Dissecting NYC’s luxury market

A breakdown of the future of Manhattan’s high-end sales market, which is already showing some cracks

Sep.September 01, 2014 07:00 AM

luxury-cover-jumpNew York City’s luxury residential market has, for the last few years, been firing on all cylinders.

But there may be cracks in the veneer.

Top brokers said they’re seeing some skittishness and price sensitivity at the highest reaches of the city’s residential market. And frenetic building in certain pockets of the city (most notably the Midtown corridor and the neighborhood surrounding the High Line) has some brokers concerned that developers could overload the market with luxury condo projects.

There’s no doubt, of course, that trophy apartments are still trading for astronomical prices: This spring alone saw two $70 million record co-op sales. And during the second quarter, the average price per square foot among the top 10 percent of residential sales in Manhattan hit a new record of $2,735 — a 48 percent spike from five years ago.

Nonetheless, several top brokers warned that if prices climb too high, buyers will revolt and the market will start to cool. Already, some said the sales volume at “older” luxury condos is considerably less active than it once was.

“It’s plateaued,” said Douglas Elliman broker Patti LaRocca, who added that even some under-construction buildings are feeling the reverberations.

Macklowe Properties outsourced sales this spring at 432 Park (to Douglas Elliman) and 737 Park (to Corcoran Sunshine), a move sources said occurs when a developer is looking to accelerate sales.

In addition, top brokers said there’s less hysteria at Extell Development’s One57, where 25 percent of the 94 units in the building are still unsold, roughly the same availability as a year ago.

“It’s going to be interesting,” said top Elliman broker Jacky Teplitzky, speculating about One57. “Will [Extell] have to do something to push the last inventory?”

Luxury broker Leonard Steinberg, president of Urban Compass, said the biggest recent change is a scaling back from the frenzy that dominated the past 18 months. The market “is reverting from an insane market to a strong, steady market,” he said.

Yet sources say if the luxury market starts softening, the rest of the market could follow.

This month, The Real Deal analyzed a slew of metrics, ranging from bread-and-butter statistics like the number of luxury sales to more nuanced indicators, like the number of foreign investors applying for EB-5 visas, to dissect the underlying strength of the luxury market.

Resistance to price jumps

737 Park Avenue

737 Park Avenue

As mentioned above, the average price per square foot in Manhattan’s luxury market — defined as the top 10 percent of sales — climbed to a record $2,735 during the second quarter, up more than 36 percent from $2,006 last year, according to real estate appraisal firm Miller Samuel.

The average sales price, $7.25 million, and median sales price, $4.97 million, were also up year over year.

Jonathan Miller, the president of Miller Samuel, attributed the increases to new developments hitting the market, and predicted prices would keep climbing, because new condos tend to be larger and pricier.

This spring, the average size of a new development condo was 3,737 square feet, up nearly 22 percent from the same time last year, he said.

Top brokers cautioned that developers might encounter price resistance if apartments continue getting bigger. Steinberg said some developers are actually building smaller units to make them more affordable, even for high-end buyers. For example, he said, Rudin Management is building three-bedroom apartments measuring 2,300 square feet at Greenwich Lane, versus a more typical 2,500 or 2,600 square feet.

Notably, while luxury sales have increased in the last year compared to the previous three years, sales of four-bedroom apartments have dropped. In the second quarter, 82 four- bedroom apartments sold, down from 104 in the first quarter, according to Miller Samuel.

“Everyone is focused on dollars per square foot,” Steinberg said. “The developer has paid so much for the land per foot, [but] you have to be able to make the apartments still affordable.… The only way to do it, if you need three or four bedrooms, is to shrink the proportions.”

Growing price gap between new condos and resales

While prices for new development condos have always been higher than resales, the gap is now widening.

The median sales price for resales — some 91 percent of the luxury market — was $4.49 million in the second quarter, up 17 percent from $3.85 million last year.

But that didn’t keep pace with median prices in the luxury new development market, which hit $17 million, a stunning 169.5 percent jump during the same time period.

Sources expressed some concern about how the widening gap is exacerbating an imbalance in the market.

In addition, the fact that so much of the new inventory coming online is geared toward über-wealthy buyers is undoubtedly going to push more people out of the city, Miller said.

“One of the glaring challenges facing New York City is affordable housing, and by affordable I don’t just mean subsidized,” Miller said. “Middle class housing is really a challenge.”

Dip in number of luxury contracts signed

During the first half of the year, the number of contracts signed for properties costing $4 million or more dropped by nearly 8 percent compared with the first six months of 2013, according to data compiled by luxury residential brokerage Olshan Realty.

Firm owner Donna Olshan attributed the dip to tight inventory.

For the first half of 2014, Olshan reported 701 contracts signed for $4-million-and-up properties, compared with 759 at this time last year.

“When everyone talks about the market, they talk about the strength and excitement going on, but we are seeing less deals done,” said Kelly Kennedy Mack, president of Corcoran Sunshine Marketing Group, whose data from the second quarter showed a 15 percent drop in signed contracts, compared with a year ago.

According to Mack, the dip reflects a lack of units priced at $5 million or less, a byproduct of skyrocketing land prices that have forced developers to build ultra-luxury properties and compete for the same high-end buyers.

In addition, Olshan’s stats show the number of contracts signed on trophy apartments, priced at $10 million and up, was relatively flat during the first half of the year. Even though trophy sales are a market unto themselves, she said, they do impact the rest of the landscape.

“It stimulates brokers to try and get a listing of a unique property and try to replicate it,” she said.

Luxury inventory overload

56 Leonard Street

56 Leonard Street

Despite the overall inventory crunch, the number of luxury properties on the market is starting to rise.

During the second quarter, there were 1,393 units for sale in the top 10 percent of the market, up more than 20 percent from a year ago, according to Miller Samuel.

Miller attributed the uptick to new developments hitting the market in more force in recent months, and he predicted inventory would keep edging higher.

“The luxury market is easing or pulling back from a frenzied state a little sooner,” he said.

Data from Corcoran Sunshine show a massive number of new units are set to hit the market in the coming months.

Mack projected 2,500 new development units would come online by the end of the year, and that 6,000 would hit the market in 2015. That’s still a far cry from the 8,000 new development units launched in 2007, but it’s a 151 percent increase from 2013.

Mack said the average asking price for all new development units rose 38 percent from last year’s second quarter, to an “astounding” $7.5 million.

“It’s a larger, more glam unit,” she said, but added that “as much as the demand still exists in those categories, the higher up the chain, the buying pool gets smaller.”

Others have expressed concern that an influx of new condos could oversaturate the market.

Olshan said the market for properties priced at $10 million and up is “the most worrisome.”

“It’s a concern about how many units are on the market now and how many will be, with the upcoming product in the Midtown corridor,” she said.

Miller put it this way: “I don’t think there’s anybody in the new development space that doesn’t have some concerns about a few years down the road, in terms of having too much product.”

Taking longer to sell high-end apartments

While the public perception is that New York City apartments are selling fast, it’s now taking longer to sell high-end residential properties.

The luxury absorption rate — defined by Miller Samuel as the time it would take for all existing inventory to sell out — was 12.5 months during the first and second quarters. That’s significantly higher than the 8.7 months and 10.8 months posted in the final two quarters of last year, respectively.

The absorption rate had mostly been dropping for the last two years.

Frederick Peters, president of Warburg Realty, said he seen “something of a slowdown” in the $5 million to $15 million market.

“Buyers are just acting more cautiously than they did in the spring,” he said. “There’s less hurry.… I would think we’re going to be seeing more price drops come September.”

Urban Compass’ Steinberg corroborated that trend, saying his sales transaction volume slowed this summer, even though property showings have been strong.

“People feel they have more time,” he said. “They don’t feel as pressured to commit. They want to see it all before they decide.”

Mack said demand is still high, but new development, in particular, has given buyers more options.

“When buildings like 150 Charles and 56 Leonard were introduced, they were the only high-end luxury buildings Downtown,” she said.

Today, there are more choices, and even more on the horizon.

“You’re seeing those purchases allocated among a greater pool of buildings, so you’re seeing absorption regularize,” she said.

Listing discounts deepen

Buyers searching for luxury apartments were no doubt happy to discover that there were deeper discounts to be had off listing prices in the second quarter.

Listing discounts, or the difference between the listing and closing prices, hit 3.7 percent, on average, in the second quarter, according to Miller Samuel.

That means that a unit listed for, say, $5 million, would end up selling for $4.8 million.

While that discount is far lower than the 8.6 percent discounts that the market was seeing in the wake of the recession in mid-2009, it’s up from the tiny .9 percent discounts logged during the first three months of this year.

Kirk Henckels, vice chairman at residential brokerage Stribling & Associates, reiterated what others told TRD: That buyers in the $5 million to $15 million resale market have been increasingly price sensitive. He said he’s seen the trend since late April.

“The whole resale market just kind of changed,” he said. He cited a mint-condition co-op on Park Avenue in the 70s, priced at $9.5 million, that’s had just five showings since Easter.

“I’ve never actually seen that happen before,” he said, referring to the slow foot traffic.

Elliman broker Frances Katzen also said the majority of discounted properties were resales, as sellers in that segment of the market are trying to compete with the influx of new projects that developers are building.

“It’s a function of not as much demand, and a little more supply,” she said.

Investors getting more cautious

Luxury real estate in New York City has outperformed the S&P 500 over the past decade, with a 6.5 percent compound annual growth rate, compared with 5.6 percent growth for the stock market index.

The prices of oil and gold, however, both blew by real estate, with a 10.8 percent and 12.8 percent growth rate, respectively.

Those higher oil-and-gold growth rates offer an attractive alternative to investors contemplating where to put their cash.

In addition, some brokers are noticing that existing real estate investors in New York are becoming slightly more cautious.

Elliman’s Teplitzky said some investors who have $10 million to $15 million to spend in New York are now choosing to buy two or three smaller apartments, instead of one larger one. The runs counter to the recent past, when many investors were brazenly writing massive checks for large apartments.

“If you’re coming in as an investor to park the money,” she said, you “don’t want to park the money and gamble it on one apartment.”

However, according to data compiled by online real estate listings company CityRealty, the priciest Manhattan condos are still proving to be good investments.

For example, the average price per square foot at 15 Central Park West was $6,288 in 2014 — up from $5,203 in 2013. That’s an 11.6 percent annual growth rate. At the Time Warner Center, the average price per foot was $4,689 in 2014 — up from $4,454 in 2013, or 9.9 percent.

Correlation to fine art

Ultra-wealthy real estate investors, brokers say, often collect luxury properties the way they do fine art.

But the art market is increasingly polarized, causing some to worry about instability and a potential bubble. Works exceeding $1.4 million made up only 1 percent of the total number of art sales last year, yet constituted 66 percent of the total dollar volume of sales, according to a report by the European Fine Art Foundation.

Overall, the report said, art sales worldwide increased 8 percent to $65.9 billion in 2013, while the number of transactions also rose.

But in 2013, it said, the “middle market showed slower growth,” creating a more lopsided market. “[Art dealers] in the middle range were suffering from the lowest demand,” the report said.

Stribling’s Henckels said the same is true for real estate. “It’s the top quality that’s going well, and the rest is not,” he said.

EB-5 visa growth hits wall

Wealthy foreign investors flooded New York’s real estate market in recent years thanks, in part, to the popularity of the EB-5 visa program, which gives investors a green card in exchange for $500,000 and a commitment to create 10 jobs.

But as of late last month, the program’s annual quota of 10,000 visas was exhausted.

Practically speaking, investors cannot apply for EB-5 visas for the next month —until the new federal fiscal year starts Oct. 1.

But because investors from a single country can’t hold more than 7 percent of the visas issued, investors from China — where the program has been exceptionally popular — are already lining up in force to get a piece of next year’s action. That will create a backlog among Chinese investors, said Kate Kalmykov, an attorney at Greenberg Traurig who specializes in EB-5 visas.

“Depending on how long the wait line becomes, it may become less desirable of an immigration option for foreign investors,” she said.

Longer wait times have a downside for developers. Currently, EB-5 investments are structured as five-year loans, but a longer waiting period could change that and add one or two years to the duration of a loan. If the loan is lengthened, but the developer manages to sell out their project, they’d still be on the hook to the lender.

“If you took a loan for five years and you’ve sold [your condos], you don’t want to keep paying interest on the loan,” Kalmykov said.

In a sign that the popularity of the program is hitting a wall, the growth in applications has been slowing over the past two years. Last year, there were 6,346 applications, up just 5 percent from 2012, federal data show. That’s a stark contrast from 2011, when applications skyrocketed 95 percent to 3,805.

Steve Polivy, chair of the economic development and incentives practice at Akermin LLC and managing partner of the firm’s New York City office, said EB-5 usage surged in 2009 when traditional financing was hard to come by.

“The EB-5 component of the real estate market is getting saturated,” he said. “There’s a natural limit in the real estate world to the types of deals that will seek EB-5 investment.”

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