Buried within a very interesting WSJ article about a condo investor’s recent woes are some fairly alarming statistics about condo construction loan default and delinquency rates. Delinquencies on condo construction loans jumped to 32% in the first quarter up from 25% the previous quarter. Defaults on nonresidential construction loans rose to 8.9% in the first quarter, from 6.6% in the previous period. Both statistics are courtesy of Foresight Analytics.
The WSJ article details the travails of Kent Swig, the scion of a San Francisco real-estate family who opted to get into the condo development frenzy in Manhattan in 2005. Although real estate investors claim “location location location!” is the key to successful investing, I would argue the new refrain might be “timing timing timing!” or alternatively “don’t buy at the peak of an obvious bubble.” In any event Mr. Swig was working on four condo projects, all of which happened to come on line in the past year. He was fortunate enough to sell one of the condo-conversion projects after one of the lenders launched foreclosure proceedings. Recently, Lehman Brothers, you remember the bankrupt investment bank that wasn’t mismarking any of its real estate positions in the slightest, foreclosed on Mr. Swig’s 25 Broad Street and filed separately to foreclose on 45 Broad, both projects near the New York Stock Exchange. Meanwhile, closings of sales at Sheffield57, a 597 unit condo project which Mr. Swig paid $418 million for in 2005, a record for an apartment building, have stopped. Contractors and their mothers have slapped liens on the building for unpaid bills. The mezzanine lenders, who hold $255 million in debt, get to decide whether to foreclose.
Mr. Swig’s troubles are representative of what is going on in Manhattan as thousands of new units keep piling up with nary a buyer in sight. In Manhattan, vacant inventory stands at record levels, and 4,500 new condo units in 44 buildings are expected to come online this year, according to Reis Inc. I am currently spending a few months in Manhattan, and I can attest to the fact that there is an unbelievable amount of property for sale at preposterous prices. I’ll share some interesting anecdotal data on the Manhattan property market with my readers soon. Make no mistake, the new construction deluge of vacant units can only end with large scale bulk sales at steep discounts. Get your checkbooks ready.