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September 13, 2006 | Source: Crains NY

Downturn hitting affordable housing units

Program designed to coax developers to build cheaper homes endangered

By Julie Satow
Published on September 11, 2006

The slowdown in the city's housing market is threatening to deal a significant blow to Mayor Michael Bloomberg's ambitious plan to create 165,000 units of affordable housing over the next seven years.

Many of those units are to be built under a newly expanded city program that allows developers to create more market-rate condos than zoning laws otherwise permit--if they agree to construct new affordable housing nearby. But with demand for condos ebbing, developers are having second thoughts about adding to the supply.

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If the housing market continues to soften, says David Von Spreckelsen, a vice president at luxury-home builder Toll Brothers, "we may see some projects get canceled and no affordable housing associated with those projects getting built."

Bad omens

The danger signs are multiplying. Last month, the Census Bureau released numbers showing that for the first time in a decade there has been a drop in the number of building permits the city has issued for residential construction. Sales of condos and co-ops in the second quarter plunged to a five-year low of 1,934, while unsold units skyrocketed 54% to 7,640, the highest figure since 1994, according to appraisal firm Miller Samuel.

For the city's so-called inclusionary zoning program, the timing could not be worse. While such programs have been around since the late 1980s, only in the past two years has the Bloomberg administration expanded their reach to include ripe-for-development neighborhoods from West Chelsea in Manhattan to Greenpoint and Williamsburg in Brooklyn. Just last month, the city added a big swath of Maspeth and Woodside in Queens to that mix. At the same time, the administration has sweetened the deal with tax breaks and other incentives. All told, the city expects the program to generate nearly 6,000 affordable units by 2013.

Only now is the program beginning to bear fruit. Less than a year ago, ground was broken in Williamsburg, Brooklyn, for the first units to be built under the new rules. In that project, Horsham, Pa.-based Toll Brothers, which just entered the city's housing market two years ago, partnered with Brooklyn-based L&M Equity. The partners got started in October on Northside Piers, a two-phase project on the waterfront. Phase one includes 180 market-rate condos and 113 affordable units. The second phase would create an additional 250 market-rate condos and is scheduled to break ground in the spring.

"It is possible that we could delay the second phase of our development," says Ron Moelis, a principal at L&M Equity.

While that second phase does not involve any affordable units, the implications are clear. Developers that can no longer make money building condos are even less likely to build affordable units. The bottom line, says Charles Brass, former president of the city's Housing Development Corp. and an executive vice president with the Atlantic Development Group, is that "if you create a formula based on conditions when a market is at its height, if the market does decline, that formula may no longer work."

Too good to pass up

City officials insist that it is far too early to worry. Despite the recent falloff, they note that the number of building permits is still running at close to an all-time high. Officials also note that the current package of tax breaks and other incentives is so appealing that any new project that goes ahead in the next few years will almost certainly include affordable units.

Shaun Donovan, commissioner of the city's Housing Preservation and Development agency, says that there are a number of deals in the works to create more affordable housing under the inclusionary program. The city is in discussions with Park Tower Group to build more than 400 units on the Greenpoint waterfront as part of a 21-acre development site.

"We recently had an application for another project by Palin Industries that would create about 140 affordable units, and we have at least five different projects in the upland areas," says Mr. Donovan.

The caveat is that none of those projects are finalized. Some developers are already pushing the city to reduce the number of required affordable units to accommodate the weaker housing market.

If worse comes to worse, however, and builders do balk, Mr. Donovan says that the city could always lean more heavily on other devices. He points to the brand-new, $200 million fund the city has created to buy land to build its own affordable housing. In a downturn, land prices and construction costs drop, so the fund's money can be stretched further to build even more affordable units, he says.

Comments? JSatow@crain.com

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