of a condo conversion project at 485 Fifth Avenue (41st Street) returned deposits to prospective buyers and sold the project to the Global Hyatt Corporation, which will convert the office building into a hotel. The Related Companies has turned seven apartments in its new 39-unit building called Astor Place into rental apartments — partly because of a complicated tax structure and not just the state of the condo market.

Still, the inventory of unsold Manhattan condos has jumped by more than 70 percent in the last year. As of Oct. 31, Manhattan had 4,115 condos available for sale, compared with 2,381 a year earlier, according to data from the Miller Samuel appraisal company.

Jonathan J. Miller, its president, pointed out that in many cases these numbers were conservative because developers often release apartments gradually onto the market to limit the perception of oversupply.

“There are more units that could hit the market,” Mr. Miller said, “but they will be brought in at a pace that won’t flood the market because it’s not in the developer’s best interest.

National housing and finance experts say while an oversupply of apartments may be good news for condo buyers, they do not believe the oversupply will grow so large that it could actually drag down the overall housing market in New York City. Stephen Blank, a senior fellow at the Urban Land Institute, a nonprofit planning and research group in Washington and a specialist in real estate capital markets, said that while he thinks there may be some overbuilding in Manhattan, it may not be excessive because banks won’t lend to developers the way they did a year ago.

“While prices may flatten or even decline slightly, there are other markets that the real estate community thinks are at greater risk for larger price declines,” Mr. Blank said. “Many people point to Miami, Las Vegas and San Diego, where there has been a lot of speculative buying.”

Mr. Blank said that in New York, he wasn’t “worried about planned condominiums because it’s going to become increasingly more difficult to finance new construction.”

Academics tracking the national markets don’t think that the Manhattan market will ever have the inventory problems that Miami and Las Vegas are currently facing.

Las Vegas has 83,400 condos that are under construction or proposed, and plans for building 12,200 more have been canceled or suspended, according to data collected by Applied Analysis, a Las Vegas research group.

The Miami market now has 82,486 condo units under construction or planned, and plans for 3,246 have been canceled, according to data from the city’s Planning Department.

John McIlwain, a senior fellow for housing at the Urban Land Institute, predicts that there may be some deals for buyers in the boroughs outside Manhattan and in Manhattan neighborhoods where banks and developers are pulling back — Harlem or the financial district, for example.

“If you wanted to move into Manhattan, this is probably a good time to buy in a second-tier neighborhood,” he said. “They may not be the top performers. But they are the entry points for a lot of people who want to get into Manhattan or who simply want a bigger space.”

Miki Naftali, the chief executive of El Ad Properties, encourages buyers to jump on deals in these parts of the market now, so they won’t have to compete with Wall Street bankers and their annual bonuses early next year.

For projects that will not be completed for several years, developers say they are becoming much more selective about what and where they will build.

Gary Barnett, the chairman of the Extell Development Company, said that for some of his projects, he was still figuring out how many units he might turn into hotel rooms or rental apartments.

One building that he is planning to construct on Riverside Boulevard between West 62nd and 63rd Streets may have some rental apartments. He is planning to turn the lower half of his project at 135 West 45th Street into a hotel, and part of his project at 151 East 85th Street into rentals.

Jules Demchick, the chairman of the J. D. Carlisle Development Company, who is building 290 apartments at 23rd Street and Third Avenue, said he would decide within the next month what the breakdown would be between rentals and condominiums.

Converting projects to rental apartments is starting to make more sense because this sector has strengthened. The vacancy rate for rental apartments in Manhattan is a very low 0.8 percent, according to Citi Habitats, a Manhattan real estate brokerage. The borough hasn’t had such a small percentage of rental vacancies since before Sept. 11, according to Gordon Golub, Citi Habitats’ senior managing director of Citi Habitats.

But some developers are also persevering with their condo plans.

Earlier this year, Veronica Hackett, the managing partner in the Clarett Group, bought the lot where a supermarket once stood at West End Avenue and 70th Street. Clarett is building nearly 200 condo units there now.

Ms. Hackett said that the deal seemed right because she paid an affordable price — less than $300 a square foot for the land — in a location where buyers will be willing to pay a premium.

The Hypo Real Estate Capital Corporation, which has avoided projects in the financial district, wrote the loan for Ms. Hackett’s deal because it had confidence in the site.

“We liked the family location,” said Evan Denner, Hypo’s deputy chief executive. “We liked that it had a long history of being a stable neighborhood. We’ve done no residential development in the financial district. We were concerned because of the lack of services down there. We have not been able to get comfortable that that could be a sustainable market.”

For the most part, Ms. Hackett said, she says no to the weekly calls and e-mails she gets from other developers trying to sell her their problematic condominium projects.

“I think today people are having enormous difficulty getting their costs in line,” she said.

One important factor is the price of land.

The record number of new condos planned in Manhattan is making developers far more cautious about buying any new parcels for projects that won’t be finished until 2009. While they will pay record amounts for prime locations, developers are paying 5 percent to 20 percent less than they did a year ago for any land that is not in a prime location, said Robert Knakal, the chairman of Massey Knakal Realty Services Inc.

He defines prime as “on the park, the waterfront, West Broadway in SoHo, Midtown, on one of the major avenues.”

Developers are considering other sites only if they can profitably use them for something other than condominiums, Mr. Knakal said. As he put it: “Some developers are not willing to build condos anymore unless they really get a great deal on the land.”

Still, there are developers who are continuing to build for the highest end of the market, which they say buyers will always covet. In many cases, developers are paying more than ever just for the land in the most desirable locations.

Data collected by Real Capital Analytics Inc., a real estate research company, shows that developers paid an average of $428 a square foot for sites to build on in Manhattan, far higher than the average of $297 a square foot they paid in 2005 or $260 a square foot in 2004. That means developers are going to have to add these high prices to increasing construction costs, making new projects much costlier over all.

In one case, Macklowe Properties paid $655 a square foot for the site of a combination hotel and condominium project at 53rd Street and Madison Avenue. That price doesn’t include construction costs or any other expenses associated with building. Now the developer has decided to put up an office tower instead.

High-end developers are betting that the current streak of job growth, record Wall Street bonuses and high hedge-fund performance will continue well into 2009. If Wall Street runs into any problems in the next few years, Mr. Barnett of Extell predicts that retirees and foreign buyers will have enough money to make up the difference.

“It’s not just Wall Street,” he said. “There’s a tremendous pool of buyers from the business world, the financial world and empty nesters.”

Mr. Naftali of El Ad Properties, which is redeveloping the Plaza Hotel into 182 condominiums and 125 condo-hotel units, is now betting only on the most expensive condos, with prices starting at $1.5 million for a one-bedroom.

He says that the roughly 125 condominiums that have been sold at the Plaza are commanding $3,500 to $6,000 a square foot, and many buyers have paid cash.

But he said that it had been harder to sell one-bedroom condos at $800,000 to $1 million because there is far more inventory. Based on that experience, Mr. Naftali paid $142 million for 250 West Street in TriBeCa, a price that translates to $355 a square foot.

He plans to turn the office building there into condominiums that cater to buyers who will pay for Hudson River views. The project won’t be completed until 2009.

“The top end of the market is extremely, extremely strong,” Mr. Naftali said. “You clearly see a slowdown in properties that are in the lesser locations.”

Banks are now more inclined to use their leverage when it comes to what gets built.

Credit Suisse First Boston has become so cautious that it is generally not lending to developers who want to build condos on midblock sites in Manhattan or on sites that do not have a supermarket or dry cleaner within three blocks. The loans it makes are typically on projects that have already been submitted to the attorney general’s office, and when the developers have already assembled a construction budget and sold a significant percentage of apartments.

“We’ve turned down several projects based on their location, whether it’s a certain part of town or a certain location on the street,” said Robert Brennan, a managing director.

Some real estate brokers are encouraging uneasy building owners to abandon the condominium market entirely.

Mr. Forrest of Marcus & Millichap was hired last month to advise the seller of a 20-story office building five blocks north of Madison Square Park who was considering selling the building and marketing it for potential condominiums. But Mr. Forrest quickly saw that there was too much competition from other projects: developers are building nearly 4,000 condo units within a three-block radius of Madison Square Park, according to Cushman & Wakefield.

“I’m telling him to sell it as an office,” Mr. Forrest said.

In the financial district, Mr. Forrest finds few buyers for building sites. One of his clients — a developer who was buying a five-story office building on Stone Street — wanted to sell it before he even closed on it. After six months of shopping the location for $16.5 million and not getting offers he liked, the owner decided to convert it to condos himself, although he’s entering a neighborhood heavy with inventory.

“He paid a price that won’t allow him to keep it simply as a five-story commercial building,” Mr. Forrest said. “He will lose money if he doesn’t build.”

Fannie Guidelines Drive Boston Condo Auction Activity
Published on April 8, 2009
Author: Brecht Palombo

New Fannie Mae condo guidelines present a new significant hurdle to sales for Boston condo developers. In the face of these hurdles and with increasingly less patient lenders it is likely that the Boston area will see more condo auctions in 2009. The Wall Street Journal reports a summary of the changes:

“The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity…The new policy became effective March 1, and most lenders have started to implement Fannie’s guidelines.”

In my business I work mainly with lenders and attorneys. Except in cases where developers have failed (often repeatedly) to reach the prescribed milestones, lenders to this point have been very generous with extensions and have been inclined to work with developers through slower than expected sales. Lately, as pressure has been mounting, I’m hearing about a lot less patience. Until this fall it was easy to be optimistic that something would happen and sales would improve in a relatively short time but the fact is that today most of the people I’m talking to are now expecting a longer down cycle than they may have previously.

After just two short months we’ll be able to assess the spring market and whether or not its made a significant impact on inventory. While there are some positive signs in the residential market, many lenders will be unable or unwilling to extend construction loans without some concrete evidence of forward motion. If Fannie’s new rules stifle that motion over these next two months, you can count on a spate of condo auctions through the second half of the year.

These 2 back to back articles seem to support a general theory that the de-materiaization of credit resulting from mortgages losses is finally winding its way through the consumer channels. For many months Goldman Sachs estimated that at least $2 Trillion in credit would be destroyed by losses of $700B in MBS securities. Losses now top $1.2 Trillion. That seemes to now be finding its way down to lack of fresh securiziation in the pipeline, depriving mortgage brokers of credit to lend out. So even with current mortgage coupon rate down to 4.80 on 30 year fixed rates, there is no "pick-up" in sales....

Thanks for posting these articles!

"n older buildings the common charge allocations were strictly on a per square foot basis. "

Define "older", because at least as far as RE Taxes are concerned, the allocations need to be ad valorum by law.

This is unrelated to real estate taxes. Seems in newer buildings(last ten years I'm guessing). Developers have found a way to assign a higher common interest based on the higher floor, despite identical square footage.

but shouldn't that be, to some extent, 'ad valorum' as well? It certainly is in Coops (it HAS to be).

wouldn't people find it odd if they looked at a Schedule A and saw RE Taxes and CC's changing in proportion each other to a large extent throughout a building? I know it would look funny to me.

Shares are not allocated in co-ops based solely on square footage. The higher the floor, the greater number of shares.

If you look at deeds and pshark.com for Manhattan condos, even those prior to the last 10 years (I can point you to a 19-year old example), land common interest & building common interest are not the same for the same line units on different floors.

30yrs - are you sure you've been dealing in Manhattan RE for 30 years :)

nyc10023, typo

should have been
wouldn't people find it odd if they looked at a Schedule A and *didn't see* RE Taxes and CC's changing in proportion each other to a large extent throughout a building? I know it would look funny to me. if you look at a rather lengthy post i wrote the other day, i explained the the suit the led to a private letter ruling stating that AV's/ % common interest had to be in proportion to pricing. but that should have been clear from the first 'graph (i.e. It certainly is in Coops (it HAS to be)).