NYT: Condo auctions in Manhattan and Brooklyn

Interesting that the article notes 8,000 new condo units on the market and 22,000 more coming out this year. The 8,000 figure seems higher than what's picked up by streeteasy.

Will be very interesting if this happens - further validation that asking prices on many new condos right now aren't serious.

What a tragedy. [SFX: roaring laughter from studio audience]

at an average of 200 apartments per building, that would mean that there are 110 new developments coming this year. doesn't that figure seem really high?

The 22k units are expected by the end of next year, not 2009. The 8,000 figure is for all of NYC, not just the Manhattan numbers usually discussed here and on the UrbanDigs widget.

This is my favorite sentence, regarding similar auctions in Florida: "The developers say sales have picked up since then, at prices slightly BELOW those received at auction."

So don't bid at auction. Let the new reality sink in and buy even cheaper.

So the 50% drop in prices (re-setting comps) may come A LOT sooner than we thought. About time.

Auction buyers have to pay cash on the barrel. If you have $1MM cash you should be waiting for a penthouse/townhouse not a 2BR in new construction on the UES. Interesting to see what a race to the bottom this market is turning into. It seems like the right thing to do is to buy two quarters into the recovery rather than try to time the bottom.

This is huge.

still having trouble believing the total number of units being mentioned. also, i wonder if this approach can work on this scale. would you want to own a unit in a building that was filled with auction buyers (i.e. speculators). Unfortunately, lower pricing does not change the basic nature of speculation.

"He said he expects the auctioned properties to sell for 40 to 45 percent below the asking prices of the first quarter of 2008"

I have been vindicated.

This is absolutely massive.

If you're an individual apartment seller right now (especially a condo seller), you just picked up the newspaper to read that your apartment value has just declined another X% (unknown, but big) on the news alone.

Just like that. Lordy lordy lordy.

In real estate auctions I believe you usually have 30 days to arrange financing. Of course this may be nearly impossible with the state of credit markets.

I also thought the 22,000 # was quite high, the NYT's has often pulled these kind of "facts" out of their a****. But if it is true maybe I should switch my biz plan to auctions? :)

columbia, it's actually not that surprising. in an effort to qualify new development for 421a tax abatement before its expiration last july/august, builders broke ground or got permits on over 30,000 units in that month alone! Certainly, much of those in early stages will not be finished or cancelled. But that was for one month and does not even include all the inventory in the pipeline before then. the expiration of tax abatement caused a surge in construction at the worst possible time. given the 18-24 month lag to completion, these numbers are about right. in fact, they are only so LOW because of a ton of cancelled projects.

I have met with a handful of sellers over the last month and most are in la la land regarding price.

So, this means that the developers are going to take a hit on the profits from the sale of some of their units, but might still be ahead depending on what they paid for the building, their development costs, etc. That still leaves those pesky 421-A abatements, which still makes me leery of bidding on one of these places.

I wonder how hyped the auctions are going to be and if the bidding will be crazy. I once sat through eight hours of an auction for used computer equipment, surrounded by people who were overpaying for used junk. I did not bid on a single item. At the end of the auction, my friend bought a $25 box of electronic junk, which turned out to contain a $500 interface unit for a T1 line. I sold that for him and we split the cash. I know this is different...

Watch lots of new units being converted to rentals, further driving down the (falling) price of rentals, further driving down the (inflated) price of buying.

La-la land is an understatement: it is still twice as expensive to buy as to rent on a cash-flow basis, it is still impossible to buy a unit and rent it out to an unrelated third party and break even. The market will be in long-term equilibrium when we reach that point, but I think it will overshoot to the downside.

"So, this means that the developers are going to take a hit on the profits from the sale of some of their units, but might still be ahead depending on what they paid for the building, their development costs, etc. "

If a developer sold say 80%+ of their units already, they may be ok overall. For those however, maybe they change to rentals, etc. But for most that are less than 50% pre-sold, they will be wiped out if their units go into foreclosure since even those who bought units initially will walk away.

Of course these developments will have to get approval from the banks to hold these auctions and I can't see that being easy. Financing is provided based on a min. price per square foot, this is the problem Trump is having with his tower in Chicago. The banks are refusing to let him lower prices to bring them in-line with the current market.

If you can't arrange financing in 30 days, do you lose your deposit? Other than that, I just worry about the downside risks from foreclosures in those buildings, rising common charges, the financial health of the sponsors, etc. It is tricky business to figure out if you should go ahead with these kind of deals.

i know everyone is excited about all of this but lets come back to the number. presumably it cannot include any units that haven't even started and i would think that it is very unlikely that projects that aren't virtually done already will go forward if any one (ie. banks) has to write any more checks to keep it going. so, based on that, perhaps we are talking about a much lower number.

"The banks are refusing to let him lower prices to bring them in-line with the current market."

Then the banks are forcing him into bankruptcy, and in bankruptcy he can force the banks to accept lower prices. DIP financing is easy to obtain, even in today's market.

"perhaps we are talking about a much lower number."

No. Just look at the construction all around us. If anything the number of units will increase because any project that can convert from luxury condos to rentals will build more and smaller units to rent out. Floor plans are easy to change at the early phases of a project.

This is going to get very ugly.

One up-side to all this it has never been easier to get a res. at Nobu...I just can't afford it now. Irony is a bitch...

there's irony everywhere you look these days.

beatyerputz, if you're a seller it's an eye-opener. But what if you are in contract in a building that still has 30 or so or more units to sell? Will you still go to the closing knowing that the developer may very well put a large block of units on the auction block as soon as closings have occurred?

"Of course these developments will have to get approval from the banks to hold these auctions and I can't see that being easy. Financing is provided based on a min. price per square foot, this is the problem Trump is having with his tower in Chicago. The banks are refusing to let him lower prices to bring them in-line with the current market."

do you know how this whole process works? when you default on your commercial loan because you can't sell your apts, the bank comes in and takes over. the banks are the ones that send these apartments into foreclosure once they take ownership. the only time you need approval by a bank from an owner selling is a short sale, which typically happens more for individuals. what you are probably referring to are projects that are not yet in distress. sure, there is language on min price/sq foot. but once the market tanks, history has shown that banks will send those properties and send them into foreclosure - what do you think has been happening across the country? 45% of existing home sales last month were foreclosures/distress. did the banks set a minimum sales price / sq foot for those guys as well?

So lets play out the scenario. You have hundreds, maybe thousands of condos being sold at 40 - 45% off peak in the spring. Then, if you follow the Florida model, subsequent sales will settle at amounts below auction prices. For sake of argument lets call this 45 - 50% off peak (insert stevejhx Cheshire cat grin here). The overall market effect will be what? All pricing will need to follow the new benchmark? What happens to co-op pricing? Worse? Or will these auctions and fire sale prices be treated as anomalies?

It's not quite that simple, Special_K - first the developer files bankruptcy, tries to obtain DIP financing (which is easy to get as it has priority over other debts) and reworks its debts. Only if Chapter 11 is unsuccessful will Chapter 7 be filed, which will lead to dissolution and bank repossession. It doesn't work like a home mortgage, which (stupidly) isn't subject to bankruptcy protection.

spinnaker1, given that there are still units coming on the market, albeit in smaller numbers, you'll see the downward pressure continue. As more developers/buildings are forced into bankruptcy, the shadow inventory will come out of the shadows and all of a sudden that widget that UD has will show ALL of the units, instead of merely a portion of them, that need to be sold (if they're not put into the rental market, further depressing those prices and skewing the rent/buy equation even more).

....also does this completely freeze up the current market? Who would sign a contract after reading this?

I don't even know how they're going to manage to auction them, particularly as time goes on, cash isn't easy for even large landlords to get right now, vacancy rates in rentals are going up, they just don't seem like viable short-term investment material and I don't know how many would commit/have to money to hold them long-term. And long-term could be quite long.

CNBC had a segment on Florida real estate auctions yesterday. A distressed housing fund bought 55 properties in Vero Beach, FL for $0.17 on the $1.00. That's how you get to a -75% price chage.

I wonder about the financial strength of a development forced to auction off units. Wouldn't want to pick up a condo in a building about to go bankrupt like Viridian, Rector Square, et. al. Some of the buildings in the article look like they're on the verge. Also wouldn't want to buy into a building without a C of O.

And what about the people that have signed contracts in these new developments and are expected to close next month? What are our options?

I wouldn't touch new development at all right now. Remember the recent Times article on what happens to common charges if the bank doesn't pay on foreclosed units - the remainder of the unit owners have to pony up. The condo association only has a lien on the apartment, and it's subsidiary to the mortgage. Only after the mortgage is satisfied will outstanding common charges be paid.

And the bank will screw you to get its money.

1. invest in a lawyer to give you real information
2. make a really, tough decision ignoring sunk cost
3. be thankful for other good things (hopefully) going on in your life

Miller says even a handful of sales could reset prices citywide. He doesn't qualify his statement with good development or bad development scenarios.

And yes - inventory is MUCH higher than even streeteasy says, as new development only releases units in bits and pieces, dribs and drabs. At the current absorption rate (new contracts) there's likely a 4- to 5-year supply if you count all units that are actually available for sale, rather than the ones that are listed.

Suggestion: I'd love streeteasy to start adding those units into the inventory. Take the total number of units a building says it has, subtract out "in contract" and sold units, and come up with an "unlisted inventory" number. It would be fascinating.

Florida built lots of units for population that does not exist, at least from what other people have said. There is still lots of demand in New York City. What is our city-wide vacancy rate?

I have to laugh when some perspective buyers ask me if our building is full. Even with a relatively high maintenance, all of our units are occupied. We have a stable cost structure. Now, the thought of buying into one of these condo buildings that might go bankrupt terrifies me to death. No thanks. Ditto on the C of O issues. Of course, you get a better deal when you are willing to take a larger risk but I don't that I am willing to take that risk.

Steve, I've noticed that in the past year or so most new developments have quit listing the total number of units being developed. Of course, it's not hard to find with a little perserverance, just another way in which they are making things less transparent.

407PAS, there's lots of demand, just not at today's prices. The income/jobs have to support the prices, unless you have a mortgage industry that will give money away with abandon, and that's not there any longer.

407PAS - as the article correctly states, much of the condo demand we have seen in recent years has been attributed to young Wall St'ers. and Europeans. Both are running scared now.

steve, that's what I worry about. The article mentions a midtown condo that's only 44% sold with no sales since Dec. Assuming the building hasn't started closings, if you buy at auction and the building doesn't get to 50% sold and the banks don't give out mortgages to the other contract holders then you're sitting in an empty building about to go bankrupt.

If this is like an auto auction where you get 3 hours to inspect before you bid I can't see paying 50% of the list price, maybe 25%.

one of the things that often comes up on many of these posts is the differential between prime and marginal manhattan real estate. so many if not all of these new developments are in secondary neighborhoods that depended on significant further development to become reasonable places to live. not sure that pricing on far west side in 40's and 50's has much to do with prices on park, mad & fifth and other prime areas.

if one has the means to live at cpw & 75th, bargain basement pricing will not motivate a move to 59th off the west side highway.

columbiacounty, not really. Everything is going to fall. Yes, Harlem might fall more, but with Wall Street dead and gone, not lots of people are left who can afford $15,000 a month in mortgage payments.

the existence of $1000/sqft properties has little effect on the properties pushing $3000/sqft. But remember there are many pockets in prime (semi-prime?) Manhattan at $1000/sqft so the effect of properties immediately going from 1000 to, say, 650 will be enormous.

Will we see a "have and have not" world of condos--the truly desirable, established condos in 'prime' areas vs everything else? If so, how much of a premium (range) can the 'haves' expect to command over the 'have-nots'? $1800-$2500 psft vs $650-$1000 psft?

interesting question for sure...without financing both for individual and bulk purchases easily available, it is possible that some of these buildings could just sit unoccupied.

Thanks currenttime for posting this article. Very interesting.

columbiacounty, they won't stay empty for long. The city/state will take them over and turn them into low income housing units. Seems like this happens every 40 years in NYC 1930's, 1970's, 2010's(?)

tell us about hi end condos from the 70's that were turned into low income housing.

columbia county, 80's man: there werent very many (if any at all) condos in Manhattan in the 70's so none were turned into low income housing. There were only co-ops and there was no (well,maybe just a couple)new construction either going on. If a conversion from rental to co-op was in mid-stream the offering plan would be abandoned until better times. Worse case scenario for new construction (condo's) is that the plan is abandoned and units turned into rentals.

The city took over a lot of co-ops in the 80's for failure to pay property taxes, and converted them into income-protected housing. Most in the outer boroughs.

Everything is impacted. If new construction condos fall from 1200 to 600 sqft, co-ops in the same area which were trading (or trying to) at 800 will be down to 500, etc, etc. And there's pockets of trouble in every area, from Harlem to FiDi.

i expect even co-ops in good areas to foreclose. i really recommend reading "740 park", it went bust and had to rent vacant units. rockefeller moved there as a renter in 1938, not owner! rich people know that renting could be smarter than owning, i wish the middle class could learn that too. jackie kennedy's grandpa was the developer.

admin - Unfortunately you may be right. There will be some tough decisions ahead for people who bought in at peak price with 20% down and are now under water.

The reality is profits on Wall street were in many cases over 80% fake and many people traded and lived their lifestyle off these false numbers. What's wrong with a 4% to 7% ROI, but from a private equity, trading, i-banking standpoint everyone thought they new better and could generate high returns to "increase shareholder value" - I am sure you all have heard of that term. Again, Wall Street compensation is based on revenue generated to the firm - not did you turn down unethical deals. If you did it by the book either you were fired because you did not generate enough revenue or you were perceived as not being smart enough to play the game. Sad commentary, but true. Now the time has come for New York real estate to adjust. This is not the first time this has happened. If you are a student of history, look at what happened to New York RE prices when Drexel Burnham went under, but everyone is shocked that the market is declining now so fast. Remember, NY RE usually falls under the LIFO method of accounting. Bonuses were still being paid as the rest of the country sunk which initially slowed the RE price declines. Finally, we are now repeating the same mistakes of the past - fraud, unrealistic returns. The good news after a painful, but realistic decline New York RE will come back.

"The good news after a painful, but realistic decline New York RE will come back. "

is Nobu lowering prices? what is the avg dinner cost there? wall streeters and celebrities are badly hurt by this downturn.

Agreed it is painful, but necessary.

admin - that is an interesting question. I was wondering if some of the more expensive restuarants would bring their prices down a bit. I haven;t seen anything yet. has anyone else?

If you look at the article posted in NYmag -- it will have to decline more than that.(ie $600 sq ft on auction properties) Middle class is $123K a year in NYC and look at the chart below indicating only 10% of the population here can afford to buy a home - any home. Also note the exodus from NYC.

http://nymag.com/daily/intel/2009/02/shocking_news_the_middle_class.html

"Middle class is $123K a year in NYC "

shouldn't one consider the median salary of those that rent at mkt prices only? there's a lot of middle income around $120k that have rent stab, not mkt rates. maybe those people shouldn't consider buying at all financially wise. my guess is taht the median income of those that pay mkt rate for rentals is much higher, but it's just a guesstimate.

Wow! Interesting article.

We looked at a sponsor unit recently in a building that is being converted from rental to coop. It's about 2/3 rental and 1/3 owner occupied. We then realized that in order to buy such an apartment you need to buy all cash. Banks will not finance such a purchase. The apartment we looked at was 700K. Now, who has that in cash? Another unit that was for sale in that building (19 Grace Court, Brooklyn Heights) ended up selling for 500K after dropping the price two hundred K.
I imagine a similar scenereo in these auctions. Banks will not finance the buyers and the buyers will not have 1,000,000 in cash. So the prices will have to drop further. Maybe one difference with Florida is that the prices there were much lower to begin with. Even if a bank was not going to finance an auction purchase, many more people have 100K-300K in cash to buy an apartment/house in Florida than the money that one needs to buy an apartment in NYC.

Currenttime, thanks for the Article. As a prospective buyer - and i would like to buy because having my money in a declining asset I can live in is more attactive that some share scrip - there is now NO WAY that I would be looking at buying RE any time in the next few months.
And to Spinnaker 1's comments: "....also does this completely freeze up the current market? Who would sign a contract after reading this?" the answer is, I don't know but certainly not me.

I'm actually rather pleasantly surprised to see the NYT publish an article like this. It is hardly supportive to their real estate advertising clients which generally seems to strongly influence their real estate editorial content!

Topper, interesting comment. Although I generally like the NYT, I've always felt that, as far as NY real estate was concerned, it was as reliable and truthful as the National Enquirer. They knew which side their bread was buttered on, but now, since there's very little butter, and bread is getting scarce, I guess there's no point in holding the presses.

Somebody with cash will step up with a lowball bid for a bunch of units and hope to backlever them later. That person will know/guess what they can get renting them in the mean time to cover their costs. Its actually what needs to happen so the market can start moving again.

problem is that rents are also in free-fall. estimating the impact of adding a bunch of units is nearly impossible given the vacuum of demand.

waverly, there was an article recently on steps restaurants were taking to maximize clients, including adding breakfast, staying open between lunch and dinner with cheaper menus, adding small plate sharing menus, and even decreasing prices. Veritas is an example of a top restaurant that used to be prix fixe only that now has a menu with much less expensive options. Alcohol prices are still insane, but I'm seeing some rather nice corkage policies as well (went to Apiary the other day, one example). Bar Milano just morphed into 'inoteca, same owner but much less expensive, more flexible menu. Went there the other night (Friday, I'll confess) without reservations and the place was packed, a far cry from the crowds recently at Bar Milano (which had a very nice menu, I might add).

I took my wife to Jean Georges last week for her birthday dinner. We treat each other to a meal at a surprise restaurant on our birthdays. The day fell in the middle of the week so we were able to get a table at 8:30. The place was not crowded but it was certainly an off night.

I am not sure if prix fixe has dropped in price ($98) because I do not track that particular economic index. We had wonderful dinner. The meal was like a long journey with stops in many places. A meal like that is good for the soul.

My wife cooks every day so a treat like this, once in a while, is the least I could do for her.

Here is a good article on the deals you can get in nice restaurants:

http://www.nytimes.com/2009/02/04/dining/04note.html?scp=19&sq=Jean%20Georges%20Mario&st=cse

bds: "And what about the people that have signed contracts in these new developments and are expected to close next month? What are our options?"

Sorry buddy, don't know about options, but you are not alone, as per the newest doom and gloom from the NYT:
"Apartment Buyers Abandoning 6-Figure Deposits"

http://www.nytimes.com/2009/03/01/realestate/01walk.html?hp

How does one participate in these auctions? Will it be advertised to the public?