As rising interest rates have slowed housing construction nationally, does Atlantic Yards/Pacific Park face a potential stall?

We Need to Keep Building Houses, Even if No One Wants to Buy, a New York Times news analysis told us 7/23/22:

The United States has a deep, decades-old housing shortage. Also, at the moment, homebuilders across the country are pulling back on development because they can’t sell enough homes.

How can both of these things be true? That riddle is at the heart of the boom-bust nature of housing, where an excess of regulation and the mixed incentives of the market mean there is never a supply that lines up with demand. One way or the other, solving it will require more building during downturns, and, most likely, some sort of public program to subsidize it.

The article does not assess New York City, which may be something of a special case, though certainly part of the problem cited--NIMBYism--applies to the suburban communities that have failed to accept there share of growth, even near public transit stations. 

(And who exactly is "we"? I'll mention the social housing alternative below.)

The Times noted that the immediate challenge is the rising cost of borrowing: "Interest rates on the average 30-year mortgage have jumped to about 5.5 percent, from about 3 percent at the start of the year."

That's especially tough for purchasers of real estate--there are no condos planned, as of now--but also for builders, who also face rising costs of materials and supply chain challenges:

Developers are responding the way Economics 101 says they should: by cutting prices on the houses they have already built, and by pulling the plug on virtually any project that wasn’t already too far along to be abandoned. Builders started construction on about 93,000 single-family homes in June, down 16 percent from a year earlier.

Real-estate cycles

So a project like Atlantic Yards, built through multiple real-estate cycles, likely faces headwinds, not just from interest rates but also--as the main developer has acknowledged--from the failure, so far, to renew a revised 421-a tax break.

From the article:

The collapse of the housing market during the Great Recession put many smaller home builders out of business, and left the ones that survived extremely cautious. Housing starts cratered to 554,000 in 2009 from 2.1 million in 2005, then barely recovered, even as demand steadily grew. Only in the past couple years did developers finally start building at something close to their pre-bubble pace — only to slam on the brakes now that rates are rising.

Atlantic Yards, of course, was stalled by the recession, and then slowed by original developer Forest City Ratner's ambitious, flawed plan to establish a new modular construction business, envisioned to be used for the full project buildout, but instead only for the ill-fated 461 Dean St. (aka B2).

Is another stall on the horizon? Certainly some of the elements are there.

But don't rule out--to adapt that line from the Times, which surely was not envisioned for a project like this--"some sort of public program to subsidize it."

A correction, not a crash?

Also see the 7/22/22 Bloomberg article, Apartment and Warehouse Deals Start to Sputter as Rates Sting, which also takes a national perspective rather than focuses on New York City:

There are already signs of a decline: US commercial-property prices sagged 5% in the second quarter and may drop as much as 5% more this year, according to Peter Rothemund, co-head of strategic research at Green Street. Apartment prices sank 4% in June from May, while warehouse values dropped 6%, Green Street reported. 

...Even lending for apartment buildings — one of the property darlings in commercial real estate — is forecast to drop 10% this year, according to the MBA forecast.

A key source predicts a correction more likely than a crash as in 2008, given the significant sources of nonbank capital, including from private equity funds.

Maybe it's all a matter of price.

That said, it's not like Greenland USA, part of a financially challenged Shanghai-based conglomerate Greenland Holding Group, its credit rating hammered deeply into junk bond territory, is swimming in cash.

Who is "we"?

In a 7/28/22 American Prospect essay, Why We Need Social Housing, Ramenda Cyrus suggested that housing should be a right:

Ultimately, housing would become a right for all. To fight for this goal, the culture must disabuse itself of the notion that there are some people unworthy of government-owned housing—whether it’s marginalized groups like the poor or even the upper middle class. American society must renounce the presumption that there are people who cannot or should not live in proximity to each other. 

That would be a big change in many parts of the country.

She points out that it's unwise to rely on private developers and landlords, given that building reflects business cycles, not actual need, and that the "incentive for the private market to build housing is maximizing profit, not meeting the needs of the people."

Could it work?

The suggested solution:

SOCIAL HOUSING ADDRESSES all of these problems. The idea is simply public housing for all. For example, a municipality might have an apartment building in which a third of the units were deeply subsidized for low-income people, a third provided at cost for the middle class, and a third at the market rate open to anyone. Every segment of the housing market, from top to bottom, would get more supply simultaneously.

Such a building would not require a subsidy to operate, since maintenance could be funded by the second two classes of units (how much depends on the market). Rents could be kept as low as possible because the government doesn’t require a profit margin. Construction could also be financed by floating a bond against expected future revenues, so construction could be greatly scaled up without requiring any direct government financing.

No subsidy to operate? Well, maybe in some places, but in New York City, we'd have to see if the numbers.

But the warning is apt. Relying on the private market got us... Atlantic Yards/Pacific Park, which was promised to be delivered in ten years, but has taken--and will take--far longer.

The question, though, is whether government has--or will have--the capacity and will to do more.