New York City's housing market has been swamped with a historic mismatch involving a flood of luxury inventory and a shortage of buyers.
Manhattan is facing one of the worst slumps since 2011, forcing developers to take out low-interest inventory loans, collateralized by unsold condos to stay afloat.
These loans are lifelines for struggling developers and a boom for companies such as Silverstein Properties Inc., who is expected to double its inventory loan book to more than $1 billion in 2020, reported Bloomberg.
Silverstein's inventory loan book is growing at an exponential rate as a housing bust across Manhattan gains momentum.
Michael May, CEO of Silverstein, said inventory loan growth among developers is the fastest in Gramercy, Tribeca, and Midtown East. These areas have also been hit hard in the housing slump.
"You're seeing some projects that are completed that have just had very, very slow sales," May said. "Given the amount of condo developers seeking debt, if we open the floodgates, we could probably load $1 billion of that product on within the next 60 days."
Developers have been pulling inventory loans to avoid slashing listing prices that would spark a firesale and lead to further downside in the housing market.
"Our goal is not to lend to projects that fail: We're in a position where if a project has a problem, we believe that we could execute the business plan, and we could finish the construction," May said. "We think that there's still demand for units that are priced well, but in many cases, the owners of these projects have not adjusted their expectations to where the price would sell in the market yet."
Silverstein has completed $500 million in financing year-to-date. Inventory loans are expected to be a large portion of the firm's book in 2020, as there's no sign the Manhattan real estate market will see an upswing then, and developers will need cheap financing to weather the storm.
Can kicking of condo loans has been institutionalized in the form of "inventory loans"— Donut Shorts (@DonutShorts) November 27, 2019
The Fed continues to see no signs of excess, BTWhttps://t.co/m5YSCsrtmF
As a result, the rise of zombie developers across Manhattan is inevitable. Thank You Federal Reserve!