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One in 4 New York's new luxury apartments is unsold

Investors, developers concerned the softening of luxury real estate is a sign of slowing economy or the start of a recession

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Buildings with residential apartments in the newly developed and exclusive Hudson Yards neighbourhood in Manhattan. For buyers, there is no shortage of discounts and sweeteners to be had.

New York

PICTURE an empty apartment - there are thousands in Manhattan's new towers - and fill it with the city's chattiest real estate developers. How do you quiet the room? Ask about their sales.

Among the more than 16,200 condo units across 682 new buildings completed in New York City since 2013, one in four remains unsold, or roughly 4,100 apartments - most of them in luxury buildings, according to a new analysis by the listing website StreetEasy. "I think we're being really conservative," said Grant Long, the website's senior economist, noting that the study looked specifically at ground-up new construction that has begun to close contracts.

Sales in buildings converted to condos, a relatively small segment, were not counted, because they are harder to reliably track. There are thousands more units in under-construction buildings that have not begun closings but suffer from the same market dynamics.

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Projects have not stalled as they did in the post-recession market of 2008, and new buildings are still on the rise, but there are signs that some developers are nearing a turning point.

Already the prices at several new towers have been reduced, either directly or through concessions like waived common charges and transfer taxes, and some may soon be forced to cut deeper. Tactics from past cycles could also be making a comeback: bulk sales of unsold units to investors, condos converting to rentals en masse, and multimillion-dollar "rent-to-own" options for sprawling apartments - a four-bedroom, yours for just US$22,500 a month.

The slowdown is uneven and some projects are faring better than others, but for well-heeled buyers there is no shortage of discounts and sweeteners to be had.

The analysis, a compilation of both public and proprietary listing and building data, is one of the most sobering looks yet at the city's flagging condo market, which peaked about three years ago amid a glut of inventory.

Now the market could face new obstacles, from growing fears of a recession, to changes in tax law and political instability heading into a presidential election year.

For an industry accustomed to selling apartments years ahead of completion and skilled at concealing the pace of sales when the market falters, further headwinds could force more drastic measures.

Moreover, a growing share of condos sold in recent years have been quietly relisted as rentals by investors who bought them and are reluctant to put them back on the market. Of the 12,133 new condos sold between January 2013 and August 2019, 38 per cent have appeared on StreetEasy as rentals. "That to me is the most alarming trend here. That's the group of folks that could go away at any minute. If there's a recession, people just want to put their money in Treasury bonds," he said, referring to a lower-risk investment strategy.

The downturn has been hardest on the ultra-luxury market, which kickstarted the trend toward bigger and fancier apartments more than six years ago.

The super-tall One57 tower, completed in 2014 and considered the forerunner of Billionaires' Row, a once largely commercial corridor around 57th Street in Midtown, remains about 20 per cent unsold, with 27 of roughly 132 multimillion-dollar apartments still held by the developer, according to Jonathan Miller, president of Miller Samuel Real Estate Appraisers & Consultants.

"That's mind-blowing," he said, because the building actually began marketing eight years ago, in 2011, and a typical building might sell out in two to three years in a balanced market. In an analysis of seven luxury towers on and around Billionaires' Row, including pending sales, almost 40 per cent of units remain unsold, Mr Miller said.

Another competitor, Central Park Tower, set to become the tallest and, by some measures, the most expensive residential building in New York, has not released any sales data.

By Mr Miller's count, which includes buildings that are still under construction, there are over 9,000 unsold new units in Manhattan. (His estimate includes so-called "shadow inventory," which developers strategically do not list for sale to hold off for a stronger market.)

At the current pace of sales, it would take nine years to sell them - a daunting timeline that could be reduced if sales were to accelerate, but there are few reasons to expect such a surge in the short term, he said.

If there is a silver lining for developers, it's that buildings with more than 75 per cent of sold units have likely fulfilled their lender obligations, and are better suited to wait out the downturn without having to slash their prices, said Nancy Packes, principal of Nancy Packes Data Services, a development consulting firm.

"It's about the buildings - you can't broad-stroke an entire market," said Ziel Feldman, chairman of HFZ Capital Group, who has worked in New York real estate since the 1980s.

Despite the oversupply, he said demand is still strong for new condos, especially ones that fill a gap in the market. At his West Chelsea project called the XI, a 236-unit pair of twisting towers near the Hudson River, he said sales have been moving "wonderfully" in part because their core product, US$4 million to US$8 million apartments, has higher demand than some of the larger, pricier condos built elsewhere.

He would not say how many units were in contract - sales are not publicly recorded until closings begin - but noted that as the project approaches completion, scheduled for early 2020, there has been an uptick in demand.

But dozens of buildings, some of them several years old, remain largely unsold, and a pipeline of upcoming projects will add even more competition. There were 88 new condo buildings that were less than half sold in late August, and likely several more that have not yet disclosed sales, according to Streeteasy.

While the StreetEasy analysis included all five boroughs, Manhattan had the most unsold condos by far: Over 2,400 of the unsold units, about 60 per cent, were in the borough, primarily in large luxury buildings.

The Manhattan neighbourhoods with the lowest share of new condo sales were the Lower East Side (32 per cent sold), Midtown West, which includes Hudson Yards (55 per cent), East Harlem (56 per cent), Gramercy Park (60 per cent) and Washington Heights (63 per cent).

The single largest reason the Lower East Side tops the list is because of the massive One Manhattan Square, an 815-unit skyscraper that towers over nearby Chinatown, where prices ranged from US$1.2 million for a one-bedroom to over US$13 million for a penthouse.

Among seven new buildings in the neighbourhood that have recorded sales, it represents three-fourths of the new inventory.

As of Aug 26, the tower, which received a permit for occupancy in late 2018, had only sold about 20 per cent of its units, Mr Long said. A spokeswoman for Extell said there are "hundreds of more units" under contracts that have not yet closed.

That is a worrying sales pace for a luxury project with some of the most compelling incentives on the market. The tower was one of the last to receive a now-expired tax break that buyers will enjoy for several years.

Midtown West, which includes the sprawling Hudson Yards project, has several upcoming towers that have not yet recorded closings. The slower rate of sales in Upper Manhattan neighbourhoods like East Harlem suggests that developers may also have been too ambitious in pushing prices in less central, comparatively affordable markets, said Mr Long.

"I keep thinking we'll have the final challenge thrown at us, and then things keep cropping up," said Ryan Schleis, a senior vice president at Corcoran Sunshine Marketing Group, which represents some of the largest new condos in the city.

He cites recent limits on state, local and property tax deductions, as well as changes to the mansion tax, which has risen from a flat 1 per cent on million-dollar sales to a staggered rate of up to 3.9 per cent for sales above US$25 million.

Factor in the retreat of international buyers from China and elsewhere, recession fears, and the fact that elections tend to roil investors, and there are a number of new challenges worsening an already oversupplied market.

"Everyone is scrambling to figure out how to move the inventory in an effective way," said Vickey Barron, an agent with Compass, and that includes sweetening the pot for brokers.

She said she recently received an unsolicited, grapefruit-size "trophy" in the mail from a major developer hoping she would bring her clients to its condo. The heavy resinlike statue, wrapped in a gift box, read "5 per cent" in large font - a promise to pay her above the standard 3 per cent commission that most agents receive.

Other developers have offered to pay brokers before the contract closing, a risky move if the deal were to fall through.

Price cuts for buyers are also common, but often made indirectly, to disguise widespread discounting. Between offers to cover transfer taxes and the revised mansion tax, it's not unusual for developers to cover 6 per cent or more of the asking price, not including other negotiations, said Emily Beare, an agent with CORE.

Where inducements won't cut it, there are signs that some developers are entertaining bulk sales. In past downturns, investors have swooped in to rescue debt-burdened developers with offers to buy dozens of units or more, sometimes at 20 per cent to 25 per cent discounts.

"Before they said 'No way, no how,' " said Elliot Bogod, president of Broadway Realty, who represents a number of interested investors. "Now everybody is talking to us." NYTIMES