Lack Of Building In Recent Years Brings Back Memories Of Housing Crisis

Developers on the South Fork have been busy building in recent years. As a result, the number of homes on the high end swelled, and space available for large construction projects has become limited.

Inventory in the luxury market—the iconic Hamptons home—is the largest it’s been in the past decade: about 489 properties, compared to previous quarters in the mid-300s. Overall listing inventory is the largest it has ever been: 2,197.

According to real estate agents, sales are down, and many of these luxurious estates sit empty, with “For Sale” signs out front.

The pace at which housing stock piles up may now be poised to slow, as recent increases in interest rates have made new construction costlier for builders.

Even though the Hamptons is a tourist destination for the Wall Street rich and Hollywood famous, the building industry is what pays the bills and runs the show. Now, market watchers are concerned that the pinch that developers are feeling will become everyone else’s problem, too.

“This adds credence to the argument that the Hamptons housing and building market is, in fact, slowing,” said Jonathan Miller, a real estate appraiser and consultant.

According to documents released to The Press under the Freedom of Information Law, the number of permits that developers submitted—for building, renovations, demolitions, electrical work, coastline erosion mitigation and renewals, to name a few—ticked up by just 2 percent in 2018 across the South Fork compared to 2017, a much slower growth rate than the two years prior.

In villages specifically, however, 2018’s performance was a welcome relief for most, after 2017 posted declines. In 2017, some villages saw at least 10 percent fewer permits submitted year-over-year. Mr. Miller said the double-digit reduction brought back memories of the housing crisis in 2008.

Southampton Village saw the steepest decline in 2017, at 21 percent; then North Haven Village and Sagaponack Village, at 15 and 14 percent, respectively. East Hampton Town issued 12 percent fewer. Westhampton Beach Village, West Hampton Dunes Village and Quogue Village had about 7 percent fewer permits issued.

Last year, signs of building narrowly bounced back in most villages, with West Hampton Dunes and Westhampton Beach being the exceptions. Building in Southampton Town took a dip, with 3 percent fewer permits; East Hampton Town dipped 1 percent.

The inconsistency year-over-year is an indication to Mr. Miller that builders are wary of doing business on the South Fork right now.

Not that they’d ever admit to it in the competitive Hamptons market, said Matthew Breitenbach, a licensed associate real estate broker at Compass in Southampton—but he knows many developers are feeling the pinch of interest rate increases. Builders are forced to slow down construction and don’t propose new projects due to the limited amount of cash they can borrow, which “means less inventory to sell.”

“A lot of the buyers can buy in cash if they need to at this kind of level in the Hamptons, or they borrow against their own investment accounts,” Mr. Breitenbach said. “But the developers borrow a lot of money in some of these buildings that they are doing. And if they borrow at a very low rate, it is easier for them to develop more, which leads to more inventory for brokers like me. If interest rates go up, then maybe they can’t do some of the projects or develop at the rate they want to.”

Jesse Cole, a Manhattan real estate investor who commissions builds in the Hamptons, said the “inventory glut” is a sort of “reset” to the market. “People can pick and choose instead of going through the pain of building,” he said. “So many builders would rather sit on properties and wait.”

As a result, after more than a decade of recovery following the national housing crisis of 2008, the slowdown in building could impact the bottom line of village governments. The permit fees many municipalities rely on—which are collected when home and business owners seek to make changes to their properties through building department permitting—are also recovering from 2017.

Building permits for projects that involve large amounts of square footage typically garner the most revenue for municipalities. Most of the largest building projects appear to be sited in Quogue Village, East Hampton Town, Sag Harbor Village and Southampton Village, which saw building permit revenue increases in 2018 of 85, 84, 48 and 24 percent, respectively.

But in the villages, where the fees matter most, declines in the number of permits could lead to higher permit fees for developers and less services for residents.

Westhampton Beach Village and East Hampton Village collected about 36 and 10 percent less in building permit revenue in 2018, respectively. Village officials say dips in the number of permits issued will likely be mitigated with fee increases and conservative budget estimates.

In Southampton Town, revenue reductions seen in 2018 won’t impact the town the same way as the villages, because the town relies more heavily on other sources of revenue, Comptroller Len Marchese said.

“We see our revenue being consistent from last year,” Mr. Marchese said. “It’s not really going up, it’s not really going down. We re-evaluate our fees constantly with man hours and our costs going up. The way it is now is the Building Department is working at full tilt.”

State Assemblyman Fred W. Thiele Jr. said elected leaders need to pay attention to market forecasts to stay on top of their budgets. He added that the slowdown will let the local building economy catch its breath while interest rates remain high.

“After working in village government and as a town supervisor, particularly on the village level, where a lot of the renovations and building activity has taken place, fee income is a much larger proportion for the villages as it is for the towns,” Mr. Thiele said. “They need to keep an eye on it.”

Mr. Miller said part of the problem is that homes aren’t selling. He’s the president of Miller Samuel, a real estate appraisers and consultant firm.

“When you have a growing amount of oversupply in the market and prices sliding, it makes sense that there is a downturn in permits,” Mr. Miller said. “The thing is that, over the past couple of years, inventory has been steadily rising. It didn’t just happen overnight. People—builders—are getting the message that while they are interviewing lenders, they aren’t confident in the financing they are going to get.”

Mr. Breitenbach said developers building on spec—that is, constructing homes before a buyer is lined up—are hoping for a big payout, but he doesn’t know how long the strategy is going to pay off.

All things considered, he said he still sees the new development market as the strongest sector for the South Fork.

Having been in real estate for more than 12 years and coming from a family of brokers—his mother is power broker Susan Breitenbach of Corcoran—Mr. Breitenbach said he has seen the struggle, including his own search to purchase an investment property for his family and to rent out his home in Water Mill.

“Looking at all of the rates and numbers, I feel that even though I bought that house in 2013, when the rates were lower, what I had to do to get that loan and what I had to put down was much more restrictive and tougher than what is available now,” he said. “There are more, easier options to get financing now—even if you are paying a bit of a higher rate.”

Many developers—especially smaller enterprises—borrow through standard bank loans, while others go through other means to raise capital. “Smaller developers are hurt the most, because they don’t have a track record or as much capital to throw into a project. A larger guy can split the cost maybe between a loan and what’s in the coffers,” Mr. Breitenbach said.

“Rates increasing affects this greatly, as there are usually smaller margins of profit to begin with on lower-end homes,” said Christine Curiale, the vice president sales manager of Valley National Bank-Residential Mortgage’s Southampton branch. “On these types of deals, it is all about the numbers.”

To combat rising interest rates, Ms. Curiale said she works with many developers and their home buyers to engage in a long-term rate lock program, which locks in new construction buyers at the current rate for up to 1 year. She said it allows the developer enough time to complete the build and keep home buyers confident in knowing what their mortgage costs ultimately will be.

In the meantime, some market watchers attribute the slowdown to an unintended consequence of the Peconic Bay Community Preservation Fund—a 2 percent tax on real estate transfers in Southampton and East Hampton, as well as the three other East End towns, to fund the purchase of properties for preservation.

Diana Weir, the director of housing and community development in Southampton Town, contends that the eventual “build-out” of the South Fork will prevent future development—including affordable housing. Mr. Thiele contends the CPF hasn’t impacted large property sales in recent years, other than raising the value of the land.

“The amount of property the town acquires and takes out of circulation for building through CPF is a fairly minute fraction,” he said. “It’s not new construction anymore, anyway. Where most of these fees are being generated are in renovations. In a place like Sag Harbor and East Hampton, there isn’t a lot of vacant land available, period. What has driven the building economy for the last 10 years has been teardowns, renovations and expansions.”

Regarding the impact on municipalities, he said, “The real question is how much did they put in their budget, because even when you are having a good year, you try to be conservative in estimating these fees because you never know how long it’s going to last and you don’t want to have a budget problem.”

Many of the villages on the South Fork have considered ways to update infrastructure, including sewer systems, to make way for more commercial and residential options in downtown areas. Sag Harbor is the only village with such a system. The lack of permits could indicate developers are waiting until environmental factors are more favorable, Westhampton Beach Village Mayor Maria Moore said.

“I was surprised to see how few permits were filed,” Ms. Moore said. “From what I can see, there is a lot going on in the village in terms of renovations and construction.”

According to the village Building Department, building revenues make up just 5 percent of the village’s $10 million budget, and go toward operational costs of running the department. Fees are increased when revenues are low. “In a village our size, there is bound to be fluctuations in building, and we do our best to predict based on prior years for our budget what the coming year will be,” she said.

Ms. Moore said she sees the signs of commercial construction finishing up: a large storage unit facility on Old Riverhead Road and a beach club on Dune Road going up, a restaurant at the intersection of Montauk Highway and Oak Street poised for demolition to make way for a new eatery, and residential construction “on every corner of the village.”

The village is expected to install a sewer system in the next two years, which will open up new opportunities for development.

“I couldn’t guess what the economic trend is going to be,” Ms. Moore said. “Economists will just have to keep looking and predicting.”

“To me, permit numbers suggest what is going to happen in a year or two in terms of actually coming to market,” Mr. Miller said. “Looking at these numbers, I think it’s only going to get worse.”