Posted by Leonard Steinberg on April 13, 2011

The world is learning the painful reliance we have on one another where because of Japan’s horrible disaster, many components manufactured there are slowing down the production of products made elsewhere around the globe. These supply disruptions affect pricing in a meaningful way.

A similar supply disruption has happened in New York real estate with the virtual halt to the construction of new apartments in 2009 and 2010. The first major shock was the first quarter results of 2011 that showed a huge shift towards the sale of co-ops versus condo’s. Sadly, no-one really went further than creating a dazzling headline to realize that the main cause for this was the lack of inventory of new condos, the largest component of condo sales. Hence these figures were badly skewered and the report was rather mis-leading. The demand for new condos has not waned. The supply has. And this supply disruption will take many, many months to cure. It is also possible that there will be a time when there is too much inventory again.

To all developers out there I caution you about this HUGE demand for large apartments. Yes, this is certainly true, there is a shortage right now of large apartments. But if every developer and banker beats the exact same drum, we could end up with an over-supply of these larger units. When large apartments cost more than $ 10million, the audience is limited. And I constantly hear developers pro forma’s that sound a little frothy…..unless you are developing something really special, be warned.

Supply disruptions always cause price escalations, but that can be short lived.