Drop in Building Permits Seen As Sign of Real Estate Turmoil

Real estate brokers and developers have spent the last several months arguing that New York City's real estate market is immune to the turmoil affecting the rest of the country. New data, however, show that developers are scaling back the number of new buildings they are planning. The third quarter saw the smallest number of new building permits in more than three years, according to the Department of Buildings. While Manhattan's numbers are strong, posting the most new building permits for the quarter since 2001, there has been a steep decline in the other boroughs. A combination of tightened lending standards, fewer building sites, and a pending change to the 421-a tax abatement is likely responsible for the number of new projects declining, experts say.

There were 1,187 permits filed in the third quarter. The last time numbers were this poor was in the first quarter of 2004, when 1,144 permits were recorded. And the last time a third quarter posted similar numbers was in 2001, when 1,054 permits were filed.

"That is a meaningful drop," the executive vice president of Radar Logic, Jonathan Miller said.

While Manhattan's numbers remained robust, with 53 new building permits, the highest figure since the second quarter of 2001, the other boroughs posted poor results. Brooklyn had 280 permits in the third quarter, second only to the first quarter of 2002, when 180 new building permits were recorded. Queens was also a poor performer, with 485 permits this quarter, comparable to the first quarter of 2005, when 480 permits were recorded.

"The marginal areas have problems first," the managing director for developments at Prudential Douglas Elliman, Andrew Gerringer, said. "There's a lot of confluencing of events right now that is making this market very interesting."

The credit markets are stymieing development, with builders having to put down as much as 30% of the cost of a new building instead of the 10% to 15% that was possible before the subprime market collapse, a partner at Massey Knakal, James Nelson, said.

"The days when it took 10% equity to finance a $100 million project are over," a senior director at Eastern Consolidated, Alan Miller, said. "It's definitely a changed world."

Mr. Miller cited the case of a Brooklyn developer who was ready to start a project a few months ago but now is seeking to sell the site because he cannot afford to finance the project.

"In some cases, people are walking away from deposits because deals are not financeable," developer Michael Pomeranc of Thompson Hotels said. Smaller developers have been coming to him "by the dozen" for help with financing, he said.

Developers are not the only ones feeling the squeeze. Architects and contractors are beginning to charge lower rates for their services.

"There is a trickle-down effect for everyone," Mr. Pomeranc said. "We are regrouping ourselves for the new realities."

In the third quarter of 2006, there were 1,605 new building permits, driven in part by a rush to build projects before a tax abatement, known as 421-a, disappears.

"They were racing last year because no one knew what was going to happen," the executive director of development marketing at Halstead, Stephen Kliegerman, said.

But while a lack of new development would be troubling for the recent building boom in the city, it could lead to less inventory and eventually higher apartment prices, Mr. Kliegerman said.