There has been plenty of talk recently about the slowdown in filings for new condo construction recently, but not many articles talking about the cause and possible beneficial effects. While the media harps on the negative as usual, you may assume that the construction slowdown has everything to do with skittishness or uncertainty in regards to the economy. That is not the case, or at least not the whole case.
The primary reason is changes that the city has made to the 421-a tax abatement program which allows developers to pass along 10-25 year tax abatements to it's buyers in exchange for building affordable units elsewhere. Many politicians felt that the existing form of 421-a caused greater segregation, allowed rich to dominate areas where working class people once dominated (areas like Hell's Kitchen, for instance), and move the poor conveniently to some place outside of the center of Manhattan. I say politicians favored the change because I haven't heard many others seeking the change in the program which has created thousands upon thousands of affordable homes, while stimulating construction that provides thousand upon thousands of jobs. Leave it to the politicians to mess with a good thing. Well they did, and initially, substantial changes were slated to take effect January 1st of 2008. That date has since been moved out an additional 6 months since so many projects were trying to break ground, to beat the deadline, that there was a shortage of companies capable of providing concrete and foundation work (in order to qualify for the 421-a abatement a foundation is required to be in by deadline). In essence the deadline created a surge of project filings with the AG's office in 2006, and a commensurate decline in the first 9 months of 2007 (-31%).
There is a real silver lining to the story. The surge of inventory, much brought to market in pre-sale between 2006 and 2007 has been readily absorbed by eager buyers over the past 18 months. There is still more to come, but nothing indicates a glut. In fact, considering that new condos coming to market in the 2nd half of 2008 through 2009 are likely to be far less than the 18 months prior, inventory could decline further causing higher prices. Among those likely to benefit are condo owners that have bought in areas with 421-a abatements where they will no longer be allowed. If a condo owner has 8 or 9 years left on his tax abatement (which is transferable), and the newer condos in the area cannot offer a tax abatement, the condo owner with the abatement has a major leg up.
So, when you hear about condo construction slowing in Manhattan, don't think gloom and doom, think future limited supply.
Related Article: Developers Scale Back Future Plans (The Real Deal)