With a dearth of new construction, developers in Manhattan have shifted their tactics. 2011 has been the year of the condo conversion, and this wave of conversions seems likely to continue as long as financing for large projects remains difficult. In lieu of working with banks to loan them the large amounts of money required for new condo construction, developers are electing to simply convert rental buildings or office spaces instead. So far the tactic is working, although this strategy is heavily dependent upon the continuation of a healthy New York real estate market. If global financial insecurity or the recent woes of Wall Street begin to turn the current seller’s market into a buyer’s market, these converted condos might prove to be unwise investments.
Developers have completed over a dozen new Manhattan condo conversion projects so far this year, and many more are on the way. Craig Nassi, chief executive of BCN Development, told Crain’s New York that, “Now is an opportune time to do a conversion. Coming out of a 3 year recession, inventory is drying up.” Indeed, the recession curtailed new construction severely, and the subsequent paucity of inventory has undoubtedly helped create the conditions for a seller’s market. So rather than sit idle, BCN took advantage of these favorable conditions and bought up 530 Park Avenue and 93 Worth Street in hopes that buyers would jump on these properties. They have good reason to be hopeful: 1212 Fifth Ave, a former rental building that once housed staff members of Mount Sinai Hospital, had over 500 people sign up to preview the property once it was converted.
Even if the economy keeps heading south and the real estate market in New York goes down with it (at least a bit), conversions have two factors in their favor that are not likely to change: cheaper cost and easier approval. While large projects are notoriously difficult to get approval for from community boards - just look at Riverside Center and the Apthorp on the Upper West Side, for example - conversions are a walk in the park by comparison. After all, nothing new has to be built, so the greatest resistance usually comes from existing tenants that are unwilling to be bought out. The cost of purchasing a rental or former office building in Manhattan is also minimal relative to new construction, so developers are much more likely to get faster returns on their investments. We will see whether or not the market grows as much as projected right now, but even if it falls short of expectations, 2011 will still be the year that developers began valuing conversion over construction.