Issue 65 – The Cooler Months

By all accounts, the third quarter Manhattan real estate market was quite healthy, with most data bantered in the market indicating:

  • sales jumped almost 10% year over year,
  • the average price per square foot hit a record of almost  $1,500,
  • the median price paid climbed almost 10% to just shy of $1 million,
  • apartments sold in the third quarter spent an average of only 73 days on the market, the shortest time since 1996,
  • and 51% of all deals were completed “all cash” vs. 43% a year earlier.

The drivers of these increases should be of no surprise, as these same factors have been highlighted by market strategists for the better part of the past 3-4 years.  To name a few, inventory is tight (particularly in the more affordable part of the market), mortgage rates are low, there is a strong foreign bid for NYC properties, and consumer wealth has risen with the recovery in global asset prices such as equities.  While I agree these dynamics are in large part responsible for the market’s improvement, I am now pondering whether “are” is slowly changing to “were.”  Remember, most of the closings in the third quarter were deals negotiated and signed in May-July, a period prior to China’s currency devaluation and the severe equity market volatility that ensued, the fairly modest but noticeable recent rise in rates, and the sharp appreciation in the US dollar.  Thus, while this data certainly looks fantastic, it can be a lagging indicator.

I often tell myself when sentiment is so one sided in any trade (notwithstanding this has been the state of play in NYC real estate for the last 5 years), you should at least take notice.  While I continue to sees deals getting done at a healthy clip, and a solid bid for apartments at the “right” price points, in the right locations, and for the right product, I can’t help but notice a slight pullback in buyer sentiment.  Traffic at open houses for a number of great properties is just a bit less robust, with buyers more reluctant to bite down on ever increasing listing prices.  This is particularly the case in the luxury market, as many sellers are asking prices that are hard to justify.  I had an interesting conversation recently with a client that is a successful professional in the finance industry, and his observations were hard to ignore.  He pointed out that outside of the prominent foreign bid that has dominated headlines for some time, the finance sector has been a large driver of the Manhattan real estate market for decades.  He told me that as a result of the increased regulation in the banking industry post the financial crisis, his compensation actually is flat to down from its level in 2000.  Yet, the loft he bought and renovated that very same year for $1.5 million in total is worth almost 3x that today. When you think about the appreciation in Manhattan real estate values vs. that of wage growth, it raises interesting questions should the headwinds mentioned above intensity.  There is little doubt that outside the uber wealthy, many buyers are becoming increasingly stretched.

Now, let me be clear.  I do NOT think real estate in the city is headed for some sort of near or even intermediate term material correction.  Far from it.  However, I think it’s important to understand that while technicals in the market remain healthy, 10% annual price increases and selling apartments well above the ppsf  that comps in the area support is not mandatory.  A healthy period of consolidation, price stability, and deals concentrated in more specific product type and locations very well may be on the horizon.  This simply means sellers may need to adjust their expectations and listing strategies a bit, and the astute buyer may soon garner greater negotiating leverage than in quarters past.

Some additional good news?  Some of the headwinds mentioned above have abated (e.g. equity values have improved), and the stronger US dollar actually could “scare” even more foreign money into the “safety” of NYC properties.  As a result, I believe any near term adjustment is likely to be on the margin, and within the context of the broader bullish trend in Manhattan real estate.

Best wishes for a healthy and happy holiday season