Joe Farrell: Building bargains, Hamptons-style

In the Hamptons, as high-end builder Joe Farrell can attest, $5 million is the new $10 million. Farrell, who founded his Bridgehampton-based Farrell Construction in 1996, has built homes for talk show host Kelly Ripa, actor Kelsey Grammer and former New York City mayor and presidential candidate Rudy Giuliani.

 

Indeed, he has recently made headlines for "Sandcastle," the 30,000-square-foot home he built on Halsey Lane in Bridgehampton, which is on the market for $59.5 million.

 

Last month, after the Jonas Brothers, the pop music superstars who had been prepared to rent it, backed out, he found a taker willing to shell out $425,000 for a two-week stay this summer.

 

But that house, which has thus far failed to sell, and its high price point are more a product of yesterday's boom than today's Great Recession. Farrell says his new homes, which are often built on "spec," or without a predetermined buyer, will be about 40 percent smaller than those from the height of the boom.

 

"Rather than stick around for a home run, we would rather hit singles and doubles," says Farrell, explaining his new scaled-down approach.

 

It's certainly an adaptation for today's market. The Hamptons market has gotten hammered since the onset of the downturn as more people have put their homes on the market and wealthy residents have seen their bank account balances shrink overnight.

 

Prices in the Hamptons have plunged and nearly every market measure has shown severe decline. The average home in the Hamptons is now about $1.477 million, a 21 percent decrease from $1.872 million in the second quarter of 2008, according to the second-quarter report from the Corcoran Group. In the same time frame, the number of homes sold fell from 825 to 433, a striking 48 percent drop.

 

With the market for mega estates no longer what it once was, Farrell is starting to produce homes that are a bargain by his gambrel-roofed, gunite pool standards. He's about to begin work on a 2,600-square-foot home with a pool on Straight Path in Southampton that will list for $1.6 million.

 

Despite the dampened sales climate, Farrell seems to be finding buyers for these "bargain" homes sight unseen.

 

In the middle of last month, a contract was signed for a yet-to-be-built home on Bridge Lane in Bridgehampton for the asking price of $4.995 million, Farrell says. He adds that the home, which will measure 6,000 square feet, could have commanded $5.9 million a year ago.

 

Mala Sander, a broker with the Corcoran Group in Sag Harbor, says spec builders in the Hamptons now routinely quote prices of $275 a square foot, whereas last July they might have gotten $400.

 

"In the old days it was an accelerating market for spec builders - they could put up a home in nine months to a year, and sell it for a really great return," Sander says.

 

Though times have clearly changed, "I think those guys will do fine if they can hang on," she says.

 

Farrell was one of those builders who could erect a McMansion in months.

 

In fact, in 2007, in a story about accelerated construction, the Wall Street Journal cited two of Farrell's fast-tracked jobs in the Hamptons - the first, a 10,000-square-foot Bridgehampton mansion he built for real estate executive Robert Lapidus, a principal at the commercial real estate development firm L & L Holding Company; the second, an $18 million home he built for hedge funder Steve Cohen.

 

Even though times have changed, Farrell, who used to work on Wall Street as a commodities trader and often builds on tear-down sites, says because land prices and materials like copper, cedar and labor are cheaper now, builders can still come out ahead. Plus, he contends that in a recession, there's an even greater chance that buyers will choose a new structure with less fuss and muss to worry about.

 

There's certainly less competition. In the first six months of this year, the Town of East Hampton, which makes up about half the geography of the Hamptons, saw 30 new homes built, according to the area's building departments. In contrast, in the first six months of 2008, there were a combined 59 new homes there.

 

There was a similar drop-off in the town of Southampton, where there were 66 new homes built from January to June of last year, versus just 34 this year.

 

Meanwhile, the Village of Westhampton Beach and the Village of Quogue saw three and four new homes, respectively, in 2008, and none this year.

 

Farrell says his strategy now is to keep his inventory low. In 2007, Farrell might have had up to 10 new homes on the market at once; now he has only three.

 

"You can't get caught, you can't get hurt," he says, "because three is not enough to hurt us." He adds that he is burning off inventory at a good pace.

 

A drop in inventory can actually stabilize prices for those lucky enough to tough out a down market, says Ed Bulgin, another builder whose Southampton-based Bulgin & Associates was founded in 1983.

 

Bulgin's own workload is down about 50 percent, from 12 projects last year to about seven now, and he's had to lay off several carpenters from his company, which has about 250 employees when times are busiest.

 

Though Bulgin never built spec homes, preferring custom jobs with less risk, he says, Farrell seems deft enough to predict trends, and homes that sell for under $2 million seems to be one.

 

"I think that is generally where everything is headed, yes," Bulgin says. "Farrell has formulas that have worked before, so he's probably smart enough to adapt."

 

Farrell notes that he has felt the recession, too. In the last four months he's laid off 10 percent of his staff, which now numbers 50, plus subcontractors.

 

He has, however, been helped by a lack of reliance on bank financing. In 2006, seeing the problems befalling home markets in California and Florida, he stopped taking out bank loans and began partnering with investment firms like the Carlyle Group, which he has since split with.

 

Today he's using his own money for projects like a planned home at 91 Bailey Road in the Village of Southampton. The lot, which had a house that he razed, cost $750,000, but the new spec house will list for $2.995 million.

 

In addition, he is applying his new less-is-still-a-lot formula to two new spec projects: a 6,000-square-footer for Cobb Road in Water Mill, for $5 million, and a 5,800-square-footer in North Haven, a section of Southampton, for $2.495 million. Neither has a contract yet.

 

Still, Farrell insists that "to say the market for large new homes is over out here is incorrect." That theory may be tested at Sandcastle, which has nine bedrooms and comes complete with a movie theater, bowling alley and climbing wall.

 

"People come out here to entertain," Farrell says, "so they need big houses."

 

Farrell and his family are living in the non-oceanfront estate while it's being marketed, except for the two-week period this month when an "Eastern European businessman" will move in.

 

However, in perhaps another sign of the times, the $425,000 that the renter is paying is still more than a 15 percent drop from the $495,000 Farrell was asking. That's despite the fact that last month he told Hamptons.com that he turned down $1 million for the summer because he didn't want to move his family out.

 

Diane Saatchi, a broker with the Corcoran Group, says that while the home may find a buyer because there's always someone around with out-of-step tastes, Farrell stands a better chance with smaller properties.

 

"I do have clients right now who are saying, `I don't want a McMansion anymore.'"

 

She says Farrell's revised approach is a good one.

 

"Excess is out and economy is in," she says, "and Farrell seems to be keeping up with what buyers are saying."