Sales of condominiums are starting to match co-ops. What could that mean for New Yorkers?

For most of the last century, Manhattan was known as the Land of the Co-op. Where new condominiums rose and re-crafted the landscape in other major metropolitan areas, New York remained a place unique in all the country for the sheer numbers of properties where owners bought not the real tangible property, but hares in a corporation that jointly owned the whole building. As recently as the 1980s, co-ops represented about 85 percent of the sales market.

But now the condominium is eroding the dominance of the co-op.

Today, few co-ops come to the market, in contrast to the ongoing blaze of new condo developments and conversions. And the trend is only gaining momentum. Actual sales activity over the last three quarters shows the ratio of co-op sales to condo sales was 1 to 1, according to Jonathan Miller, president of Miller Samuel, Inc., a real estate appraisal and consulting firm. In other words, for the first time in New York history, the number of condos sold equaled co-op sales.

Have we entered the age of the condo? Or will the seemingly nonstop announcements of new condo developments and conversions lead to a glut of condos that portends a drop in prices?

Overall, Miller predicted that the condo segment of the market will continue to grow because condos are more marketable than coops. Condo buyers own their individual condominium units outright, unlike coop buyers who own shares in the cooperative association. Prospective coop buyers face personal and financial scrutiny by a coop board before they can purchase coop shares, a process that discourages foreign buyers and real estate investors. Miller also said that developers charge a 9 to 10 percent premium for condominiums because they recognize condos’ advantages for buyers.

Demand for Manhattan residences is global, noted Michael Slattery, senior vice president of research at the Real Estate Board of New York, also known as REBNY. The Manhattan real estate market serves not only the resident population, but also provides second homes and an investment option for both national and international buyers, attracted by the health of the city’s economy.

“The best measure shows the city’s economy continues to be quite strong,” said Rae Rosen, regional economist for the Federal Reserve Bank of New York. In January, the city’s annual economic growth rate was 6 percent, measured by the coincident economic indicator, which summarizes income growth, the performance of the manufacturing sector and overall employment. The city’s unemployment rate is 4.9 percent, a record low, and Wall Street had another excellent year, Rosen said.

“We’ve seen a dramatic increase in activity,” said Gregory Heym, chief economist at Halstead Property, a New York residential real estate broker. “Condo inventory is declining from its 2006 levels.” Spring is also the usual peak buying season, not only because the weather is better, but also because the Manhattan real estate market is heavily affected by Wall Street bonuses, which are paid in January.

“The average sales price of condos in the last quarter of 2006 period increased 7 ½ percent over the last quarter in 2005,” Miller said. The average sale price of a Manhattan condo in the fourth quarter of 2006 was just under $1.5 million at close to $1,200 per square foot. Miller expects single-digit percentage increases to continue over the next three to four years, in contrast to the housing boom period at the start of the decade when condo price increases reached 20 percent each year.

During the period from 2001 until mid-2005, surging demand for condos created rapid price appreciation, according to Miller. But conditions changed when the Federal Reserve began to raise interest rates in 2004. Demand for housing eased, while new condo developments continued to add supply to the Manhattan market. Although demand remained fairly strong from 2004 until 2006, the completion of new condo developments kept price increases in check, and Miller expects this trend to continue.

Michael Smith, chief executive officer of StreetEasy.com, an online real estate listing database, said that the median listing price of condos rose in most Manhattan neighborhoods in early 2007 below 96th St. with the exception of the Upper East Side where prices remained stable.

Smith watches the listing discount – the difference between the asking price and the selling price –to track the real estate market trends. Although the listing discount grew steadily most of last year, it declined slightly over the past four months – another indicator that there is not an excess of condos for sale at present.

Market trends in condo sales tracked by the real estate publisher Yale Robbins reported 597 condos sold in February 2007 for a total of $841 million compared to 427 condos in February 2006 for $490 million. Twenty-eight percent of total condo sales were concentrated in eight new developments -- 30 West. St. (32), 325 Fifth Ave. (31), 225 Fifth Ave. (22), 15 Broad St. (20), 310 West 52nd St. (17), 20 West St. (17), 350 West 42nd St. (16), and 30 East 37th St. (15).

There’s no glut,” Slattery of REBNY said. “Every quarterly report over the past 18 months has shown improvement in the average and median prices for condos.”

Recently announced new condo developments or conversions that will add a significant number of new units to the market in the future include the Visionaire at 70 Little West St., (251condos), Gramercy at 340 East 23rd St. (207 condos), Platinum at 247 West 46th St. (235 condos), W Hotel at 123 Washington St. (184 condos), the Setai at 40 Broad St. (167 condos) and 650 Fifth Ave. (67 condos).

Two factors have the potential to negatively affect the generally optimistic predictions about future condo sales – changes in the city’s real estate tax code and a downturn on Wall Street.

Mayor Michael R. Bloomberg signed legislation in late 2006 that will change the 421-a property tax exemption program created in 1971 to stimulate New York City housing development and to encourage the construction of affordable housing. The change will take effect at the end of 2007, if the New York State Legislature approves it.

Originally, the 421-a program gave developers a tax exemption on the difference between the taxable value of a lot and the value added by a qualifying development project. A development project qualified for the reduction in real estate taxes if 20 percent of the building was reserved for affordable housing. However, for Manhattan projects below 96th St., developers were able to purchase negotiable certificates to relocate the required affordable housing units to the outer boroughs. Mayor Bloomberg’s new legislation will no longer give developers the option to transfer the affordable housing units to other locations, if they apply for the 421-a tax abatement.

“The proposed changes in 421-a will have a significant dampening effect on new development,” said Slattery at REBNY. He said that developers would evaluate projects at full cost (excluding affordable housing units), and the consequence would be that fewer condo projects would be feasible. Smith at StreetEasy.com expressed doubt about Slattery’s conclusion. Smith believes that the profitability of most condo development projects for developers is large enough to absorb the potential change in the city’s real estate tax structure.

More fundamentally, the city’s economy and the health of its real estate market are closely tied to the performance of its financial sector, which is inherently cyclical. Last year, Wall Street’s profits were $16.8 billion (a record year, exceeded only by profits in excess of $20 billion in 2000). Bonuses, which have climbed every year since 2002, reached a record level of close to $24 billion in 2006, according to the estimates of the state comptroller’s office. New York City’s current budget is based on the assumptions that Wall Street profitability will decline to $14.3 billion in 2007 and to $10.7 billion in 2008.

If Wall Street does suffer a downturn in the latter half of the decade, a glut of condos could occur in the future, given the current pace of development and conversions. But the fundamental transformation of the Manhattan real estate market toward condos and away from coops appears likely to continue.