Issue 62 – Are Co-Op’s really that uncool?

It’s no secret the condo market led the way in pushing 2014 New York City real estate prices to record highs, in part the result of a wave of high end new development closings. The appeal of condos also has been widely noted: a less stringent approval process, less disclosure requirements, more liberal sublet policies, (however that is starting to change) and often newer amenities given the vast majority of new developments are condominiums. Some have noted that condo prices were 40%-45% higher than co-ops in 2014, which of course wildly exaggerates the true basis given the distortion created by larger condo units and super luxury new development. When viewed on a more apples to apples basis, the price differential falls to about 10%. Nevertheless, this differential often equates to real value for those finding it difficult to afford the ask prices in the condo market. This discount, coupled with emerging inventory patterns, amenity upgrades, and select behavioral changes from co-op boards to enhance their building’s “competitiveness” lead us to believe the co-op market may see solid performance in the months ahead.

In the last quarter of last year, co-op inventory fell 4% year over year. While this was not uniform across all price and size points, it is in contrast to the increase in inventory and slowing sales volumes seen in the condo market. In the addition, 2014 saw several records set in the co-op market, with at least three sales in the $70-$80 million range taking place on the Upper East Side. While condos certainly have their benefits as noted above, let’s not forget what co-ops typically offer. To go along with greater current affordability on average, many buyers still take comfort in the more rigorous screening and sublet process. For some, knowing your neighbors won’t be a revolving door of sub letters, and the fact that purchasers are deemed to be financially stable, respectful shareholders often of similar mind to others in the building can be quite comforting. Remember, this screening process also resulted in co-ops holding up relatively better during the throws of the financial crisis, in part due to this greater financial scrutiny, and lower allowable leverage. This in part led to less forced sellers. In addition, let’s not lose sight of the fact that the vast majority of the city’s beautiful prewar buildings are co-ops, with an increasing number also upgrading amenities to compete with those offered by often newer condominiums. Layer in the fact that many co-ops are reevaluating their policies to make them a bit more liberal without jeopardizing overall control, and you have a recipe for solid upcoming performance in the co-op market.

My observations are not to say that the best days for NYC condos are behind us, in fact, far from it. However, it’s not unreasonable to expect a near term plateauing in condo prices as the market works off the increased inventory. In addition, with overall real estate prices meaningfully outpacing wage growth in many cases, a modest decline in the pace of price appreciation would not be shocking. And, as I’ve mentioned in previous reports, this often is a healthy market development. In most bull markets, there tends to be periods of consolidation. Real estate, while a unique asset class, is not necessarily immune to these sort of broader market trends. That said, our view is 2015 will remain another healthy year for New York City real estate. Buyers and sellers alike simply will need to take a more strategic, thoughtful approach to maximize value.