Lowering expectations for 2014

Sure, nobody knows what’s actually going to happen in the New York City residential real estate market in the New Year. But it’s still fun to guess.

In this month’s Q&A, The Real Deal asked residential brokerage heads, market analysts and developers to give us their best educated guesses on everything from residential pricing to how the beginning of Mayor Bill de Blasio’s term in City Hall will impact the market.

Most seemed to be in agreement on at least one thing: the 2014 market will not be able to sustain the pace of the 2013 market. But, they said, that’s more a function of the record-setting pace of nearly every metric in 2013 than it is of the coming year.

“It’s unrealistic to expect deal volume to compete with what we just experienced, so I would lower my expectations on the future pace of contract activity and ultimately price action for 2014,” said Noah Rosenblatt, the founder of brokerage and research platform UrbanDigs.

While Rosenblatt and others said a shortage of inventory will continue into the New Year and will lift prices, some said buyers have hit their limit on price increases. That’s partly because much of the inventory that is coming on the market is being “posited toward the ultra-luxury buyer,” said Core CEO Shaun Osher, who noted that the “affordable luxury” sector —between $1.5 million and $3 million — is still seeing a void of quality product. He said anything listed in that price range this year will do well.

In addition, several sources said they didn’t expect de Blasio’s first year in office to impact market conditions immediately, partly because it will be hard for him to get anything passed in Albany because of the state elections this year. But they said, depending on what the new mayor does this year, his presence could impact the pipeline of residential product more long-term.

For more on which areas of the city are expected to do best and worst, what developers are looking out for, and what to anticipate in terms of a residential bubble, we turn to our panel of experts.

Shaun Osher: founder and CEO, CORE

NYC’s residential market has strengthened beyond what many could have anticipated a year ago. What are you expecting to see in the New Year? Where do you expect the market to be a year from now?

A year from now I think we will be in a more stabilized place and I don’t think there will be the rate of appreciation in property value that we have seen over the last 12 months. We have actually seen a bit of a slowdown in appreciation on values and a little bit of a slowdown on some absorption.

The residential inventory shortage is obviously one of the big factors driving market conditions right now in NYC. What are you expecting on the inventory front in the coming year?

There is not much of a pipeline of new product coming on the market in terms of numbers. We are still historically low with respect to inventory. There are less than 5,000 available units on the market right now. We are at 50 percent of where we should be. There are a number of new projects coming on the market, but in total unit numbers, it’s going to have an insignificant impact on inventory. I think there is going to be a housing shortage and I think the shortage is going to be exacerbated by the fact that a lot of the inventory that we are going to see coming on the market is going to be posited toward the ultra-luxury buyer.

Residential sellers had the upper hand in 2013. Do you expect that to continue in 2014 or do you expect that dynamic to change?

I expect the dynamic to change slightly because buyers feel that value has reached a threshold. Buyers are going to start saying no to irrationally exuberant values. So I think we are going to see a more stabilized market where the momentum will go more to the buyer and there will be more equilibrium.

Sales volume hit the second-highest level in Manhattan in 24 years in 2013’s third quarter. What are you expecting when it comes to deal volume in the coming year?

It’s going to have to slow down at some point, but I don’t see that happening over the next 12 months because of the shortage. Absorption on market-rate properties will be very quick. Good product in a strong market will always sell very quickly.

The luxury market obviously did extremely well in 2013, but some have expressed concerns that developers are now paying too much for land and banking on getting per-square-foot prices that are unrealistic. What do you expect from the luxury sector in the coming year?

I agree with that statement and I think that the luxury sector of the market is going to feel some pressure, especially where developers need to meet certain prices because of the land cost and construction cost. Any developer that is expecting prices in a neighborhood that won’t command them will be caught with their pants down.

Which sectors of the market do you expect to perform well in NYC this year?

The market that has the largest void is the affordable housing in the luxury segment — anything priced between $1.5 million and $3 million. There is a void of good quality product in that category. Anything at that price point should do better than any other segment of the market.

Which geographic areas do you expect to struggle most in NYC in the coming year?

Anywhere that is too pioneering, where they are demanding prices that are too high for the neighborhood. It will be interesting to see what Hudson Yards does, but I am very bullish on West Chelsea and Tribeca and the fringe areas around those neighborhoods. The neighborhoods that could be disappointing would be Hell’s Kitchen and pockets of the Far East side.

What are your thoughts on a residential bubble? Do you have concerns about that in the coming year?

I think certain segments are in a bubble. There is always a concern about an unforeseen event that is going to initiate a correction or adjustment.

What new, big residential projects (other than One57 and 432 Park) do you expect to generate the most buzz in the NYC residential market in the coming year?

Larry Silverstein’s Four Seasons [hotel and condo] project in the Financial District will be one to pay attention to because it’s uncharted territory where prices have not been tested.

What impact, if any, do you think the new mayoral administration will have on the residential market in the coming year?

In the next 12 months, almost none. But it will have an impact into the pipeline of product for the next five years.

Noah Rosenblatt: founder, UrbanDigs LLC

Where do you expect the NYC residential market to be a year from now?

When we look at deal volume and year-over-year price action, 2013 was certainly a record year, but I am unsure the market can sustain that pace for another year. It’s unrealistic to expect deal volume to compete with what we just experienced, so I would lower my expectations on the future pace of contract activity and, ultimately, price action for 2014. At the moment, I think conservative price gains, in the 4 percent to 7 percent [range] is a safer assumption looking ahead the next 12 months. That would put us on a pace that is roughly half of the record-setting pace of 2013.

What are you expecting to happen with the inventory shortage this year?

Buyers have been dealing with declining supply since early 2009, the height of the credit crisis here in Manhattan. Only recently are we starting to see a ‘tick up’ in new monthly supply, but nothing that would move the markets in a noticeable way. As long as there is a continued lack of fear in the marketplace and pressure on trade-up buyers, I think inventory trends will continue to favor the sell side. By trade-up buyers, I mean those apartment owners who need to sell their smaller apartment and then immediately upgrade to a larger property. These buyers realize very quickly how tight inventory is and how leverage has shifted to the sell side. While market forces help them sell their smaller unit quickly, they may find themselves with very few options — or priced out of the higher price points. Therefore many of these would-be sellers are deciding to remain out of the markets altogether, further limiting supply.

Are you expecting sales activity to continue quickening or to slow down soon?

Given how furious contract activity was in 2013, I just can’t buy into a repeat of that pace. That doesn’t mean prices are going to fall, it simply means that I believe the pace we saw in 2013 to be unsustainable. An interesting way to look at it is that if we slow down 30 percent from 2013’s record levels of deal volume and price action, that would still put us on par for a solid 2014. I would put myself in that camp.

Do you have concerns about a residential bubble bursting in the coming year and what warning signs will you be looking for?

I have a hard time believing it’s a bubble if there is no widespread credit expansion. Yes lending standards opened up a bit after tightening up big time in 2010, but from where I am standing, banks have not loosened [too aggressively] over the past two to three years as policy-driven markets reflated. Who knows how long markets will react positively to federal policies. We all are wondering where prices would be without all these policies. The warning signs will likely first appear in credit spreads and then equities and bond markets will react. That’s how it started last time, in 2007, so that is where I’ll be looking again. The hard part is figuring out whether a minor blip is just that, a blip on a longer-term positive trend line, or if it’s a true warning of some bigger event.

Steven Goldschmidt: senior vice president, Warburg Realty

What are you expecting on the inventory front in the coming year, and how do you expect that to impact market dynamics?

Inventory will continue to fall short of demand. We don’t expect any major increase in inventory in the coming year, except perhaps in Harlem. New mega-developments, such as Hudson Yards, and the new towers along 57th Street, are still years away from coming to market. And smaller, trendy boutique [projects] won’t have much of an effect on inventory.

What do you expect from the luxury sector in the coming year?

The price per buildable square foot paid [by developers] for some locations is a cause for some hesitation, and luxury buyers are especially [price] savvy. Developers must still build the right building with the right amenities in the right location to achieve optimum pricing.

Which geographic areas do you expect to perform well in NYC in the coming year?

We expect to see significant activity in Harlem as well as parts of Brooklyn and Queens. Some properties in Bed-Stuy are being listed for as much as $1 million to $2 million … and we recently sold a townhouse in Long Island City for $2 million.

Which geographic areas do you expect to struggle most in NYC in the coming year?

Parts of the Upper East Side, especially high rise “cookie cutter” apartments, will continue to lag behind other neighborhoods.

What do you expect the biggest challenges to be in the coming year?

The lack of inventory remains the toughest challenge in terms of satisfying demand for apartments instead of driving buyers to outlying suburban areas.

What aspects of the current political environment do you think will impact the market in the coming year?

With the economy on the upswing and in a midterm election year, there will be pressure to avoid any major increase in mortgage interest rates. Many New Yorkers are anxious to see how Mayor de Blasio acts on his many campaign promises and how they affect real estate.

What new, big residential projects do you expect to generate the most buzz in NYC in the coming year?

Attention will certainly be focused on the new towers along West 57th Street, and the start of construction at Hudson Yards and a number of Downtown boutique projects. The industry will be watching these projects to detect any sign of weakness in the marketplace.

What trends will you be watching out for in the coming year?

New mortgage rules, including the new “Qualified Mortgage” rule will be important to monitor in terms of its effects on borrowing. The QM rule is designed to protect consumers from risky loans. That’s a good thing. But the new law will also establish some hard limits for debt-to-income ratios. Borrowers with too much debt may have trouble qualifying for a mortgage in 2014, when the new lending rules take effect. Lenders will continue to be risk averse, and the new Qualified Mortgage Rules will only make lenders more careful.

Noah Freedman: principal, Bond New York

Where do you expect the market to be a year from now?

I expect continued strength. There is nowhere for the demand to go and our micro-economy is strong and diversified. We will end the year at a higher price point than where we begin.

Sales volume hit the second-highest level in Manhattan in 24 years in the third quarter. What are you expecting when it comes to deal volume in the coming year?

It cannot sustain that level because there just is not the inventory, but it should be healthy.

What do you expect from the luxury sector of the market in the coming year?

That is hard to say. There is so much foreign demand for trophy buildings.… Developers take big risks for big rewards — that is the name of the game.

Do you have concerns about a bubble?

I think we are a long ways off from a residential bubble burst. It takes years to build, and we are in the first inning of this thing. That being said, it is a bubble, it’s always a bubble, timing the bubble is everything.

What trends will you be watching out for in the coming year?

I think it is the ever-expanding role of the international buyer. I was just in China, and the demand for New York City real estate is unprecedented.

What are you expecting out of lenders — either for NYC homebuyers or for NYC developers — in the coming year?

I expect them to continue to loosen standards as the market proves itself over time. As always, lenders favor those who don’t need loans.

What big brokerage developments are you predicting for 2014?

I expect more of the smaller players to be shaken out. You need to be very big or very very small.

Barbara Fox: president, Fox Residential Group

Where do you expect the market to be a year from now?

I believe the residential market will continue to remain strong until inventory loosens up. Resale inventory is at an all-time low. Fine pre-war co-ops are at a premium, and well-renovated, well-priced units are selling quickly and with multiple offers.

What do you expect the biggest challenges to be in the coming year?

As a broker, we are continually dealing with product shortage and competition among the ever-expanding residential brokerage industry. With inventory low, the biggest hurdle will be getting into properties early in the game and convincing buyers to step up to the plate quickly and forcefully. Securing new exclusives will become increasingly difficult. This also drives home the need for constructive cooperation among those in the brokerage community. Relationships and fair dealing among brokers become paramount.

David Kramer: principal, Hudson Companies

Where do you expect the NYC residential market to be a year from now?

Never listen to anyone who offers any hint of certainty about what’s going to happen in the market. Our proformas typically show rent growth of 3 percent annually in rentals, and we don’t expect price growth for condos. We try to be reasonably bullish without being exuberantly optimistic. We’re certainly hoping that some of the neighborhoods where we’re developing will have great upsides, but you can’t count on it in any given 12-month period.

Some have expressed concerns that developers are now paying too much for land and banking on getting per-square-foot prices that are unrealistic. What do you expect from the luxury sector of the residential market in the coming year?

Depending on location, it’s a legitimate concern. I’d like to see more comps with unabated taxes to get a little more comfortable with condominium prices in a post-421a landscape.

What do you expect the biggest challenges to be in the coming year in the NYC residential market?

We’re back in an environment where land prices are escalating, construction costs are escalating, equity is enthusiastic, and yet, as a developer, you have to stay focused and disciplined about the projects you take on and create reasonable expectations.

What impact, if any, do you think the new mayor will have on the market?

So far, de Blasio has made fantastic appointments [for] the first slots for transition team chairs, first deputy mayor and police commissioner. I expect he will continue the good work and help keep the residential marketplace robust, dynamic and revenue producing. If he ends up doing something about the outrageous tax disparity for new rentals and condos, that would be a plus, too.