Crain’s New York Business.com, By Amanda Fung, on June 26, 2011 5:59 a.m.
See timing as right to transform rental, office buildings.
Next month, 55 condominiums in a classic prewar building on Fifth Avenue overlooking Central Park will hit the market at prices starting at $1,000 per square foot. The opening comes after 18 months of work to convert the 15-story, brown-brick and white-limestone property, which once housed Mount Sinai Medical Center staffers, into modern luxury residences.
“This was a unique opportunity,” said Harold Fetner, president of Durst Fetner Residential, which bought 1212 Fifth Avenue for $42 million in 2009 and is spending $100 million to convert it. “It's all about location.”
These days, a growing number of developers are also betting that it's all about timing. In fact, the apartments at 1212 Fifth will be just the first in a new wave of condo conversions expected to hit the market in coming months.
Unable to secure financing from still-leery banks to build condos from the ground up, developers across the city are settling for a cheaper and easier alternative. They are snapping up existing rental or office buildings and converting them, wagering that the paucity of construction in recent years and an improving economy will combine to create a strong sellers' market.
“Now is an opportune time to do a conversion,” said Craig Nassi, chief executive of BCN Development, which is working on two condo conversions—one at Union Square and another in Brooklyn Heights. “Coming out of a three-year recession, inventory is drying up.”
BCN Development's projects are among at least a dozen condo conversions planned or in the works across Manhattan and Brooklyn. These projects include conversions of 93 Worth St., a 165,000-square-foot downtown Manhattan office building, and of 530 Park Ave., an Upper East Side rental-apartment building.
In an encouraging sign for sellers, the number of apartments listed for sale slipped in the first quarter to its lowest level since 2007, falling 5.3% from the year-earlier period, to 7,605, according to a report by Prudential Douglas Elliman and appraisal firm Miller Samuel Inc.
Some experts, however, warn that developers may be getting ahead of themselves. “Everyone is banking on the market improving,” said Jonathan Miller, chief executive of Miller Samuel.
Mr. Miller notes that the city's “shadow inventory” remains high. The term refers to the apartments that developers aren't actively marketing because they are part of projects halted during the downturn or are units in new developments and older conversions that have yet to sell out.
He also points to other danger signs: a high percentage of deals being done on an all-cash basis—which indicates that homebuyers are still having a hard time getting mortgages—plus stubbornly high unemployment and forecasts that profits on Wall Street could be crimped for years to come.
1,000 VISITORS A DAY
Even developer Mr. Fetner admits there is “still some uncertainty” in the market. Nonetheless, he's bullish on his property's prospects—and with good reason. So far, 500 people have signed up to preview the units at 1212 Fifth Avenue. Traffic to the project's website has run as high as 1,000 visitors a day.
Others are also getting upbeat.
“We feel that market conditions have stabilized, and we are looking for new product for conversion,” said Roberta Axelrod, director of condo sales and conversions for Time Equities Inc., a real estate firm that has completed a number of condo conversions in Manhattan.
Shlomi Reuveni, executive vice president at brokerage Brown Harrison Stevens Select, said he is working with developers on three new rental-to-condo conversion projects in midtown east and the Upper West Side. He expects units from those projects to hit the market in six months to a year.
“Development is a complicated business,” Mr. Reuveni said. “I strongly believe that if you build it correctly and offer a quality product, you will have a successful project in any given market.”
Similarly, BCN's Mr. Nassi is filing conversion plans for 9 E. 16th St. He expects to spend up to $3 million transforming the 15-unit, 30,000-square-foot rental building, which he bought for $17 million.
BCN expects to close on the purchase of 184 Joralemon St. in Brooklyn Heights next month. The plan is to spend up to $9.6 million turning the 12-story, 32,000-square-foot property into condos.
“It's a prestigious block, and there is a lot of financing out there for smart projects,” Mr. Nassi said.
Even some of those who got scorched during the downturn are starting new projects. Sources said Harry Macklowe, who once owned the GM Building and other midtown towers before losing them to his creditors, is in the process of scooping up a prized prewar rental building with 108 units at 737 Park Ave. to convert to condos. The price is expected to be $250 million to $255 million.
Just last week, a participant confirmed, Mr. Macklowe closed on the $70 million acquisition of a 34-unit rental building at 150 E. 72 St., which is also expected to become a condo property.
Not exactly the GM Building. But as they say in many boom-and-bust industries, you gotta restart somewhere.