Issue 76- ARE CO-OPS OBSOLETE?

With the explosion in new development, the media loves to beat up New York City co-ops. But lately, they’ve been having more fun than usual. With articles like Forbes’s “Why Co-Ops May be a Thing of the Past” and The Real Deal’s “Fading beauty? In a sea of new dev, UES co-ops have fewer takers,” the old stalwarts of the Upper East Side may feel a little bruised. But I wouldn’t write off the grand dames on Park, Fifth, and West End Avenues just yet. As Mark Twain famously said, “Rumors of my death have been greatly exaggerated.”

Co-ops can be easy targets to outsiders. They are not as shiny and new as much of the available inventory. They do not always offer over-the-top amenities, like golf simulators and indoor skate parks. And the “dreaded” co-op board admissions process can seem much too invasive and controlling for some buyers. Many people write co-ops off as relics of a bygone era. Or, at least, that’s what the media wants us to believe. The truth is, I’m not so sure that the alternatives to co-ops, often the newest of the new, are all that perfect either. With foreign buyers snapping up new glossy condominiums to use as pieds-a-terre, all too often we have heard the unfortunate story of owners “ghosting” their ownership by disappearing and ceasing to pay their common charges and taxes. Frequently the result of unanticipated hardship, this puts the burden on the remaining owners to plug the shortfall or pull from the building’s reserves in order to cover the carry. In smaller condos, issues like this can be especially damaging, since events like foreclosures may impact the willingness of banks to lend to prospective buyers. In a small building, just one or two situations like this can breach the comfort level of lenders. This ultimately can impact the value of the building and lead to the “storytelling” in the market about “that” building. Conversely, for all the things co-ops are not, their discretionary process and ample due diligence ensures that every shareholder is held accountable and has the means to meet their financial responsibilities over the long-term. Subsequently, co-ops rarely experience the “revolving door” dynamic.

In my experience, generally buyers who choose co-ops are looking for a primary residence and prefer an original, one-off, non-vanilla property. Although there are a few super high luxury, Robert A.M. Stern replica buildings, new developments that mimic the original limestone pre-wars are in short supply. Beaux-Arts buildings from the 1930s are anomalies that cannot be replicated. These buildings are of a different era and often of a different caliber of construction. To build these today would be cost prohibitive and thus much of the newer product simply is not the same as the authentic co-ops designed by such noteworthy architects as Candela, Carpenter and Roth. Beyond that, some would say that the new construction from ten years ago is already looking dated and somewhat out of fashion, whereas the design of many of the city’s stately co-ops have timeless appeal. Yes, some of the units may be tired, but can be renovated and restored to their original glory. The units also can be updated to include the styles of modern development while still getting the benefits of the building’s broader architectural beauty.

As you know, when buying into a co-op, you are buying shares in a corporation and a proprietary lease governs all aspects of the relationship between the co-op and each shareholder. One of the many functions of the Board is to vet prospective buyers, which includes their financial strength. This is designed to ensure all shareholders are capable long-term of meeting their share of the financial requirements of the building. The admissions process seems to be one of the most often discussed aspects of co-ops, and the perception is rarely positive. Yes, this process can feel invasive and somewhat out of the buyer’s control. However, the long-term benefits and peace of mind that come from creating a stable, respectful, and financially secure shareholder community cannot be underestimated.

Co-ops also tend to have more “rules” than condos, as outlined in the proprietary lease and the building’s house rules. However, in theory, these guidelines are designed to protect the interests of shareholders. Therefore, this is another characteristic of a co-op that should not be unilaterally viewed as a negative. It is up to every buyer to decide whether they feel the rules offer protection or unreasonable restrictions on behavior. For those that see the community benefiting from reasonable guidelines, co-ops can offer real value.

One of the other interesting aspects of co-ops is the nature of the community that can be created through the discretionary admissions process. Many buyers find this comforting and believe they are more likely to have things in common with their neighbors. Let’s also not forget that New York City is home to more private clubs than anywhere else in the country. Therefore, it should come as no surprise that many buyers prefer the “selective” private club feeling of co-ops.

Another characteristic of co-ops that is either good or bad, depending on one’s perspective, is restrictions on renting out units. Some owners prefer the flexibility to rent out their homes without board approval should their needs dictate. This is understandable. However, many buyers who intend to use the property as a primary residence prefer the stability that is established by co-ops’ rental restrictions. If the ability of owners to rent is limited, there is less resident turnover, less risk of getting a difficult, new, and unvetted neighbor, and fewer disruptive move-ins and outs.

Let’s not forget costs, arguably the most important factor in any buyer’s purchasing decision. Co-ops are often less expensive than condos, in part because of the perceptions outlined above. However, as discussed, many of the perceived negatives of a co-op can be positive depending upon your perspective and individual circumstances. If you’re in the latter camp, you can take advantage of the co-op “discount” yet get something that is exactly what you want and value. Closing costs also tend to be lower for co-ops. Streeteasy found that to purchase a hypothetical apartment for $500,000 in NYC, the condo fees would be $23,125 while the co-op fees would be almost 50% less at $12,760. This is due to the fact that certain items necessary in closing on a condo are not required for a co-op, such as title insurance.

Finally, there is the long-term performance. While this is difficult to say, and I’d hate to speculate, co-ops’ current discount to condos is as big as I can recall over the last 15 years. While there are some structural reasons for this, it does feel like co-ops offer solid relative value in today’s market. While it’s only one quarter, the most recent Elliman 2018 4Q Report demonstrated that co-ops outperformed condos in terms of price and sales last quarter. Co-op sales increased 2.6% versus condo sales that fell 9.5%. And the total number of co-op sales outpaced condos by nearly 400 units despite less total supply.

Although co-op prices may have declined overall, their appeal to many has not. Choosing a co-op can be a very smart choice for people who value stability in prestigious neighborhoods, want a greater sense of community, don’t want high turnover, value the due diligence of the admissions process (both financial and otherwise), and intend to stay put and plant roots in a building and neighborhood. There also is prestige and beauty to many of the older buildings in the city (most of which are co-ops), as well as a value of traditional and elegant architecture. For those who find the rules of a co-op to be more for their benefit than a nuisance, a co-op can offer a wonderful home.

As someone who spends a great deal of time in both the condo and co-op markets, I see the value in each. Truly, it comes down to individual circumstances and preference. Therefore, I would resist believing the hype and include both condos and co-ops in any new property search!