Warburg Blog

I like to say that residential real estate is a relationship business disguised as a transaction business. If you don’t build trust with your customers and clients, if they don’t feel confident about your knowledge and integrity, you have nothing.  Maybe someone will find your listing on line, as they used to find it in the paper. Maybe they will contact you for an appointment, and maybe you will even sell them the property they come to see. But it doesn’t happen all that often. To make it in residential brokerage in New York City, which has almost as many licensed agents as it does real estate sale transactions in any given year, agents need repeat business and referrals. The agents who are successful, year after year, are those who have built a reputation for professionalism which translates into referrals. Many of them have so many referrals they cannot handle them all, sharing their business with assistants or junior colleagues learning the ropes.

To earn that trust, there are many things agents have to do. If absolutely necessary, they make beds and clean bathrooms. They sometimes endure the contempt of attorneys and the threats and blame of unhappy would-be buyers and sellers. Their time is wasted because it is “free.” And most importantly, they build real relationships, as facilitators of one of the most personal and significant decisions in the lives of their clients.

A colleague and I were recently discussing the unique relationship which exists between the residential agent and his or her client. For a while, we as agents become intimately involved with the lives of those we serve. We know all about their kids, their jobs, their earnings – we have to know the full story to advise them successfully. And usually, along the way, we share some facts about ourselves. We find points of commonality: schools, interests, beliefs, life situations. The relationship becomes quite intense, and it lasts as long as the transaction takes to consummate, which is almost always months and sometimes years. Over this period a bond develops. The agent and the client both seek the bond: it enables them to work together more effectively, to develop a shorthand which expedites the deal and helps to move it across the finish line. Sometimes a real friendship develops.

Then the deal is done. The agent moves on to the next transaction, the buyers to renovate and move into their new home. Speaking for myself, I always want to see how the new place turns out. I like to stay in touch, both because it is good business and because I feel connected to the lives my work has touched. Although the agent/client relationship is intense but (relatively speaking) brief, it is resonant. Agents feel a residual sense of connection to those to whom they have sold property and whose properties they have sold, and we hope they feel it too. We hope it will reach across the years to us when they are ready for another deal, or their friend or relative calls us to say “We need an agent, and so-and-so said you were the one to call.”

So are we friends? Sometimes, though not always. But the shared experience connects us long after the deal is done.

Housing is heating up! According to the Real Estate Board of New York, almost 10 times as many permits were issued for the construction of new housing units in Manhattan during the first five months of 2012 (1,422 permits) as in the comparable period in 2011 (146 permits). The 774 permits issued in Brooklyn represent a 42.3% increase over the number issued during this period last year. The much-discussed shadow inventory of unsold condo units (which, some feared back in 2009, would hold the New York market back for five years or more) disappeared, absorbed as a result of lower pricing and rising demand. The question is, will it happen again? Will supply outstrip demand again as both converted and newly constructed units move onto the market?

I think not. The economic intricacies of New York are considerable. We have an economy which is both improving and losing jobs – how is that possible? As the above paragraph demonstrates, the job situation in construction is ameliorating. New opportunities are being generated within the private sector. Businesses are, cautiously, expanding, using both cash and inexpensive (if still hard-to-obtain) financing to do so. On the other hand, the big banks are experiencing another round of layoffs as they continue to search for right-sized profit opportunities in the post-leverage era. In the midst of this uncertainty, the allure of real estate grows brighter for both American dollars and flight capital.

At one of my recent sales meetings, I asked my agents if they had seen a change over the last four years in the profile of the buyers they encounter in the marketplace. The answer was a resounding Yes. First, condos of every size are being snapped up by overseas investors, whether a one bedroom unit near NYU being bought by Chinese parents for their student daughter, a two bedroom pied-a-terre chosen by a South American or European with business here and an unstable currency at home, or a trophy purchase for a wealthy Russian, Indian, or Las Vegan! And whereas in 2006 and 2007 the substantial majority of our local purchasers were finance professionals, many of them at the big investment banks, those buyers now make up a far less significant portion of our pool. We are dealing with more doctors (surgeons in particular), more attorneys, more real estate investors, more mid-sized business owners. And when we do sell to finance people, they now tend to come from the hedge fund world.

One last point: The suburbs are still cheap, but people are not flocking to move there. To the contrary, we see more and more people in every age range and income bracket fighting to stay in the city. The enormous quality-of-life enhancements of the last decade, the convenience, the variety of experience, and the steady influx of immigrants with big dreams keeps our market tight even as other markets in the tri-state area still struggle to recover.

So what does this all add up to? In both the co-op and condo arenas, pent-up demand exceeds supply, even in the dog days of July. So we need to keep those new units coming ; even this year, with its enormous increase in construction starts over the preceding years, still represents less than half of the new units begun in 2008. We are a market starving for high quality inventory, and I am confident that if we build it, they will come.

Friday afternoon I attended a meeting where no-one worked in real estate. In a discussion after the meeting ended, one of the participants discovered that I run a real estate brokerage. He asked me what kinds of things we sell. I told him that a big chunk of our business was in the market for properties between $2 million and $7 million. He was amazed. And in that moment I remembered something we too easily forget as we go about the work of selling our inventory every day: the prices are extraordinary!

In a city where studio apartments regularly cost considerably more than the price of the average house in the U.S., real estate agents can easily lose sight of the enormity of the amounts which our buyers and sellers are exchanging. This has multiple implications for us as agents, for our clients, and for all New Yorkers. For us, it means we can lose sensitivity to the significance of the decisions which our clients and customers are forced to make. For our sellers and buyers,  it means that small adjustments in price or terms can actually have significant dollar consequences. And for all New Yorkers, it means that the question of who can live where is ever more pressing.

For most agents at Warburg, doing deals in seven figures, or more, is the norm (although we certainly do plenty of six figures deals as well.) I am acutely aware in advising my agents about these transactions that years of experience in the market, and the stresses of trying to put deals together, can make us cavalier about amounts of money to which we would pay a LOT of attention in our own lives. When I hear someone say “They only have to come up another $50,000″, or “It is underpriced at $4,000,000″, I try to interject a gentle reminder that we are talking about, as the case may be, FIFTY THOUSAND DOLLARS or FOUR MILLION DOLLARS. For anyone, neither of these is a sum to be contemplated lightly. I have a similar reaction when a seller, after Googling a prospective purchaser, will say “They can easily pay another $100,000.” Perhaps. But the money is theirs to dispose of, not ours to command. It is all too easy for all of us, agents and principals alike, to lose sight of just how high the financial stakes are in this interchange we are arranging.

More profoundly, these ever increasing prices in both the rental and sales markets dramatically reshape our city. Thirty three years ago, my brother and his girlfriend bought a loft on the outskirts of what was then considered Soho, on Crosby Street. She was an artist, and this big raw space provided her with space for her printmaking and, as time went on, her framing business as well. They both liked the gritty feeling of the neighborhood. Garbage littered the streets, and the parking lot directly next door to them (where the swank Crosby Street Hotel now stands) provided cover for prostitutes and drug dealers. No one was thinking much about gentrification or investment.

Now, with luxury loft condos costing millions on Crosby Street and high end residential projects moving ever deeper into the Lower East Side, artists have moved first to Williamsburg, and then again to Bushwick. And today the likelihood of further gentrification in Bushwick, or Bed Stuy, or Harlem is on everyone’s mind. Little by little, all of Manhattan and most of the surrounding boroughs have morphed into investment opportunities. Nothing is inexpensive in Manhattan anymore, or Riverdale, or the surrounding areas in Brooklyn, Queens, and New Jersey.

So as time goes on, will we just be a city of the rich? Where will the people come from who make our city run?  Will they live in Mayor Bloomberg’s proposed “micro-studios”? Few of them live in Manhattan anymore, or in Park Slope, fewer all the time in Greenpoint or Long Island City or Whitestone.  What does it mean to live in a city in which only the wealthy (or the poor, ghettoized in failed “urban renewal” projects) can live? The truth is, we don’t know. But whether that is the environment we want, and what we should be doing about it, is a question about which all New Yorkers should be thinking.

The world wants to buy in New York City. In the second quarter of 2012, New York real estate manifested as an investment similar in security to bonds.  Although buyers realize that they can no longer count on the high returns which a residential real estate purchase promised them during the boom years, bricks and mortar have once again become desirable safe havens. New Yorkers, a national constituency of buyers from all over the United States who want property in the country’s greatest city, and international buyers from everywhere seeking a safe haven for their capital, all invested in New York properties during April, May, and June. All three were extremely strong months in both the Manhattan and Brooklyn marketplaces.

A change which I noted in the first quarter but which accelerated in the past three months was the popularity of smaller properties. Appropriately priced units at $1,500,000 or less have been a hot commodity, in both the co-op and condo arenas. Clearly the combination of low interest rates, high rents, and a historically low rental vacancy rate motivated buyers from all over to jump into the market. One after another, our exclusives in this price range, all over Manhattan, have sold with competitive bidding –sometimes as many as six or eight offers on a single property.

No part of the city burned hotter last quarter than brownstone Brooklyn. Virtually every house received multiple offers, whether in Fort Greene, Park Slope (both north and south), Cobble Hill, or Carroll Gardens. Some of these offers came in as high as 25% over asking prices! And this is no longer a phenomenon of people moving to Brooklyn because it is more affordable than Manhattan (although the houses are still less expensive than in most Manhattan neighborhoods.) Brooklyn’s leafy, low rise neighborhoods have become a destination; a whole generation now eagerly crosses the bridge to the borough many of their parents could not wait to leave behind.

A similar story exists in Harlem. Predictions of a huge condo oversupply, widely proclaimed three years ago, proved as incorrect there as in other locations around the city. Most of the available inventory has been absorbed, and new product appearing on the market today sells briskly to a broad spectrum of buyers from all over the city, the country, and the world.

Numerous marquee sales lifted the price averages at the ultra-luxury end of the market. In both co-ops and condos, the wealthiest Americans and international buyers have staked a claim in Manhattan. The penthouse contract at new midtown condo One57 for more than $90,000,000  the sale of Courtney Ross’s two apartments at 740 Park for $52,000,000, and the recently much touted sale of Ted Forstmann’s Fifth Avenue penthouse for $40,000,000 are only a few examples of these transactions. The most interesting part of this marketplace is the relatively large number of buyers competing for a relatively small dossier of apartments. When one of these ultra-glamorous Central Park facing trophy listings hits the market, there are back-to-back appointments for several days as agents try to rush their customers in the door before a deal is made. The caveat, of course, especially in the co-op world, is that even at this rarefied level many buyers are price conscious, especially if the property is not EXACTLY what they want. So some great listings in top buildings linger, even as others are snatched up, if the buyers don’t perceive an appropriate level of value.

In fact, at every level of the co-op market and all but the highest in the condo market, value is critical. Properties which are priced wrong don’t sell. Sellers struggle to accept this, as each of us harbors a fantasy that our property will somehow be the one which defies the trend. “It only takes one person”, sellers intone to us over and over. Unfortunately, that one person rarely comes. It is true that a unique property can very occasionally attract that perfect buyer who has to have it. But that is a 1% of 1% occurrence. For the rest, mispricing creates multiple problems, and never more so than in the ultra value conscious months of 2012. First, since buyers and brokers search properties online, an overly ambitious price often puts it outside the price criteria for the right buyer and his/her agent. They simply don’t know it’s there. Second, the seller cannot take advantage of the pent-up demand waiting for properties like his to come on at the right price.  The property lingers, creating a third problem: days on market. Every buyer knows these statistics today thanks to the multiple real estate websites out there. So even when the property reached its proper price it has the longevity strike against it.

This quarter the price problem has been particularly acute with properties in the large two and three bedroom categories.  For a variety of reasons, most particularly job insecurity and the changes in the way Wall Street bonuses are paid, this group of buyers feels particularly price conscious. Many Park Avenue and Central Park West properties with overblown prices have lingered months on the market even as their more modestly priced cousins on Lexington or Broadway have been snapped up.  Now more than ever, pricing sells.

Overall, even as overpriced units lingered, the spring market was both strong and healthy. Buyers are value driven but they like real estate. While predicting the future remains a dangerous occupation, especially in an election year, I anticipate that the market will remain brisk and healthy. Buyers outnumber sellers in most segments of the market; these buyers understand that an apartment in New York is both a conservative investment and the gateway to life in our fabulous city.

Last December as the year was coming to a close, the New York Times characterized 2011 as “The Year of the Turndown.”  In addition, the reporter acknowledged that it was becoming more common for co-op boards to grant provisional consent to buyers, requiring that significant sums of money be held in escrow to ensure that monthly charges would be paid on time.  This year, co-op board rejections and conditional approvals have not diminished; in fact, they are on the rise.

Although it’s nearly impossible to quantify the number of board rejections, brokers can spot the snubs when properties come “BOM”—Back on Market.  Only sometimes, however, and then only anecdotally within our own companies, do we overhear when boards request that buyers meet certain conditions before their purchase applications can be approved.

Few turndowns make the headlines.  Unless the denied is a celebrity, of course, and then it’s newsworthy.  Like when Nixon was rebuffed by a Fifth Avenue cooperative after he resigned as President.  Or when the San Remo said no to Madonna.  Or in 2005 when the Dakota declined to interview Antonio Banderas and Melanie Griffith.  Or very recently when Sheik Hamad bin Jassim bin Al Thani from oil rich Qatar was rejected at 907 Fifth Avenue, it was easy to understand why someone with two wives and fifteen children, a ministerial entourage and diplomatic immunity might not be welcome.  Some board turndowns can be baffling, however, and all cause anguish, embarrassment and financial hardship for buyers, sellers and their agents alike.  The broker’s role in assembling the required documents for the board and in managing the expectations for both principals is critical. 

The boiler plate language of the contract states that the “sale is subject to the unconditional consent of the Corporation,” which means that if the board stipulates any conditions then the  buyers can either agree to the provisions, renegotiate with the seller because of the conditions, or walk away and take back their 10% deposit.  The Board might ask the buyer to finance less than the amount specified in the contract, or to not finance at all, or to provide a third party guarantee for the maintenance, or to deposit several years of maintenance with the co-op in escrow for an undetermined amount of time.  Recently, one Park Avenue board asked a candidate to post into escrow a staggering 10 years’ worth of maintenance fees for five years for the privilege of purchasing in that building—an amount exceeding $350,000. 

The “business judgment rule” for co-ops gives board members great latitude as long as they act within the bounds of authority provided by the co-op’s by-laws and proprietary lease and as long as their decisions are not discriminatory.  In New York City, Fair Housing Laws protect twelve specific categories including age, citizenship, familial status, handicap, marital status, national origin, occupation, religion and sexual orientation.  If discrimination is proven, individual board members can be held personally liable.  When they reject a candidate, they are not required to give reasons, nor are they required to interview the applicant.  In fact, when a board intends to reject a purchaser, the interview never happens.  Although the New York City Council has tried numerous times to enact legislation requiring boards to disclose reasons for a turndown, it is unlikely to be passed any time soon. 

Board turndowns and conditional approvals are a particular phenomenon in Manhattan where cooperatives still make up approximately 70% percent of real property ownership.  This year, with nearly every deal I handled, whether I represented the buyer or the seller, I began a conversation early on in the process about provisional consent and the possibility that the board might request maintenance in escrow.  When my Park Avenue seller accepted a bid from a divorcee who’s only income source was a trust fund plus alimony that would expire in eleven years, we asked for a side letter to the contract in which she agreed to put up to two years of maintenance in escrow to be held up to two years should the board require that as a condition to her approval.  Similarly, we have side letters for my West End Avenue and Central Park West deals that are in contract with financial professionals where their bonus money is substantial but out of favor with co-op boards because of market volatility.  On a deal where I represent the buyers of an east side one bedroom whose board does not permit guarantors, where father and son are co-purchasing an apartment where the son will reside, the co-op’s Managing Agent emailed last week to ask whether they would consider putting a year of maintenance in escrow.  I encouraged the buyers to look beyond the short term of wounded pride to the long term, and then succeeded in getting the seller to split this amount with the buyers. 

Throughout Manhattan, in every size category and every price range, co-op boards are stepping up their scrutiny of candidates— checking and rechecking that financial statements add up and are sufficient and verifying personal references with searches on Facebook and Google for anything that might undermine social acceptability.  With the board package, the purchaser has one chance to make a first impression; second chances are rare.  It’s up to the real estate professional to guide buyers and sellers through this new normal.