If real estate is like a roller coaster, then at least one veteran developer thinks New York’s residential investors are sitting in little cars about to start hurtling forward while everyone screams.
“There’s just this crazy, over-zealous feel in the market that’s getting scary,” Ken Horn, president of Alchemy Properties, told the members of B’nai B’rith at their luncheon meeting last week.
Horn’s metaphor of choice was not an amusement park ride but a pendulum: a pendulum that has swung very fast.
To demonstrate, the developer — who hopes to start sales at the new condos on the renovated upper floors of the Woolworth Building next March — reviewed Alchemy’s projects since 2008. Those projects include some remarkable post-recession success stories.
At the Isis and Griffin Court, condo developments on the Upper East Side and in Midtown West, respectively, Alchemy has sold out the residential units at prices that far exceeded the initial underwriting just two years ago.
In the case of Griffin Court, on West 54th Street, apartments that were expected to sell for $1,000 psf are selling for an average of $2,000 psf.
But Horn bought the sites and secured the financing at the bottom of the market, at a time when it was a hard sell to get lenders and investors behind any kind of real estate development.
“We never could have gotten either of those deals if we had taken into account that prices were going to increase,” Horn said.
According to Horn, strong relationships with banks and investors and a good reputation have allowed his firm to secure funding for projects even in the tough times.
In 2008, that meant HSBC was willing to give end loans to buyers in Alchemy’s Columbus Circle building, Hudson Hill, which started sales at the time of the collapse of Lehman Brothers. In the case of that development, Horn didn’t hit the pendulum swing at quite the optimal time, and sold the units at break-even prices just to convince buyers the building was viable.
When he started buying development sites again in 2010 and 2011, Horn said, those relationships made it possible to start construction at a time when the number of building permits issued in the city had dropped markedly. “The equity partners and the banks don’t want to be the first guys in the water,” he said.
But the pendulum has swung wide in recent years, and there is now financing available to build luxury apartments with the expectation that they will yield the kind of prices Alchemy is seeing in the units it is selling today.
“I think the scary part of where we are in the market is the market is very, very good,” Horn said.
Residential inventory is low and apartments and development land are both selling at a premium. At 35 West 15 Street, another site where Horn says he used relationships to start construction at a low point in the market, the building is three weeks away from topping out and half sold, he said, with an average price of $2,500 psf.
But Horn’s not sure it will last.
“Are these numbers real? Is there a never-ending supply of these wealthy people who are going to be paying three, four or five thousand dollars a foot?” He asked.
To try to get at an answer, Horn shared that 12 of the 32 buyers at the Isis, on 77th Street, were from outside the U.S. One $6 million, four-bedroom apartment sold to a family who plans to use it twice a year on holidays. “Can a developer rely on that as a market?” Horn asked. “Some people are.”
Alchemy is still out in the market buying, Horn said, but he is focused on “B locations” or assets with some form of distress, such as an ownership of feuding relatives.
He warned that the market may be suffering from “inflated prices and inflated expectations,” and defended his strategy from accusation of underselling the market.
Conservative underwriting, he said, is part of Alchemy’s magic formula.
“Our strategy has always been that if we can lock and load at a rate of return that’s going to be acceptable and take that risk off the table, that’s what we’re going to do,” he said.
