NYC leads way in recovery race

Manhattan market stabilizes, while rest of country plays catch-up

Jul.July 29, 2011 03:25 PM
The gulf between New York City’s real estate market and the rest of the country has always been wide. But that disconnect appears to be growing.

“Manhattan seems to be one of the lucky ones,” said Jonathan Miller, president and CEO of Miller Samuel, who called the Big Apple one of “the best housing markets in the country, relatively.”

For example, Manhattan’s median residential sale price in the second quarter was only 17 percent below the market peak in 2008, according to the most recent report from brokerage Prudential Douglas Elliman, which is prepared by Miller. That’s an improvement from the worst depths of the downturn, when Manhattan prices were 25 to 30 percent below the high, said Miller, who also does market research for Las Vegas, Washington, D.C., Baltimore and Miami.

By contrast, homes in Las Vegas, one of the hardest-hit markets in the country, have lost around 60 percent of their value over the past few years, Miller said. And, the nationwide average decline from the peak of the market is currently around 30 percent.

Unpleasant housing statistics have also abounded elsewhere outside New York City, leading many experts to conclude that a “double dip” in house prices has already begun nationally. According to the Standard & Poor’s Case-Shiller Index, national housing prices dropped to a “new crisis low” in March, though they did bounce back slightly in April — jumping 0.7 percent for the 20-city data set that was studied. Meanwhile, the index found that the number of existing home sales rose in May nationally, but is still roughly 15 percent below last year’s volume.

Here in Gotham, by comparison, residential prices have remained stable.

In the second quarter, the Manhattan median sale price dropped 5.5 percent to $850,000 from $899,000 in the same period last year, but rose 8.7 percent from the previous quarter. And, sales volume, while down 3.8 percent from last year’s second quarter, jumped 10.7 percent between the first and second quarters of 2011.

In the commercial sphere, Manhattan is also rebounding faster than the rest of the country.

According to data from the CoStar Group, the price per square foot for commercial office rents has been increasing here since the second quarter of 2010, while the average price per square foot nationally for urban markets declined over the same period (with the exception of 2010’s fourth quarter, when there was a slight uptick).

Indeed, the average asking rent peaked in the Big Apple in the second quarter of 2008 at $63.82 per square foot. While rents dropped to a low of $42.63 last year, they’ve since risen 8 percent to $46.05, according to the CoStar data, which includes all building types.

Nationally, however, office rents are moving in the opposite direction.

While asking office rents for urban markets peaked nationally at an average of $24 a square foot in the first quarter of 2008, they dropped to a new low in 2011’s second quarter, to $21.34.

CoStar’s senior real estate strategist, Chris Macke, said when compared solely to the country’s 10 “major” office markets, Manhattan also outpaces its counterparts. While some of those cities, such as San Francisco, are performing strongly and seeing rent increases, others, like Phoenix and Philadelphia, are clearly struggling.

But on the bright side for the nation overall, Macke noted that the rate of decline is slowing down and the amount of office space being taken by tenants (also known as the net absorption) saw a big boost in the second quarter.

Plus, Macke noted that while Manhattan is rebounding faster than the nation as a whole, it also fell harder because there was a much bigger run-up here during the boom.

Indeed, that seemed to bear out on the investment sales side, too, where the most recent figures show that Manhattan saw three times as much growth as the rest of the country.

According to preliminary numbers, Macke said Manhattan saw about $8.4 billion in building sales for the second quarter of 2011 — a 189 percent increase from the $2.9 billion it logged during the same time in 2010. By comparison, nationally there was $73 billion in building sales for the second quarter — only a 65 percent increase from the $44.5 billion registered during the same quarter in 2010.

Defying history

Explanations for New York’s relative strength range from the obvious (ties between the Manhattan economy and Wall Street) to the more esoteric (the condo and co-op conversions of the 1990s strengthened lending standards and decreased financial exposure here).

“We have been buoyed by foreign buyers, and the weak dollar is certainly helping, and Manhattan employment is better than the national average and the region,” Miller added. “And then you have total Wall Street compensation, which is up, and a much lower market share of distressed sales in foreclosure activity.”

Manhattan obviously has not been immune to this downturn (during the darkest days of 2009, residential sales volume dropped almost 50 percent). Still, Robert Sammons, vice president of research services at Cassidy Turley, agreed that employment is one of the key reasons Manhattan hasn’t been hit as hard as the rest of the country.

“The key to this has been job growth, and in New York we have had incredibly good job growth in 2010 and year-to-date in 2011, and that really surprised a lot of people,” he said. “We gained jobs, and [more] important for commercial real estate, we gained office jobs.”

In May 2010, the unemployment rate in Manhattan stood at 8 percent. A year later, that figure dropped to 7.1 percent, significantly below the national average of 8.7 percent, according to the New York State Department of Labor. Some of that has to do with the fact that Wall Street firms were bailed out during the recession, insiders said. But it’s also is a testament to Manhattan’s diversified economy, which includes tourism, media, fashion and technology.

Another factor is that the early 1990s crash prompted changes that still “reverberate today” in New York, according to Steve Malanga, a senior fellow at the Manhattan Institute.

That downturn resulted in bankruptcies for entire residential co-ops buildings, he said, which in turn caused many boards to institute new restrictions on sales and financing, which, 12 years later, ended up limiting Manhattan’s exposure to subprime lending.

Similarly for the commercial market, Malanga said a speculative building boom in the 1980s made speculative financing much harder to secure in the city, thus limiting over-development and the creation of a glut of new, tenant-less buildings.

This is not to say brokers, buyers and sellers in Manhattan should break out the bubbly. While Manhattan is doing better than the rest of the nation, insecurities abound in both the commercial and residential markets.

“It is not that we are booming again, it’s that we appear to be stabilizing while a large portion of the county is looking at more declines over the next couple of years,” said Miller. “I still think New York City metro is looking at general price declines over the next couple of years which will be under the rate that we will see nationally, and I see Manhattan in the best case scenario as remaining flat.”

Other skeptics, like CoStar’s Macke, noted that recent high-profile building sales in Manhattan are somewhat misleading, and there is more demand for “trophy” properties than other market segments. “When you drill down into sales, there is a real split between properties in high demand and everything else,” he said. “It is not as if the overall market is doing as well as the trophy ones, which are leading this charge.”

Macke added that some of the prices being paid for trophy properties are highly dependant on strong rental rate growth — which is clearly not a guarantee.

In addition, Miller warned against thinking that the city is completely protected from the market forces that impact the rest of the country, noting that viewing Manhattan in a vacuum could provide a false sense of security.

“The brokerage sales pitch often is that this is an island and they don’t make land here. Come on,” he said. “Technically we are an island, but that is a geographic fact, not an economic fact.”


Additional reporting by Jill Noonan and Candace Taylor


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