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Toll Brothers Has a Secret

Nicholas Yulico

Toll Brothers(TOL Quote) CEO Robert Toll said on the company's recent earnings call that sales of the company's Brooklyn condos have been going "pretty strong," but he made no mention of the pricing problems at the developments.

In recent weeks, the homebuilder slashed prices by nearly 20% to sell a block of condo units that have less-than-desirable views in the first tower of Northside Piers, TheStreet.com has learned. What's more, the company appears to be having trouble selling the remaining 11 units that also suffer from poor views at North 8, a nearby project that has had these units on the market since October 2006.

Toll is building both developments along the waterfront in Brooklyn's Williamsburg section, which is a five-minute train ride across the East River to Manhattan. The area will eventually be home to numerous condo developments and parks as part of a rezoning plan approved by the city two years ago.

Over the past decade, Williamsburg has transformed itself from a cheap living destination for artists to a gentrified, pricey extension of Manhattan. While Toll's luxury condos would seem to be a surefire hit in the ever-expanding area, the company may have trouble finding premium pricing for the developments.

Lior Barak, who handles new Brooklyn condo sales for real estate firm Prudential Douglas Elliman, says that there is a lot of demand for housing in Williamsburg, but the Toll projects will be somewhat separated from the neighborhood itself.

"I think that some of the big buildings being built on the water will not appeal to everybody," says Barak.

Thus far, about 40% of the 180 units at Tower 1 of Northside Piers have been sold, with about 70% of the units having been released for sale, says David Von Spreckelsen, a vice president at Toll Brothers who heads the New York City office. Eventually two more towers, totaling as many as 400 additional units, will be built in coming years at the site.

A visit to the Northside Piers sales office confirmed that Toll cut listing prices on 17 two-bedroom units in the project by $200,000, or about 20%. The units, which will eventually have views of the second tower to be built at the site next year, were "mispriced from the beginning," Von Spreckelsen says.

So far, the remainder of the building has sold at list prices near $850 per square foot, with some units seeing a 5% price increase since January, Von Spreckelsen says. Essentially all of the studios and one-bedrooms have been sold in the first tower. Two-bedrooms and three-bedrooms have been a "challenge to sell," he says. "It's a younger market than we thought."

Nonetheless, he expects the entire tower to eventually sell for an average price of $850 per square foot, putting it at the top end of pricing in Williamsburg. New condo projects in Williamsburg are selling at a range of $700 per square foot on the low end to $850 per square foot on the high end, says Prudential Douglas Elliman's Barak.

A few blocks away from Northside, Toll's North 8 project has sold out of its one- and two-bedroom units, which all have water views. That project opened for sale in October.

Still for sale are six two-bedrooms, whose windows face North 8th Street and mostly offer no views of Manhattan. Five duplex townhouses, listed at around $1.2 million each, also are still on the market. The company says there have been zero cancellations and no incentives offered to buyers at either project.

The two Brooklyn projects represent a small piece of Toll's overall business. But the company's management has said in recent months that the New York City region -- and the developments specifically -- is the one bright spot in an ugly national housing market.

Across the country, builders are cutting prices and facing pressure on profit margins in order to sell homes. Last month, Toll withdrew its full-year earnings guidance amid ongoing weakness in the real estate market.

In a recent research note, Bank of America analyst Daniel Oppenheim said Toll would need to cut prices and offer more discounts across its portfolio to reach management's revenue forecast of $4.26 billion to $4.88 billion in 2007.

Room Without a View

Much of the discrepancy in pricing at Northside Piers has to do with views. The site is billed as a waterfront destination, but a good chunk of the water-facing side of the first tower won't see the Manhattan skyline. Instead, the view will be of neighboring new buildings.

Eventually, another two towers will be built at Northside Piers. One is slated to be constructed next year, while the other is about three years away. These buildings will obstruct much of the waterfront and Manhattan skyline views from Tower 1.

On the so-called B-line section of Tower 1, where two-bedroom units facing the water will eventually suffer from blocked views, prices were cut from above $1 million to the $800,000 range, a sales agent said.

In all, 23 apartments sit on the B-line, but only 17 have been released for sale. Of those released, 10 have been sold, four have deposits and three remain available for sale, as of last week.

The cheapest B-line unit available is a 1,133-square foot two-bedroom on the fourth floor that is listed for $744,990, or about $660 per square foot. A higher unit, with the same size, is listed for $818,990, or about $720 per square foot.

The so-called J-line of the building, which has nonwater views and a total of 13 units, saw prices cut about $40,000, or about 5%, but are still listed at a price-per square foot number of nearly $850.

Altogether, the J- and B- blocks account for 20% of the tower.

Another issue altogether is whether sales at Northside Piers may lend themselves to future cancellations from buyers who currently have contracts on the units. Closings are set to begin in November, but some early buyers could end up disappointed since they may have been unaware of just how much the two additional towers would obstruct water views.

"In the beginning, when they started selling, they didn't have models in the sales office, so people couldn't really understand what buildings would be built in front of the existing building," says Barak, the Elliman broker.

The sales office denied that the model wasn't there when the office opened in January.

Aside from the blocked waterfront views, Tower 1 of Northside Piers will also eventually suffer from poor views to the North, since a competing condo project called The Edge will be built next door.

Jeff Lavine's Douglaston Development, a prominent New York City builder, will develop The Edge, which is expected to have 1,000 condo units. Although official plans haven't been determined, local Brooklyn real estate sources say the Edge project will be 15 floors high, thus blocking much of the views on one side at the 29-story Tower 1 of Toll's Northside Piers.