When Gary Barnett launched sales at One57 in 2011, he was met with skepticism.
Prices at the Extell Development tower ranged from $3,000 to $8,285 per square foot. Some in the industry called those asks “very rich” and questioned whether buyers would fork over such sums.
But they did. In 2014, Michael Dell paid $100.47 million for the top penthouse, shattering the city’s sales record and solidifying Billionaires’ Row position as the epicenter of ultra-luxury development.
Still, a condo boom during the 2010s has left few (if any) undiscovered submarkets, said Barnett, who weighed in on aspirational pricing, discounts and the fallacy of an annual pied-à-terre tax.
What’s the biggest change you’ve seen in development over the past 10 years?
One significant difference is we’ve never had such a [sustained] period of time where capital was so cheap. Essentially, if you had money in the bank you got 0 percent return. So we had a flood of cash into the real estate business. It was viewed as very safe. You might not make 15 percent, but you made a few percent, and that caused a tremendous surge of development.
The second thing is, we’ve seen a very sharp jump in values. That’s been great, of course, for the city’s tax revenue. If you look back at the end of the last decade, prices were nowhere near what they are today on average. I’m not [just] talking about Billionaires’ Row. That was already expensive at the end of 2008. But you could get into a beautiful building in Tribeca for $2,500 per foot. What we saw in the last decade was a tremendous upsurge in cost to developers, because construction costs went up sharply.
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What about super-luxury?
The super-luxury also increased in supply, but that’s been absorbed. But in the mid-range at the high level — $2,500 to $4,500 per foot — there are buildings all over town with really aspirational pricing and large units. If you look across the board, that’s the weakest part of the market. People who are buying in the $5 to $10 million range, they’re not the super wealthy. They’re being very careful about what they’re getting and paying. There are a lot of buildings that might just be too expensive for what they are and people are not ready to pay that price.
I’m speaking about us, as well. We have a building — the Kent [on the Upper East Side] — it’s a spectacular building. But we built a lot of units in the $6 million to $9 million range, and we see people saying, “I want to be on Park Avenue for that number.” So that building is slow. We’re offering discounts to move the product.
Do you see some developers getting inventory loans?
You are seeing troubled projects that haven’t sold and now need inventory loans to pay back people. There’s not much margin. The banks will be wary of giving those loans. But in a way it’s a healthy correction for the oversupply. You have cheap money, a lot of developers who want to get into the field and then an oversupply. Then the money gets nervous and you don’t see the availability anymore.
Overall, New York City is booming. If there are no shocks to the system, the market will eventually recover. I think we’ve kind of hit bottom at this point in terms of pricing. But the market will eventually recover and we’ll have another upturn. This all assumes nothing dramatically changes in the overall economy or in government policies.
How do you feel about your Billionaires’ Row projects?
We’ve continued to see very good activity on the upper end. We don’t have the velocity we’d like to see, but we are signing deals. We are chipping away at the inventory. There’s less inventory at that super high level. There are also fewer buyers. But I don’t think it’s unhealthy. It’s still reasonably healthy — unless the government imposes new taxes will absolutely shut down the real estate industry.
You’re talking about the new Transfer Taxes?
Transfer taxes — it was the right thing to do. It takes money out of my pocket, plain and simple. But it didn’t dramatically move the market because it was measured. It is a one-shot tax. I’ll certainly look more carefully at the next deal, but it’s on the margins.
But an annual pied-à-terre tax, all of a sudden people capitalize that. It would demolish the value of real estate. People don’t realize how bad the effects will be. This is the state making a grab and damaging the New York City tax base. Even the constant talk is damaging. It’s irresponsible to talk about something that will damage New York City so much.
Real estate taxes and other revenue provides over 50 percent of the New York City budget. You want to tamper with that because some state senator wants to get a headline? And by the way, he’ll destroy the value of his constituents’ condos and co-ops.
How significant are foreign buyers to the luxury market?
I can’t emphasize enough, the foreign market is a very important part of our market — as it is in any large, international city. It has lessened. The Chinese were such an important force several years ago, but they’re still there. We’re seeing buyers from India picking up. We see buyers from Europe and of course the rest of the United States. There are plenty of big buyers who want to own something in Manhattan. If you drive those buyers away, you can forget about the values in the residential market.
Will you be as prolific during the next decade?
We are being very, very careful going forward, specifically in New York City. The market is still oversupplied. And we don’t know how [politicians] will re-write the rules of the game.
The politicians say, “Look, we can do whatever we want to building owners because they can’t pick up the buildings and leave.” Well, they can put the buildings on the market and go somewhere else. We love New York, but if you make it too risky it’s going to happen.
We’re definitely looking to do more outside [New York]. In New York City, we’ve moved more into the rental arena. It’s more predictable. People think there’s no limit to what you can do to try to grab from the [building] owners and developers. And there is. Here we are with the pendulum swinging and I think it’s going too far. When it does, it will have consequences.
What do you think the “next” amenity or new neighborhood will be?
I think there will be some trend toward micro units. I also think land prices will come down — maybe not to a point where you can build rentals. But I do think the city has to get more invested in trying to encourage affordable housing now.
I don’t see any other dramatic changes, or undiscovered situations that will really come up. We’ve had an incredible boom these last several years and most of the stuff has been discovered. Hudson Yards is quite a feat. We’ve seen substantial expansion of the Billionaires’ Row area. You’ve also seen substantial development along the High Line.