The Billyburg Bust

Driving around Williamsburg with David Maundrell, it was easy, if only for a moment, to forget about the recession. A 34-year-old with jet-black hair, a fuzzy goatee, and a thick Brooklyn accent, Maundrell is the president of, a brokerage he founded in 2002 that was among the first to specialize in the neighborhood’s high-end housing stock. The past few years have been some extraordinarily good ones for him. No other neighborhood in the city has been more visibly transformed by new residential construction than Williamsburg, where countless glass-and-steel structures have gone up on blocks long defined by abandoned factories, trash-strewn lots, modest row houses, and (more recently) residents of the nebulously creative postgraduate variety. Maundrell, who grew up in the area “when it was just a working-class no-man’s-land,” has been involved with the marketing of over 150 new buildings in Williamsburg—about half of them condos—and in the process has gone from working alone out of a dingy storefront to employing 45 brokers inside a sleek, loftlike headquarters that would not be out of place in late-nineties Silicon Alley. To celebrate the success of the past few years, Maundrell recently splurged on a silver Maserati Quattroporte, a shiny bullet of a car that retails in the ballpark of $120,000.

“This here is 100 percent the result of the Williamsburg condo boom,” Maundrell told me, chuckling a bit, as he revved the Maserati’s eight-cylinder, 405-horsepower engine on a recent sunny morning. As we began driving around, however, Maundrell’s nostalgia for the days when brokers like him “could practically sell out entire buildings before they even existed” darkened to a state of concern for the neighborhood. With sales across Brooklyn down a staggering 57 percent from a year ago, Williamsburg, with its high density of new construction, has taken on an ominous disposition. Walk down virtually any block and you’ll come across an amenity-laden building that sits nearly empty: relics of a moment in history that seems, increasingly, like a fever dream. Some developers with iffy financing have quietly been forced to go rental, others have lowered prices to the point where losses are inevitable, and a handful of projects, including two buildings Maundrell had been selling, have gone into foreclosure.

Most unsettling are the cases of the developers who seem to have vanished, leaving behind so many vacant lots and half-completed buildings—eighteen, to be precise, more than can be found in all of the Bronx—that large swaths of the neighborhood have come to resemble a city after an air raid. “I mean, look at that,” Maundrell said as we drove down a particularly grim block on North 9th Street that was lined on both sides by pits of mud where luxury buildings were supposed to be going up. “No signs of anyone actually building anywhere. It’s crazy. My lovely Williamsburg is filled with all these vacant sites everywhere you look.”

All over the city, overleveraged developers have seen their projects stymied by the recession, but the highly speculative nature of what’s happened in Williamsburg stands out as exceptionally dramatic and misguided—New York’s version of the collapsing exurban “boomburgs” in Florida and Arizona. Thanks to its proximity to Manhattan and trendy reputation, Williamsburg had seemed poised, by the end of the nineties, to shed its identity as a postindustrial moonscape and attract the sort of culturally current luxury buyers who were being priced out of the Manhattan market. But developers were constrained by the neighborhood’s zoning, which remained manufacturing-only.

This changed in May 2005, when the city passed a sweeping bill rezoning the area’s most desirable section—the frenetic cluster of blocks surrounding the Bedford Avenue subway station—for residential construction. While many in the neighborhood worried that the rezoning threatened to destroy Williamsburg’s raggedly chic charm, the Bloomberg administration heralded the policy as a way of “harnessing the private market” to create much-needed housing at both affordable and market rates. Developers, of course, were more than willing to be harnessed: A neighborhood that had been tantalizingly off-limits was now suddenly there for the taking.

Construction began at a phenomenal pace. In 2005 alone, there were 130 new projects in the works; since then, over a thousand proposals have been filed with the local community board—including a handful of buildings with more than 200 units apiece. As the frenzy ensued, few developers seemed to entertain the critical question of whether a neighborhood with mediocre schools and a median income of $25,892 (less than that of decidedly ungentrified Crown Heights) was fully prepared to lure hordes of young professionals willing to pay Manhattan prices. “Basically, dreams were being built upon dreams,” says Matthew Haines, the chairman of PropertyShark .com, a website founded in the neighborhood that aggregates real-estate data. “The first developers out the gate thought they might—might—be able to ask around $500 or $600 a square foot. Soon they had bid each other up to $1,000 a square foot. It was ridiculous, considering that in Manhattan you could still buy for $800, but the buyers were there, so no one was really worried about what that meant.”

Part of what makes the present situation so dire is that it is still in the early stages of unfolding. There are already about 400 new apartments on the market in Williamsburg, and additional condos are completing construction every month. According to a study Maundrell released last month, 2,818 new apartments will have hit the market by the end of this year, with another 2,766 projected by the end of 2010. On top of this, Fannie Mae, the country’s most dominant home-mortgage lender, recently implemented a policy requiring that buildings be 70 percent in contract before guaranteeing mortgages, thus delaying the moment when a developer can stop covering the taxes and common charges on a finished project. (While most other banks require 50 percent of a building to be in contract, Freddie Mac, the other chief lender, is expected to follow Fannie Mae’s lead later this month.)

“The thing is,” Maundrell told me as we drove past a sarcophagus of a building on Berry Street, “a year ago, those inventory numbers would have been great news. Buildings around here have been selling out so fast that there didn’t seem to be an end in sight.” He paused. “Now, with the new restrictions, the bottom line is that most of the new buildings will have to be turned into rentals. The problem is that, for a lot of these guys, that’s just not an option.”

Like many people in the real-estate industry I spoke to, Maundrell placed blame for this implosion on the city as much as the hubris of developers. The “inclusionary zoning” plan of 2005 was passed largely to foster the revival of the neighborhood’s waterfront, where developers would be allowed build as high as 40 stories—and receive huge tax breaks—so long as they dedicated a portion of their building to low-income housing. But in reality, most new construction ended up inland, where developers could receive the same benefits on smaller buildings without having to set aside affordable units.

Recognizing this design flaw, the city amended its tax-abatement program in June 2008 to require all new buildings, no matter how small, to devote 20 percent of their units to affordable housing. “That 20 percent? It’s a developer’s profits,” Maundrell said as we parked outside a vacant lot on North 10th Street. “What the city did is they forced all these guys to take down the existing building and drive the pile”—in other words, to rush construction far enough along that the development would not be subject to the new rules. “Most of them did it with their own money, or they took a hard-money loan at some outrageous interest rate. Well, that was just as the banks stopped lending. It was like Armageddon. You had the city looming, you had to take down your old building, and then—poof!—there was no money.” He sighed. “So here we are, everyone asking the same question: What the hell is going to happen?”

On October 16 last year, a party was held inside a storefront on North 6th Street to celebrate the launch of what once seemed like one of the neighborhood’s more promising and unique new projects: a development called the Steelworks Lofts, which, when completed, would offer 88 high-end units featuring exposed beams of salvaged wood, claw-foot bathtubs, and wide-plank oak floors, as well as a rooftop outfitted with private “cabanas,” an outdoor cinema, and a communal fire pit. The scene, at that point, had become a familiar one in Williamsburg, where a number of storefronts formerly occupied by eccentric boutiques had been converted into “sales galleries” that invited young professionals to buy apartments on spec in buildings that existed only as renderings on flat-screen monitors. Inside the Steelworks Lofts party, a stylish crowd streamed in and out over the course of a few hours, sipping cocktails provided by Woodford Reserve and Finlandia while admiring the model kitchen and bathroom that had been designed by AvroKO, the firm responsible for the Nolita restaurants Public and Double Crown.

Two of the guests, however, were having trouble fully embracing the festive mood. Greg Belew and David Berger, former classmates at Wharton who went on to found Fifth Square Partners, the boutique development firm behind the project, were quietly beginning to question the timing of their endeavor. A year and a half earlier, when they paid $26.5 million for the 130,000-square-foot former steel factory on North 4th Street—one of the biggest deals the neighborhood had seen—the Dow was soaring toward 14,000 points and Wall Street was handing out $33 billion in bonuses. Their faith in the endurance of this kind of economy was implicit in their somewhat unorthodox business model: As part of the deal they had struck with their lenders—a combination of private investors and the Anglo Irish Bank—they were required to “pre-sell” fifteen units before construction funds would be released. Then came the collapse of Lehman Brothers and the dismal events that followed; the day before the party, the Dow had plummeted 733 points—the second-largest single-day drop in history.

“I just feel like we got sucked into this giant tsunami that isn’t letting up anytime soon,” Belew told me recently when I visited him in his offices on lower Fifth Avenue. It had been a demoralizing nine months since the party; not surprisingly, Belew and Berger failed to get enough units into contract to begin construction, and by January they were issued an eviction notice at their sales office for not paying rent. (Today the space has been turned into a flea market on weekends.) While they had positioned their development as a sophisticated alternative to the cookie-cutter condos going up in the neighborhood, it now stands as a particularly vivid case study in the limited options—all bleak—that many Williamsburg developers are faced with. “People say to us all the time, ‘Why don’t you just turn it into cool, raw apartments, rent them out, and then convert it back into condos when the time is right?’ ” Belew said. “What they don’t understand is that it’s not nearly so simple.” Indeed, the savings in construction costs are less than one might think, and with banks currently dealing with their own pressures on the road to solvency, such loans are nearly impossible to secure. “It’s really crushing,” Belew added, “to work so hard and to spend so much time on something just to see it fall apart like this.”

Though he continues to hope that the economy will recover enough to build the Steelworks Lofts as originally conceived, it was clear as we spoke that Belew recognized the odds were slim. (He had trouble avoiding the past tense: “For the kitchens, we were going to have these great, industrial fixtures—excuse me, are going to have these great, industrial fixtures.”) At the moment, they’ve been able to renegotiate their loan with the Anglo Irish Bank, which, having imploded and then become nationalized over the last year, is in an even more precarious situation than their own. They are making their monthly payments with the help of private investors, who would prefer to sink more money into the project than see their entire investment vaporized by the bank. But this is a holding pattern that won’t last much longer. Most likely, Belew and Berger will try to take the building rental (if successful, this could bring in around $3 million a year, which would cover their monthly loan payments), but they are considering other options, too.

“Lately, we’ve been thinking of turning part of it into a kind of youth hostel,” Belew admitted.

For a moment, I wasn’t sure I had heard him correctly. “A hostel?” I asked.

“Yeah,” Belew said, shaking his head. “A hostel.”

A few days after my drive around the neighborhood with David Maundrell, I spent a warm Sunday afternoon meandering through a handful of open houses. My first stop was a building called the Rialto, on North 5th Street, a choice block near the Bedford Avenue subway station. “Conceived to create special homes for design-conscious urbanites,” according to its sales brochure, the building in many ways epitomizes the style favored by developers in the area: slick, modernist, with “soaring” ceilings and “European-style” kitchens featuring teak cabinetry and CaesarStone counters. The Rialto has been on the market since May of last year, but only seventeen of its 31 units have sold. Hoping to entice new buyers, the developers have begun to offer incentives that would have been unthinkable to those who purchased fourteen months ago. In April, for instance, anyone who bought an apartment was treated to an all-expense-paid trip to Venice—to walk the actual Rialto Bridge! Alas, there were no takers.

It says something about the current state of the market that Ted and Marianne Hovivian, the husband-and-wife team behind the project, are in a far better position than many in the neighborhood. With just over half the building in contract, the Hovivians have made it past one major hurdle—the fact that most banks will not release closing funds until at least 50 percent of a building’s units are in contract. (Most sales were made before Fannie Mae upped its threshold to 70 percent.) And because they’ve owned the land since 1983—it was the site of their furniture-manufacturing company, Rialto Furniture—they can afford to be patient. “Thank God for that,” Marianne told me when I called her after visiting the property. “If we’d paid the high prices that some people around here paid, we’d be in a much worse position.”

The idea to convert the property had been on her and her husband’s minds since the late nineties, when they got an unexpected call from someone with Starwood Hotels. “That sparked our awareness that the neighborhood was really beginning to change,” Marianne said. Though she still felt that she and her husband made the right decision, she conceded that “we’re not as happy as we’d like to be.” The Hovivians had figured the building would sell out quickly, in as little as six months, allowing them to retire in style. “There were many grand plans of what might be when we first got started,” Marianne told me, laughing ruefully. “But now, obviously, those are all on hold.”

I next headed two blocks west, to check in on a building called NV, a reference both to its North 5th Street address and, ostensibly, the idea that anyone who moves in will become the “envy” of all their friends. With its aquamarine exterior of glass and “brushed jade steel,” the building is one of the most conspicuous new projects in the neighborhood, resembling something that, after failing to sell in Miami’s faltering market, was airlifted and plunked down into Brooklyn. Like the Rialto, the building is finished, but on the day I visited, only twelve of 40 units were in contract. Having paid $13 million for the land alone, Michael Morton, the president of the Morton Group of Del Rey Beach, Florida, was not in a position to hold out for the high bidders, as he was paying the taxes and common charges for the entire building. In the lobby window, a banner informed interested shoppers that the Morton Group was willing to pay 100 percent of closing costs, evidence that a contingency plan was in effect. “Is this what I expected? Of course not,” Morton told me a few days later. “You go into a project like this expecting that the sellout would be very quick and that you’d be able to keep raising prices as the units sold.” Instead, Morton has been forced to drop the prices considerably, which turned out to be an effective (if less rewarding) move. Since I visited, the building is now 75 percent sold. “We feel as good as we can right now,” Morton said. “We’re still in the black, that’s the good news.”

From NV, I made my way down to the waterfront, where the neighborhood’s two riskiest and most ambitious projects, the series of high-rises known as Northside Piers and the Edge, will eventually introduce a combined total of over a thousand units to the market. It is these, more than any other development, that represent the core philosophy behind the Bloomberg administration’s 2005 rezoning: that the city could create affordable housing and revitalize the waterfront without spending public money. Financed by industry stalwarts—Toll Brothers at Northside Piers and Douglaston Development at the Edge—the two developments began construction at a time when national developers were eyeing substantial parcels of the Williamsburg and Greenpoint waterfront, and many observers expected this slice of northern Brooklyn to evolve into a sibling of Battery Park City.

“Basically, dreams were being built upon dreams. It was ridiculous, but the buyers were there.”

A year before her death, the urban activist Jane Jacobs, then 88, wrote a remarkably prescient letter urging Mayor Bloomberg to scuttle his plans for the Williamsburg waterfront. “Even the presumed beneficiaries of this misuse of governmental powers, the developers and financiers of luxury towers, may not benefit,” she wrote. “Misused environments are not good long-term economic bets.” Four years later, Jacobs’s prophecy has been realized: Developer interest along the waterfront has receded, and given the current state of sales at both Northside and the Edge, it’s unlikely that similar buildings will be going up anytime soon.

The Edge—which, in addition to offering 360 “moderate-income” rentals, includes two towers of 570 condos, plus all the usual amenities—is expected to be completed by the end of year; right now, just over 20 percent of the units have been sold. Still, Douglaston Development has yet to lower prices, which may explain why the glossy sales office was among the most desolate I visited. “Look, we’re in a fortunate situation,” Jeffrey Levine, Douglaston’s chairman, assured me. “Our financing is secured, so we’re in a position to weather the storm. If we had a completed building, the story would likely be different. My belief is that the economy is going to rebound, but if the market doesn’t improve, of course we’ll take steps to improve our product. For now, our attitude is, let’s keep building and see what happens.”

It is hard to imagine the Edge successfully selling at its current prices (about $950 a square foot) given what’s happening next door at Northside Piers. That project was designed to include three towers around 30 stories each, one of which is complete, another almost finished. When Tower One hit the market in 2007, sales were initially brisk, with units going for an average of $900 a square foot. But only 70 percent of that building had sold by the time I visited, and with sales already begun on Tower Two, Toll Brothers had announced the most dramatic price cuts the neighborhood has seen so far, with some units in the first tower being reduced by as much as 36 percent from their listing price.

Perhaps as a result, the sales office was a bustling environment. “We talked about it for a while,” David Von Spreckelsen of Toll Brothers told me, referring to the decision to slash prices. “The bottom line is that we’ve been on the market for two years, and we expected to be sold out by now so we could focus on selling the second tower. After doing some individual deals at reduced prices, we figured we should just bite the bullet and do a price amendment with the attorney general’s office. People can look at it as a failing building or desperation, but it was the only thing that made sense.”

More recently, Toll Brothers announced a summer special, offering to cover mortgage payments, common charges, and real-estate taxes for twelve months after closing— essentially allowing residents to live free for a year. Tower One’s first buyers (the $900-a-square-foot ones) are now sharing elevators with neighbors who have paid hundreds of thousands of dollars less for identical units. Meanwhile, no one talks much about Tower Three.

Northside’s aggressive sales tactics have helped move inventory, but they have also had huge ripple effects on the market throughout the neighborhood, putting pressure on smaller developers to make similar concessions. Unfortunately, many are not in the position to compromise so radically, either because their lending banks won’t allow it or, in the case of buildings in the last stage of construction, developers don’t want to upset those already in contract.

Later that afternoon, I made my way to a building called Warehouse 11, on the corner of Roebling and North 11th Streets. Marketed by David Maundrell, the building has 120 total units (plus the requisite yoga center, playroom, parking garage, 24-hour concierge, gym, and communal sundeck). While the model apartment seemed an appealing enough place to live, there was something generally off about the building as a whole: Despite having been on the market since early 2008, only 30 percent of the units were in contract, and it was clear that construction wasn’t complete. The list prices, too, were significantly higher than comparable products, as if the developer had not been informed about the current state of the economy. A few weeks later, I noticed the front doors of the lobby had been padlocked shut. The process of foreclosure had begun.

I called Maundrell to ask what, exactly, had gone wrong. He explained that the developer had found himself caught up in a number of unfortunate tangles. “When we opened the building, the first units in contract were priced at $760 a square foot,” Maundrell explained. “Realistically, if you want to sell right now, I think you’ve got to be at somewhere around $650. But since we sold 30 percent at the initial rate, lowering the prices across the board would have been a huge risk: Maybe we’d get new buyers, but we’d also likely lose the ones we already had. It’s a tough call.” Massey Knakal, the brokerage firm handling the sale of the building, looked into converting it into a rental and projected that it could bring in $4.1 million annually, which, with monthly returns of $340,000, would not be nearly enough for the developer to pay off his current loans—$50 million from Capital One and another $12 million from private equity.

In a situation like this, Capital One knows that going into foreclosure will significantly devalue the property and likely involve years of legal wrangling. But foreclosure also offers a lender two options, each of which would generate at least some returns. They could sell the condos in a fire sale—at $500 a square foot, for instance, the revenues would still be more than $50 million—or simply arrange the sale of the building at a discount, which is the route Capital One is taking. But even this isn’t pretty. According to a number of people familiar with the situation, bids coming in are closer to $30 million than the $50 million owed.

In the world of real estate, one developer’s misfortune tends to be another’s opportunity. Among those closely following the status of buildings like Warehouse 11 is Jamie Wiseman, a laid-back 33-year-old who is not what most people think of when they think about real-estate developers. A self-described “recovering lawyer” who favors stenciled T-shirts, Wiseman lives with a roommate in a small apartment in Bushwick, where over the past few years he has made a modest living buying up nondescript buildings and turning them into rentals and condos.

In November 2007, he made his first foray into Williamsburg, when, along with his business partner, Jacob Sacks, he purchased an abandoned factory at 44 Berry Street for $12.7 million. During the height of the market, the building would have been far out of his price range; in fact, it was in the process of being sold for $15 million to a California-based conglomerate called Atherton-Newport Investments, which planned a luxury-condo conversion. That deal fell apart last January, when Atherton filed for bankruptcy.

“They’d already put down a nonrefundable deposit of a million dollars, so the owner was willing to cut us a deal,” Wiseman told me on a recent afternoon, as we stood outside the building along with the project’s development manager, a 25-year-old named Ari Heckman. “The biggest difference between us and most of the developers out there is we’re not building apartments based on the fantasy that Williamsburg is where bankers want to live. Basically, what we’re doing is creating places for the people who live here now.”

As Wiseman and Heckman gave me a tour of the building, which was nearly complete, it became immediately clear what they meant. Unlike most new apartments in the area, theirs were more reminiscent of the semi-legal artists’ lofts that have been all but eradicated by the influx of development: big, airy spaces designed to be shared by self-consciously creative types who don’t mind sleeping in cramped mezzanines. Rents in the building average $2,500 and are meant to be split two or three ways.

“Will I get rich off this building? Not at all,” Wiseman said as he showed me the apartment he’ll be renting to himself. “I’ll probably need a roommate to afford this.” Still, Wiseman explained that although he won’t see the immediate returns that condo developers aim for, he is expecting slow, consistent revenue from a product that can expand and contract as the market dictates. The building is poised to generate about $2 million a year in revenues, which, after the debt is serviced and operating expenses are paid, comes out to around half a million in cash. Most of that will go to paying off private investors, with Wiseman and his partner receiving a roughly 3 percent management fee. They hope to refinance down the line, which will free up cash for other projects.

On the Fourth of July, Wiseman threw a party for the future residents of 44 Berry on the building’s expansive roof deck. It was a decidedly different affair than the launch of the Steelworks Lofts back in October: keg beer instead of top-shelf liquor, twentysomethings decked out in thrift-store attire as opposed to thirtysomethings in designer clothing, and the general mood seemed less like a stylized appropriation of the neighborhood’s identity than something approximating the neighborhood itself. Less than a year ago, the notion of such a scrappy scene unfolding in a brand-new building would have been unthinkable. But in time, as more developers fail to find buyers and default on their loans, Williamsburg is likely to see more projects like 44 Berry begin to take shape: new endeavors that, somewhat ironically, will keep the neighborhood feeling much like its old self. As everyone gathered to watch the fireworks dazzle above the Manhattan skyline, it was easy to imagine a future in which even Williamsburg’s swankier buildings have become home to the very people they once threatened to displace.

The Billyburg Bust