Real estate circles these days are bullish, but nobody has a crystal ball.
The effects of a sudden downturn are a subject rarely acknowledged. Market watchers and real estate veterans call it the elephant in the room, or the dead horse in the bathtub. But dodging the question doesn’t mean it’s not hovering on the edge of the horizon.
While experts believe there is no imminent likelihood that the current ripe real estate market will sour, they have a few ideas about what might happen if it did.
Some believe that the wave of gentrification sweeping certain neighborhoods of Manhattan, Brooklyn and Queens might be stymied, especially in areas that have only just gotten cachet as undiscovered hot spots, even in Manhattan.
“It’s not really about where,” said Fred Harris, AvalonBay Communities senior vice president of development. The company is currently building apartments on the Lower East Side and in Long Island City. “I’d say it’s about timeline. It tends to be the more recently ‘hot’ areas that are more vulnerable.”
Other market watchers agreed.
“If the neighborhoods are just at the beginning, if the big projects haven’t yet started, it’s easy for people to back away,” said Barry Hersh, associate director of the Steven L. Newman Real Estate Institute at Baruch College. “It’s never the Upper East Side that gets slammed. It’s some place that is viewed as a frontier of some sort.”
Some pundits believe that people are moving to Brooklyn and outlying areas simply because they can’t afford Manhattan, despite hype that proclaims that these areas are “destinations.”
Still, not all experts believe that a sagging market would halt expansion there.
“I think it’s all relative,” said Andrew Gerringer, managing director of Douglas Elliman’s Development Marketing Group. “If there’s a 5 to 10 percent correction, it’s not going to help that many more people to afford to be in Manhattan, so they’re still going to buy in Brooklyn.”
Quality of the housing stock in emerging neighborhoods might protect them, said Christopher Wilson, senior vice president and director of project marketing at Stribling Marketing Associates.
“If what you’ve got, regardless of location, is a high-quality residential product that’s in high demand and limited supply, you’ve got a blue chip investment,” he said. “Hence the preference in New York at times for prewar, because they’re not making them any more.”
Many emerging neighborhoods in Manhattan and Brooklyn are solid enough that they would survive, said Richard Grossman, director of project marketing at Halstead Property.
“They could be vulnerable, but most of them have matured enough as neighborhoods that I wouldn’t say you’re going to see that,” he said.
For example, Brooklyn’s Williamsburg, long a haven for hip renters but still in the early stages of a condo construction boom, would probably keep its appeal for buyers, though that is a recent development, said Grossman.
“If you go to Williamsburg on the weekends, it’s full of 20- and 30-year-olds, and these are buyers who have good jobs in the city,” he said. “They want to live there in a young, vibrant community; on weekends, it’s like being in San Francisco.”
David Wine, vice chairman of The Related Companies, one of New York City’s biggest developers, agreed that in a fizzling market, outlying areas may continue to do just fine. The company’s project on Roosevelt Island, which has been selling at a good pace since it went on the market a month ago, would appear to be invulnerable despite not being in Manhattan.
“I don’t think it’s going to be affected, because it’s still perceived as kind of a new opportunity,” Wine said.
In fact, Wine said, if the markets in outlying areas consist of mostly first-time buyers not so dependent on reselling their properties, that may help sustain emerging neighborhoods.
But when it comes to the future, nothing is ever written in stone. Grossman said he believes the bottom may fall out of the lower-end marketplace first, as the upper end always has cash and is unaffected by rising interest rates, while middle-income people always need a home.
Gerringer disagreed, and said the high end will go first.
“It usually happens from the top down,” he said. “The more expensive properties slow down because those are discretionary purchasers.”
But many market watchers feel there is a middle-to-high level range encompassing $2.5 million to $5 million units now selling for about $1,000 to $1,500 a square foot that may be the first affected by any market collapse.
“I think the most corrected in a downturn will be luxury’s new rich people nouveau riche will be the most affected,” said Asher Alcobi, co-founder and president of Peter Ashe Inc.
Hersh agreed, theorizing that those neighborhoods most likely to experience irrational price inflation while not being as established, like SoHo and TriBeCa, might suffer from the biggest downturn.
The savvy in real estate circles should be “looking around and seeing where there is an excess of [inventory] relative to the market’s requirements,” Wilson said.
That may be a clue to which submarkets may flag if the market heads south. It’s hard to predict what might happen, but investigating former market downturns might help. Gerringer says the last time real estate deflated in the late 1980s and early 1990s, the market was very different from the current one.
While investors comprised the market then, it’s now dominated by end users. Smaller, investor-oriented units were popular in that era and became overbuilt.
Now many market watchers agree there is no sector that is overbuilt, but most are watching the product pipeline for clues about sectors that could be at risk. A shortage of suitable development sites may help insulate this market, Wilson said.
Currently, the boom is in residential and not commercial, Hersh said, and the residential market tends to be more resilient.
But as a word of warning, there is always the looming risk of overbuilding in the office market, said Seth Weinstein, a principal at Hannah Real Estate Investors.
“There is a market for new office product, but I don’t think it’s very deep,” he said. “If there’s another run at speculative office construction, which there seems to be developing, that could be vulnerable.”