Issue 73 – As New York’s Real Estate Landscape Continues to Change, Knowing When or Where to Buy is Up for Debate

You only have to take a look at the recent history of New York City real estate to know that it is constantly in flux. That has never been more true than today. While the outer boroughs appear to be sizzling, with neighborhoods transforming in front of our eyes, parts of Manhattan seem to be lukewarm or even cold.

Going back the 1970’s and ’80’s neighborhoods such as Tribeca, the East Village and Soho were low-income, bohemian enclaves filled with struggling artists, squatters and were known for drugs and prostitution. Now they are exquisitely desirable parts of town, filled with luxury condos and boutique shopping. Change, whether you welcome it or not, is as inevitable in New York as a snowstorm and subway delays. Many other areas have followed the same path from grit to glitz — DUMBO and Williamsburg in the 1990’s being among them — and there are other areas such as Long Island City and Bushwick which are also on the same track.

We have already seen record sales in Harlem and the Bronx. Massive Transit Orientated Development (TOD) is occurring in Westchester, Yonkers, New Rochelle and White Plains and brownstones in Brooklyn, particularly gentrifying areas such as Crown Heights and BedStuy, are on the same path as once low income neighborhoods before them. If Manhattan prices continue to rise, still gentrifying neighborhoods will enjoy a greater stability. The domino effect that has gone from Prospect Heights to Crown Heights and Bed-Stuy will continue in Brooklyn on to East New York where zoning changes have precipitated massive new development.

According to the most recent Douglas Elliman report by Miller Samuel, Q2 saw a generally resilient Manhattan housing market after a few softer quarters. Price averages for Manhattan apartments were up by 8 percent to $2.19 million. The total number of sales jumped 15 percent compared with the previous year. New condos fueled the rise. Average condo sales price jumped 13 percent over the previous year to $3.12 million and new condos increased by 7 percent to $4.70 million. However, Jonathan Miller, the president of Miller Samuel, predicted that the very top of the market will be weaker than other sectors. And that is where much of the contention lies.

Prices have dropped in this sector over the last couple of years, and many market pundits don’t see a meaningful recovery taking hold in the short term.  There are a number of factors at play — the equity market, mortgage rates, the rate of the dollar against foreign currency, and of course, the amount of inventory available. Also, crucially, there is a certain malaise at the moment, particularly with foreign investors, because of political volatility. The “feel good” factor about a place is important psychologically, and when the news media is filled with one political controversy after another pouring out of Washington, buyers often hit the pause button. When there is a risk of a potentially acrimonious relationship with the US government and an investor’s country, fears are only heightened.

Nowhere is more luxury than “Billionaires’ Row” around 57th Street. Lender Barry Sternlicht of Starwood Property Trust caused hailstorm of debate recently when he predicted that the developments around there could be an impending “debacle”. He referenced loans for buildings at 111 West 57th St and 53 W 53rd St. “The building on 57th Street just went through its B-lender.”  Sternlicht also referenced some concern about foreign investors leaving the market in lieu of Washington’s missteps. The Chinese are still investing in US luxury real estate, perhaps not with the same zeal as before. There is some investment from the Middle East and Turkey. However, money from Brazil and Russia appears to have lessened significantly as their currencies are not doing well against the dollar. Much of the action now seems to be coming from domestic American buyers. Many, though, who have been priced out are sitting on the sidelines waiting for further price drops.

None of these observations seem unreasonable.  However, it is important to note that virtually none of them are especially new.  In fact, some of these catalysts have been in effect for not only quarters, but for years.  Furthermore, “Billionaires’ Row” is hardly representative of the broader, high-end resale market.  After all, hundreds of units competing in similar locations at $10,000 a foot is a unique niche unto itself, and as a result, too liberal a generalization of dynamics in this sector would be a mistake.

Therefore, while a material recovery may or may not occur in short order, this does not mean prices will drop further. In my view, most if not all of the aforementioned risks are now built into current valuations, outside perhaps the prices of select new developments that were reaching even in a healthier market.  Thus, it feels to me like a bottom may be forming.  While it is understandably tempting to wait for further declines, quite often this is a losing strategy since conditions can turn quickly.  For example, the equity markets at record highs have many investors looking to diversify portfolios by reallocating into real estate.  Should this intensify, it certainly will serve as a near-term catalyst for real estate demand.  In addition, it seems virtually all of Trump’s expected pro-economy policy changes have been dramatically discounted, which leaves the potential for upside surprises should anything get done in Washington.  This outcome could spark a reemergence of buyers that have been pushed to the sideline by political uncertainty.  Couple of drivers such as this with mortgage rates still near historical lows, and the next leg up in real estate prices may materialize more quickly than expected.

I believe there is little doubt that prices will improve again, the all-important question is when. As Warren Buffet famously stated, “Be fearful when others are greedy, and be greedy when others are fearful.”  Many owners and developers alike have now reacted to the negative themes that have been in play for quite some time.  As a result, I believe that smart purchases today will look quite attractive in hindsight, and astute buyers will be rewarded for taking advantage of current price adjustments. As always, the key is buying the right product, in the right location, and at the right price. I believe the pricing piece of this equation has now come in line for much of the high-end market.

If you’re interested in buying in Manhattan, don’t let analysis paralysis have you perpetually circling the airport. For smart buyers, there are a number of premium properties that offer compelling value propositions.  Remember, generalizing, particularly in real estate, can mean missing out on very attractive opportunities.



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