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Tug of War

Uncategorized // May 18, 2009

In an upwardly moving market, developers and bankers are the best of friends! In a downward moving market, they can become the worst of enemies. Especially after what we’ve experienced over the past nine months! As the market slowly thaws, we are seeing more deals being made and more buyers step in. People are definitely starting to take advantage of lower prices and more inventory. I expect this to transition into a more “normalized” state eventually (as it always does). But then again….nothing in New York City ever seems “normal”. Some projects are starting to sell, and others are still waning. It seems as though there are some developers who are oblivious to the correction in the marketplace and simply will try wait this out. They run full page advertisements with a new spin on the message. I’m sure they understand how sophisticated New York buyers are. Are these developers really that naive? Or perhaps there’s another reason they are caught in this deadlock.

When a bank loans money to a developer, they require the developer to agree that nothing will be sold below their minimum release price. But what happens when the market dips below that minimum release price? Firstly, it probably means that the developer has lost his equity position in the deal and has no motivation to do a deal like this.  Secondly, it means that the bank may soon have the ability to take back the project and still make some money.  A banks “break-even” number is clearly lower than the developers. No deals are made. No new contracts are signed.

This tug of war we see going on now is not helping anyone. Some of these projects will be worked out, and sell.  Some will not.  It’s becoming easier to see which of those will stall. It’s not that difficult to see sites that have been abandoned.  No construction activity.  No more flow of money to finish what has been started.  One thing I do know is that Manhattan is an island and has limited space. These projects will become something.  Perhaps not what was originally conceived, but they won’t sit idle forever.

In every market, just like a tug of war, there seems to be a winner and a loser.