Click image for larger versionThe fourth-quarter market reports revealed that the recession’s worst-hit Manhattan neighborhood isn’t newly gentrifying Harlem or even the recently residential Financial District. Midtown — one of the city’s most well-established neighborhoods — saw the sharpest price decreases, the most price cuts and the longest days on the market.
What happened?
Experts say Midtown West, in particular, fell prey to a hotbed of speculation during the boom, fueled by an abundance of new condos, and the area is now paying the price.
During the mid-aughts, thousands of new condo units were built in Midtown and quickly snatched up by investors eager to flip them for six-figure profits in the wildly escalating market of the time. Now, while overall market activity is on the rise again, falling prices have dampened demand from investors, leaving Midtown with an oversupply of condos — and absentee owners frantically trying to unload them.
Around 42nd Street, “there are large, monolithic new development buildings, with a lot of investors and pied-à-terre buyers who are now desperate to sell,” explained Sofia Song, vice president of research at StreetEasy.
In the fourth quarter of 2009, the median price of an apartment in Midtown — defined as the area between 34th and 59th streets — fell 24.6 percent from the same quarter of 2008, compared to a 10 percent drop for the market as a whole, according to StreetEasy’s market report. That was the sharpest price drop of any neighborhood included in the report, which found that the median price fell 19.6 percent year-over-year on the Upper East Side, 14 percent Downtown, and 4.6 percent in Upper Manhattan. The median price actually increased 4 percent on the Upper West Side (which saw particularly strong sales activity in the fourth quarter).
To explain the weakness of the Midtown market, experts point to several factors. The first is inventory. Midtown saw a bevy of new buildings developed during the boom, from the 43-story Platinum at 247 West 46th Street to Extell’s Orion at 42nd Street and Ninth Avenue.
Aiming to capitalize on river views, many of these buildings were built on the far West and East sides, like the 500-unit Atelier at 635 West 42nd Street between 11th and 12th avenues, Alexander Plaza at 315 East 46th Street between First and Second avenues, and the Milan at 300 East 55th Street at Second Avenue.
“There’s certainly a lot of inventory to be had, especially in those large new developments on the fringes of Manhattan, on the rivers,” said Charlotte Van Doren, a senior vice president at Stribling.
These buildings, with their proximity to shopping and theater, proved to be popular with pied-à-terre buyers and foreign investors, said Camille Duvall-Hero, a managing director and associate broker at Warburg Realty. But because they’re farther from the subway and other residential must-haves, many New Yorkers don’t find them as appealing.
“It’s a different customer in Midtown,” said Duvall-Hero, who recently sold a unit at Trump World Tower at 845 United Nations Plaza near First Avenue. “You don’t find as many families — it’s not as close to the schools or parks.”
Even Midtown’s more centrally located buildings tend to draw investors or out-of-town owners rather than Manhattanites, a fact developers recognized by including large numbers of studios and one-bedrooms.
For example: the Orion and other buildings on busy 42nd Street, which are “in an area that no one wanted to live in,” Song said. “The Orion is across the street from Port Authority. You can’t be a New Yorker and buy there. You have to be an out-of-towner who didn’t know, or didn’t care.”
During the boom, there were plenty of investors to snatch up these units, many of them making hefty profits as prices soared upward.
The Orion “sold out quickly to a lot of foreign buyers,” Song said. “People were flipping as soon as [they] closed.”
One notorious attempted flip at the Orion was apartment 47H, which closed on Sept. 26, 2006, for $837,510. By Oct. 13, it was on the market again for $1.25 million, according to StreetEasy. It eventually sold in April 2007 for $995,000.
Charlotte Von Doren of Stribling has a number of listings at the Centria on West 48th Street, a building now heavily marketed to international investors.
New Yorkers, too, bought and sold condos as investments, said real estate attorney Allison Scollar, a partner at Gold Scollar Moshan, who said she bought investment property during the aughts.
“I had clients buying apartments like stocks,” said Scollar. “People at the closing were already scheduling the sale.”
That activity came to an abrupt halt after Lehman Brothers collapsed and Manhattan prices started sinking. These days, investors can’t break even on the units they own, let alone sell them for a profit.
“I talk to owners who would like to sell their apartments, but can’t even get their money back,” said Prudential Douglas Elliman agent Marie Bianco, who specializes in Midtown condos. “People only make money on apartments they bought six or eight years ago.”
Now that quick flips have largely disappeared, the demand for investment condos has slackened considerably, while bargain-seeking homebuyers generate much of the city’s sales activity. “People are really buying to own,” Scollar said, noting that she’s relieved that she sold her investment property before the market turned.
Unlike investors, homebuyers tend to skip Midtown in favor of neighborhoods with more residential amenities.
Take, for example, the Financial District, another area of Manhattan with a large number of new developments. In the third quarter of 2008, the median price of an apartment in the Financial District was $840,000, according to StreetEasy, slightly less than Midtown West’s then-median of $890,000. Prices in both areas have fallen since then, but the median price in the Financial District was $800,000 in the fourth quarter, topping Midtown West’s $700,000.
The reason? While Midtown is more “touristy,” Song said, the Financial District has become popular with families because of its proximity to highly sought-after schools like P.S. 234 (see “Swirling around schools Downtown”).
“Midtown West was primarily investor buyers,” Song said. “FiDi had more families moving there, especially the ones that got priced out of Tribeca and Battery Park.”
Now, some owners of Midtown investment condos have been forced to sell at deep discounts because they can no longer afford to carry them, especially now that falling rents have greatly reduced the income these apartments generate for their owners.
The StreetEasy report found that 504 listings had price cuts in the fourth quarter in Midtown East — the highest of any Manhattan neighborhood — while the average number of days on the market in Midtown was 149, spiking 34 percent from the fourth quarter of 2008.
“When there’s been something along the lines of a 40 percent drop in rent from the expectations of what these investors thought they’d be able to yield from the tenants, that’s going to have an impact on the bottom line,” said Van Doren, who has a number of sale and rental units available at the Centria at 18 West 48th Street, a building heavily marketed to international investors.
The sheer volume of units for rent in Midtown forces prices down even further.
“It’s tough when there’s a whole building of investors, and all those investors have to find tenants,” Van Doren said. “It creates an incredible downward pressure on prices, which can be devastating.”