If you build it, they will come. Or will they?

There is much discussion lately of the slow down in the real estate market throughout NYC. Many high profile, luxury new development projects have been put on hold until further notice. Which begs the question, if you construct a new building in Brooklyn or elsewhere in the city, will the buyers or renters come?

I think that greatly depends on the type of product you’re planning to construct, and whether that portion of the market is underrepresented or totally over-saturated. After all, there is no such thing as ‘one size fits all’ in the world of real estate. There are various kinds of housing, in this great city of ours, from cooperatives, condominiums and condops generally ranging in size from studios to 3 bedrooms, to townhouses, multi-families and mixed use properties. It is a valuable trait of the developer to recognize what the next wave of buyers and renters will prefer in terms of type of housing.

In addition to the types of property, developers also need to assess the location of their development, and more specifically, what housing options are underrepresented in that area. If we look at trends from the past few years, focusing specifically on Brooklyn, we would see that 1 bedroom condos had the highest demand between 2008-2010, while the city and the world were reeling from the U.S. housing market collapse and the economic collapse of the world’s top financial institutions. This may be best explained by a period of downsizing in combination with young professionals’ burgeoning interest in Brooklyn, and reflective of a demand for first time buyer starter apartments.

Around the Spring of 2010, the demand for 2 bedrooms versus 1 bedrooms began to arise, eventually resulting in townhouse demand matching that of 1 or 2 bedroom apartments during Spring of 2013. By Spring of 2014, townhouse demand had exceeded that of 1 or 2 bedroom apartments, highlighting a growing urgency for larger homes and an influx of more affluent buyers across the borough, relocating from Manhattan, other metropolitan cities and abroad. A major contributing factor to this trend of buyers into Brooklyn was a burgeoning tech scene and shared office space like We Works, with several companies relocating their offices to Brooklyn from the West coast and Manhattan.

For the developers who recognized this trend, appropriate housing in the form of higher end condos and upscale, two family townhouses ensued. By August of 2015 that inventory appears to have peaked with an average price per SF of $860 in Brooklyn, all the way up from a measly $550 per SF back in the Spring of 2010. The following Spring of 2016 saw that average drop to around $800 per SF with new development inventory decreasing ever since. So now the developer must go back to the drawing board, to figure out what inventory is not currently represented in the Brooklyn market.

And sometimes, developers can be stubborn in recognizing the signs, that the inventory doesn’t fit the demand. They may try to offer more amenities to sell the units, but eventually the market will self correct, and prices will go down. Fewer developers will build during these times of uncertainty, but some will have the vision to determine the next wave of home buyers and renters and capitalize upon that. So what do we see happening next?

The townhouse market appears very saturated, although newly gentrifying areas like East New York, Cypress Hills, East Flatbush, Flatbush and Kensington, may provide locations affordable for developers to construct or renovate and flip existing townhouses to home buyers seeking larger living spaces at a more affordable price point than the prime areas of Brooklyn. These areas may also offer opportunity to develop rental buildings, with a potential affordable housing component tied in, to provide tax incentives to the developer. Additionally, condo developments will be likely across Brooklyn, with more emphasis on space, quality, live-ability and lifestyle, than on a trendy and transient amenities package or flashy finishes. I believe the most important take away for developers right now, is to recognize that there are segments of the buyer and renter pool, whose housing needs are not being constructed and are thus relocating out of the city. This is an opportunity for a developer, who is willing to accept smaller margins of profit for a growing segment of the population, in exchange for less risk during an uncertain time.

Housing Market Forecast

Opinions abound as to the future stability of the housing market and whether there is another housing bubble; however, most forecasters agree that certain factors should be assessed in forming your opinion. Those factors which affect the market most are interest rates, price, wages, taxes and cost of living, inventory, and demographics.

Interest rates are at an all time low since the housing bubble burst and the recession hit. The federal government implemented the stimulus plan in order to help the economy stabilize. As this stabilization takes effect, and the recovery continues, the FED will eventually taper off the stimulus program and raise interest rates. We saw this briefly in the 3rd quarter of 2013, when the FED announced they would begin raising interest rates. The momentum of the market stalled, and the FED quickly renounced that intention. However, as the economy strengthens, unemployment rates decline, and job growth increases, the inevitable will eventually happen, and interest rates will slowly climb into 2015. Predictions range near 6% towards the end of 2015, and thus prices will either level or drop depending on the increase.

With historically low interest rates and inventory, prices skyrocketed in parts of the country, specifically major metropolitan areas. This in turn caused certain would be buyers to drop out of the market due to lack of affordable homes for the lower and middle income brackets. This trend is further propagated by an increase of new development in the luxury sector primarily. However, there is still a significant portion of homes which are bank owned that are unable to be released to the public due to government restriction on the banks. Once the government relinquishes control of these REOs and the market is flooded with more inventory, home prices should decline.

As the prices rise, so do the taxes, which puts additional strain on the average Joe homeowner to maintain their monthly housing expense. In addition to taxes, the cost of living greatly effects the housing sector. If  the cost of gas suddenly rises to a high percentage, the number of foreclosures will increase too. Current indicators show that inflation has leveled, despite signs of increase earlier this year.

Another indicative factor of the health of the market is earnings or wages. Although we see continued job growth, the positions being created are in the low income bracket, and hence, overall average wages are falling. This is reflected in proposed demographic models which show trends for a lower skilled and lower paid population over time.

So what factors that will insure a stable housing market? Higher wages, smaller monthly payments achieved through a 50 yr model, easier qualifications for lendees and more efficient construction to name a few.