Experts weigh in on a beleaguered luxury market

By Melissa Dehncke McGill | October 28, 2009 07:59PM

The beleaguered luxury real estate market in New York is beginning to show some positive signs, but there is expected to be a lot of stumbling along the path to recovery.

The high-end market here has been harder hit in terms of both price drops and activity than any other sector, and there’s still a sense of nervousness among many about buying multimillion-dollar properties.

However, in this month’s Q & A, The Real Deal talked to market analysts, top luxury brokers and heads of firms who said that while there is still a lot of caution, they are beginning to see a mild increase in activity in Manhattan’s most exclusive property trades.

Within the last two months, some say they have noticed an increase in buyers, who for the first time in the last year are not convinced that prices will continue to go down.

But sales are still way off, and one analyst disputed the notion that prices are going to head back up anytime soon, saying “inventory is still grossly overpriced for the current conditions.”

Meanwhile, many of the transactions that have taken place are from all-cash buyers who are paying lower prices, or from buyers who are putting in at least half of the cash needed to finance the purchase. That means the jumbo mortgages that drive the segment are still not getting easier to obtain — a reality that does not bode well for the sector in the near future. And many of those interviewed said sellers are still not dropping their prices to the levels they need to be at to lure buyers. They said the $2.6 million to $5 million range and the $10 million to $20 million range have suffered most.

For more on what’s going on, which areas of Manhattan have seen the largest drops in the luxury sector and which ones are holding stronger, we turn to our panel of experts.

Jonathan Miller

president/CEO, Miller Samuel

How is the luxury market faring in relation to the overall Manhattan market?

There are two answers to that. If you are talking about the level of activity, it’s faring worse. There’s currently more energy in the sub-$2 million market than the top 10 percent of the market, which is how I define luxury. In terms of prices it is also being hit considerably harder than the lower end of the market. It’s the disparity between financing for jumbo mortgages versus conforming mortgages. Bank underwriting and qualification on the jumbo side is much more restrictive, which is keeping transactions down.

What sort of price discounts are you seeing for luxury properties compared to price discounts in the overall market?

It’s not that much different. In fact, in the third quarter the listing discount was actually less for luxury, at 4.1 percent, than it was for the overall market, at 7.6 percent. That explains why you have fewer sales. People are simply not releasing properties at fire-sale prices, so far fewer transactions are being done. The discounts we are reading about are related to very severely overpriced properties.

Are you seeing more distressed sellers in the luxury market now compared to three months or six months or a year ago?

Not noticeably, but what happened is over the summer we saw a tremendous amount of all-cash buyers in the luxury sector. Every time I speak with a group of real estate agents and they tell me about their high-end transactions, I always ask, did the buyer get a mortgage? In the three months and about 50 individuals I’ve spoken to, I’ve never had somebody say yes. The lenders are behind the market. [But still,] there aren’t enough cash buyers out there to say that the market can go back to business as usual.

Why do you think there are so many cash buyers, and what impact are they having?

Anecdotally, I am getting feedback that sellers are opting to take a slightly lower offer for a cash purchaser, or someone getting a 50 percent or 20 percent mortgage — definitely a mortgage less than 50 percent, because the transaction is clean. That may serve to depress prices more than they normally would have simply because cash is driving the market.

What would you say is the primary challenge of selling luxury real estate in New York today?

For a seller to recognize the current market conditions, and price to the current market and not to a prior high-water mark. That’s the key problem. [You] tend to find sellers on the high end are more disconnected with market conditions than the overall market, and that presents a significant challenge to brokers today.

How does the luxury market in New York compare to three months ago and six months ago in terms of inventory?

At the end of the second quarter we had 1,844 listings and now we are down to 1,616, which is a 12.4 percent decrease. Even though there is a decline in inventory, that doesn’t speak to how accurately the product is priced. Inventory is still grossly overpriced for the current conditions.

Have a lot of high-end brokers started dealing with less-expensive sales?

What you are seeing is a lot of refocusing on the middle market and the entry-level market. There are too many agents that were focusing, even during the boom years, on the high end because the rewards were so great. Now that’s ended. It doesn’t appear to be temporary; it’s more a matter of survival. I’m definitely seeing that.

Which segment of the luxury market would you say has suffered most by price?

Probably in the lower half of the upper 10 percent, from about $2.6 million to $5 million, is the weakest segment because those were Wall Streeters putting 10 percent down. Now, at 20 to 35 percent down and job security not solid going forward, that’s where you are seeing the fallout. Over the last decade that was the sweet spot of development as well. Now it’s the most vulnerable segment.

Neil Binder

principal, Bellmarc Realty

Which segment of the luxury market would you say has suffered most by price?

Over $10 million has definitely been hit hard. It’s hard to get renters for those properties, too.

What sort of price discounts are you seeing for luxury properties compared to price discounts in the overall market?

We had seen some [price declines], but there is [now] no further decline from the drop in the summer.

Are you seeing more distressed sellers in the luxury market now compared to three months or six months or a year ago?

Definitely more people are feeling pressure. It was one thing when the catastrophe happened, but as their bank accounts get lower they are feeling more pressure. It’s been happening all over the country, but now it’s happening here, too.

What’s the balance of power like between buyers and sellers in the luxury market now compared to three months ago, six months ago or a year ago?

Buyers are in the catbird seat. The exception is in those pockets of sparse inventory like the West Side where there are multiple bids. On the West Side, for a classic six there are 10 to 30 people at an open house. If there are a lot of choices in a given category and inventory is high, the wave is against the seller.

Obviously distressed sellers don’t want buyers to know that they have to sell. So are you hearing more about “whisper listings” on the high end, where luxury apartments are being quietly shopped around?

I don’t take as a rule that it’s a bad thing for the buyer to know that the seller needs to sell. It’s the opposite, it represents good value, so I urge the seller to use it. Sometimes it works in actively promoting bids and it can create a crescendo with buyers to bid up the pricing. It’s a good thing to let the buyer know that the seller needs to sell.

Which neighborhood in Manhattan has been hardest hit when it comes to high-end sales?

The Financial District is struggling. Also, sales in Greenwich Village have dropped because sellers have kept their prices pretty steady. They have refused to drop their prices, so people in [our] Greenwich Village office have had to do most of their sales outside that neighborhood.

What surprises you most about the luxury residential market in Manhattan right now?

I am surprised that the market has not gone down further.

Wolf Jakubowski

managing director, Brown Harris Stevens

How is the luxury market faring in relation to the overall Manhattan market?

For the last 30 years, my practice is almost exclusively the sale of townhouses. So my observations relate to houses only, and only those in the prime Manhattan markets — Upper West Side, Upper East Side, Midtown and Downtown. I maintain my own data on these townhouse sales. Beginning in March of this year, each month has seen a typical number of sales transactions occurring, albeit at lower prices. Trades have occurred at 20 to 30 percent discounts from the first-quarter 2008 peak.

Are you seeing more distressed sellers in the luxury market now compared to three months or six months or a year ago?

There are a few townhouse owners I know who are experiencing special financial problems, but these are very few. In each case, the bank is working with the owner to allow for time to sell the property. Generally the bank, after speaking with me, determines there is sufficient equity at today’s prices and that their position is secure. I repeatedly hear that the banks have no interest in taking back these large properties at substantial costs to themselves, only to be saddled with the resale obligations and additional risks.

What’s the balance of power like between buyers and sellers in the luxury market now compared to three months ago, six months ago or a year ago?

Just within the past 60 days I have noticed a sense of urgency creep into conversations with buyers, and they have been bidding more aggressively. Previously buyers felt confident that time was on their side and prices had only one way to go: down. As the houses they are interested in are sold or taken off the market, they reconsider their assumption. Remember that with only 200 to 250 townhouse sales occurring in an average year, the number of choices available to a townhouse buyer are much fewer than those available to a luxury apartment buyer.

How does the luxury market in New York compare to three months ago and six months ago in terms of inventory?

We have been at a high plateau of available houses for about 12 months. Although a large number of owners have taken their properties off the market and sales have been steady for the past six months, townhouse inventory is still high. The best indicators of a coming correction in inventory are the announced reductions in asking prices.

Are you hearing more about whisper listings on the high end?

The owners who have been calling me of late to “whisper” the availability of their house do not have realistic expectations and have not been accepting my advice about the new reality. So I have not been paying much attention to them.


What are buyers looking for today, and how has that changed over the last year?

In townhouses, the super-high-end is homes over $25 million, and I am only aware of a single sale in the last couple of months at that level. During 2007 there were nine such sales. Personally, I have not changed my practice. I continue to sell houses starting at $3 million, but the bulk of my buyers are interested in being in a house for between $5 million and $10 million.

Which segment of the townhouse market would you say has suffered most?

Within the townhouse universe, houses that require substantial renovation have drawn the least interest from buyers.

For the last year, Wall Streeters have seemingly been in real estate retreat on the buying side. Is that changing now?

Only within the past month have I had serious inquiries from people in finance. None of these were talking about $20 million listings, like they have in the past.

Can you give us an example of a deal on the luxury end of the market that you were either involved in or know about that illustrates what’s happening in that segment of the market today?

The best deal I know of occurred at the bottom of the market this year. It was the sale of a Kips Bay house. It had gone to contract for $4 million in 2008, the buyer never closed, and it resold in the first half of 2009 for $2 million.

Which neighborhood in Manhattan has been hardest hit when it comes to high-end sales?

As far as townhouses are concerned, I think it’s the Upper East Side. There are just a lot of houses competing for fewer buyers.

Daniela Kunen

managing director, Prudential Douglas Elliman

How is the luxury market faring in relation to the overall Manhattan market?

I think it’s picking up. Certainly activity has picked up and there have been a number of sales. Buyers are feeling that the market is stable and they are jumping in before prices start going up again.

What sort of price discounts are you seeing for luxury properties compared to price discounts in the overall market?

In the luxury market I’ve seen 20 to 25 percent; with the overall market as much as 30 percent. But anytime there is an apartment that has special features, the discount is less, probably 15 to 20 percent.

What are you seeing in terms of inventory in the luxury market?

We are very tight on the inventory in the luxury market, and the reason for that is a lot of sellers are holding on. The trend I’m seeing is sellers putting their property on the market, and if the property doesn’t get a certain level that the seller anticipated, they are withdrawing their property. Therefore the inventory is greatly controlled.

How does the luxury market in New York compare to three months ago and six months ago in terms of inventory?

The inventory is only very slightly higher. It’s not accumulating. There is still a shortage for any particular buyer that wants a six-room, seven-room, or a 10- or 15-room apartment. There are very few apartments in each category to show them, a handful — literally, if they are confined to a certain area. For example, if they just want the Upper East Side close to Fifth Avenue or they want Central Park West, there are very few apartments to show them.

How has the brokerage world changed for the super-high-end?

Sellers have become more selective in choosing who represents them. They are looking especially for brokers who have been through down cycles before and weathered the storm.

Which segments of the luxury market would you say have suffered most and least by price?

Apartments between $10 and $20 million have suffered the most, and that is because of this reluctance on the part of purchasers to spend that kind of money on real estate. What was hit the least were apartments under $1.5 million, because a lot of first-time buyers took advantage of the low mortgage rates.

Which segment of the luxury market would you say has suffered most by property type?

Townhouses and co-ops. Generally speaking, people who buy townhouses can be more highly leveraged than those going into expensive co-ops because they don’t need multiples of liquidity to purchase. In general, they may be less established than those people buying co-ops. In this economy the less established people were hurt the most. The people buying co-ops between $10 and $20 million are largely comprised of the financial community, and they are still a bit nervous. The condo market hasn’t been hit as much at the luxury end because of the international draw and devaluation of the dollar, so the purchase becomes a wise investment for foreigners.

What are the biggest price drops you’ve heard of recently in the luxury market?

I have seen a significant price drop on Fifth Avenue. Many of those buildings are all-cash buildings. They don’t encourage financing. That’s where I have seen the most hesitation and price drops. This is in the $10 to $20 million apartments; that seems to be the segment hesitating the most. The price drop has been about 25 to 30 percent in that area, which draws in large part Wall Street people, who have been very nervous over the last six to eight months. That’s also where I now see the activity increasing and people getting ready to buy. I believe that will happen after those bonuses are paid in January.

Leighton Candler

senior vice president, the Corcoran Group

How is the luxury market faring in relation to the overall Manhattan market?

The luxury market lags the lower market by several months. In the lower entry-level market, the first-time buyers come forward sooner as they seize the opportunity quickly, when prices have reached a level where they can enter the market for the first time.

What would you say is the primary challenge of selling luxury real estate in New York today?

The balance the seller weighs of waiting for a stronger market, or accepting the lower valuation.

Which segment of the luxury market would you say has suffered most by property type?

Properties that needed renovations suffered the most, as they always do in a downward-sloping market. Buyers are hesitant to purchase and then continue to invest in a renovation if the property is not increasing or holding steady in value. Without question, the best values on the market are those needing renovation, and those will see the highest value differential in the recovery.


Michael Pellegrino
Michael Pellegrino

senior vice president, Sotheby’s International Realty

What sort of price discounts are you seeing for luxury properties compared to price discounts in the overall market?

Different markets have seen different percentages, but overall there have been 20 to 50 percent drops. The major properties have not dropped as much as everybody would think.

What would you say is the primary challenge of selling luxury real estate in New York today?

The media. When there is a lot of negative media, it affects prices.

For the last year, Wall Streeters have seemingly been in real estate retreat on the buying side. Is that changing now?

They are back but very cautious. They are not being reckless.