As the sunsetting of the 421-a tax exemption for developers looms, some interesting things are happening to the New York real estate market. Most notably, Manhattan, during the first four months of 2008, saw a huge increase in the number of application for residential building permits over the same time period in 2007. The increase – from 67 to 98 – was a surprisingly large 46%.

Given the large increase in problems with the credit market, the city’s declining sales numbers and several other important factors, it is more than a little surprising at first glance to see such a large increase in building applications.

There are two possible reasons for the strong numbers. First, the tight credit markets could actually be spurning developers to move quickly to secure credit before, they fear, the situation worsens beyond the point of no return. Whether or not they are right, there does seem to be a perception in the construction community that loans will not be as available in the near future.

Second, and probably more important, the sunset of the 421-a tax exemption is spurring a rush among developers to begin building before the sizable credit expires. The tax exemption expires on June 30 of this year.

As an interesting side note to that trend, while some developers have been rushing to meet the deadlines, others have given up hope, and have put their development plots up for sale. Indeed, dozens of sites with approved condo plans are back on the market. There are a number of reasons for this, but the 421-a sunset has combined with recent rezoning in a number of neighborhoods important for developers in order to make city regulatory changes by far the single most important factor in spurring the sales of developments sites that have already been approved for construction.

Other developers are shifting from apartments to townhouses or other types of buildings that are subject to different tax laws.

Some brokers argue that the 421-a regulation will not affect the luxury market as much as the rest of the New York apartment market, because the size of the tax abatement is comparatively small, relative to the overall value of the homes.

What is certain, however, is that with the new regulatory changes and the changes in the market over the past six months, the end of June marks the beginning of a decidedly new era in the Manhattan real estate market.

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