Franklin Trust on Montague Going Residential

There are a lot of new residential units coming on the market Anon 11:29 because we are still in an up cycle for condominium development in New York City. The supply issues caused by the cost and difficulty of getting housing built here have shielded us somewhat from the housing slump being experienced in some markets. At some point in the next few years, it's likely that there will be a glut of units coming on line as condominiums, when there are too many units being sold at too high of prices for buyers to absorb. This has already happened on a small scale in some parts of Brooklyn.

This isn't likely to help the average Brooklynite very much though, since the American Community Survey gives the median income of a Brooklyn household as $35,453 as of 2002. Most developers will just rent out some of their condominiums as expensive rentals and sell their units a little at a time.

The pace of construction and conversion will slow, and there will be a down cycle for a few years. Eventually residential development will pick back up when net inflows of people start to increase the population. In the 2005 census, Brooklyn had an estimate population of 2,510,000 people. This is still less than in 1950 when the population was 2,740,000 but in 2030 we are projected to come pretty close to that number again with 2,720,000.

Posted by: Shahn Andersen at March 5, 2007 12:33 PM

I don't know if I'd call my answers to your questions "insight" as much as I'd calll then opinion. Regardless, here they are:

Q. Why are we still in an up cycle for condo development in NYC and what are the driving factors of it? If this has to do with cheapness and low interest rates, why don't we see a similar growth in commercial space?

A. Reasonable interest rates and increased demand due to high prices in Manhattan, long commutes to New Jersey and Long Island, and a change in attitudes about living in the city with children.

Q. Which Brooklyn neighborhoods are you seeing a drop in price b/c of oversaturation in the market

A. Parts of Williamsburg and the South Slope have seen some overbuilding and shown a pricing impact, but nothing really catastrophic. I opted out of taking an equity position and construction managing a project in Williamsburg for this reason three months ago. Maybe I'm wrong, but I'd be leery of starting a project there right now.

Q. You note that NYC is shielded from much of the housing slow in the rest of the country because of this cheapness to build [elsewhere], but my understanding is that NYC real estate is always going up because of the demand for it, not the cost of expansion and growth

A. Each market in the US is different, but beyond the cost to build here, you have to factor in the difficulty of finding a site to develop at a reasonable cost, getting approvals and permits from the notoriously backlogged and capricious DOB, getting financing, etc.

New York real estate is not always going up. A lot of people lost their shirts from speculative buying in the late 80's and early 90's. You can't separate the costs of building from the demand for completed housing. They are fundamentally tied together. At some point when the cost of buying and building on land is so expensive that the units that result are too expensive for the people wanting to buy them, then demand is reduced because of costs. The saturation of the suburbs and low interest rates have kept things going, but when there are too many units that are too expensive, buyers turn to renters.

Posted by: Shahn Andersen at March 5, 2007 1:54 PM