Warburg Blog

Last Thursday a couple of my downtown Warburg agents held a first
open house for their new multi-million dollar loft exclusive in Tribeca. The
open house began at 12:30; by 2:00, when it ended, they had a full price offer
which sets a new price-per-square-foot record for the building.  Welcome
to 2013!

While the sense of frenzy and boundless optimism which fizzed
through the New York market in 2006 and 2007 is not so much in evidence today,
the extremely tight inventory in our market has driven prices up and introduced
a sense of urgency. This has created a complicated situation for buyers and
sellers, and their agents. Buyers must gauge the level of interest in the
property to which they are attracted and figure out what it is worth to them.
At the same time, using comps from six months ago can lead buyers to assume too
low a value. Real estate, like any commodity, is worth what a willing buyer
will pay for it. And willing buyers are paying more now than they were in June,
or September, or even November, of 2012. For the buyer entering the market
today, this sense that reliable comparables are hard to find can be
disorienting. I have had numerous conversations recently with Warburg agents
who are frustrated that their purchasers will not be more aggressive in bidding
for a property they like. Unfortunately, many buyers have to lose a property or
two before they fully comprehend the speed and upward trend of today’s market.

Sellers today face a different set of pitfalls. For them, the
temptation to overprice is almost overwhelming. Because prices are rising, many
sellers feel that the sky is the limit, and they can price their property based
on aspiration rather than fact. Even in a fast, rising market like this one,
there are limits. If the last similar sale occurred within the last six months,
sellers should reasonably remain within 10% of that number. One fact which has
not changed: the best buyers usually come during the first few weeks after a
property is listed for sale. With today’s inventory shortages extending into
most markets and parts of town, there is often a line of frustrated buyers
waiting to storm the door of any new listing. But they won’t jump at a crazy
price, and after a month on the market, the thrill is gone. We strategize every
day with sellers about how to be aggressive but not excessive in their pricing,
so they can maximize the advantage of those first few weeks of pent up demand.
We don’t want them to leave money on the table, but we also want the prices
reasonable enough so they are not simply LEAVING the table.

Inevitably a market environment like this one leads to many
competitive bidding situations. For everyone’s benefit, the parameters of these
situations need to be as clearly defined as possible. We suggest to our
sellers’ agents that they define a complete bidding process including the
amount of the best and final offer, the financial and other qualifications of
the buyer, the closing date, any other terms, and any additional information
the buyer or his broker might deem relevant. We request that these offers all
be delivered at a specific time, usually a few days hence, so the seller
and his agent can review them and decide with whom they wish to proceed. We
strongly urge our sellers to stick to the defined parameters; I abhor the
behavior, which has become prevalent in recent years, in which a lower bidder
will jump back in after having made a “best” offer to upset the apple cart by
raising his bid. And the seller whose head is turned by such an offer, received
after he has accepted another buyer who followed the rules of the process,
often lives to regret it. These offers designed to bump another (what we refer
to as “gazumping”)  are withdrawn at a much higher rate than offers in the
ordinary course of business, and in such cases the seller can be left with
nothing. His original buyers, who have been pushed aside , frequently want
nothing more to do with the property. His new buyer has withdrawn. He is back
to square one.

For agents and principals alike, the most effective strategy in
today’s market tempers aggression with fairness.  The seller who wants top
dollar should price aggressively but still in relation to recent sales of
similar properties. The buyer who hopes to secure a desirable property needs to
understand that the comps from six months ago are not a reliable guide to what
the property will command today. And agents on both sides of the transaction
must cultivate both courtesy and a fine line of transparency. As fiduciaries,
we must always put our client’s needs first. But within that framework we will
act with honor and integrity. We don’t reveal what others have offered. We
don’t invent offers we don’t have. We deploy our expertise towards obtaining
the best outcome for our client while working towards a fair outcome for
everyone. Agents can provide the guidance, on pricing, bidding, and structuring
deals, which keeps fast markets orderly and progressive. That is a win for
everyone.

My wife and I moved into our apartment on Central Park West in 1977. At that time we and three other couples were the first young people to have moved into our 86 unit building in a decade. At the same time, younger people with babies (or like us, soon to have babies) were moving into the surrounding buildings. The late 1970s were a baby moment for Central Park West north of 81st Street. The area was affordable and the proximity to the Park was an enormous draw. There were a lot of side streets we did not want to walk down, there were a lot of crack vials on the sidewalks of Columbus and Amsterdam, but we were all young and liberal and we felt a strong sense of connection to each other and our neighborhood.

At the time we arrived on CPW, it was the cheaper alternative to the East Side: more bohemian, less clean, more ethnically diverse. Today the demographics of Park, Fifth, Central Park West, and Riverside Drive are far more similar. Condos on Broadway sell for thousands per square foot. We could not have moved to CPW as young people today.

Neighborhoods ebb and flow, acquiring and shedding characteristics as the city around them changes. The New York neighborhoods in which we sell real estate have changed profoundly in the last 30 years. Today we would probably have moved to the area around 110th and Broadway, which seems to share many characteristics with the Upper West Side to which we moved many years ago. Our friends’ kids have moved to Washington Heights, to TriBeCa, and, in increasing numbers, to Brooklyn. SoHo, which was emptier, grittier and far artier than the Upper West Side in 1977, now has few affordable residential alternatives and is a crowded tourist destination crammed with high end shops. TriBeCa became so desirable (and such a popular alternative for young Upper East Side transplants) that the public schools which were such a draw became overcrowded and thus LESS desirable.

In 1977 none of our friends moved to Harlem, but today the condos in Harlem have drawn a wonderfully diverse crowd from all over the city and the world. The neighborhood is teeming with new restaurants and the services attendant on residential development, such as supermarkets and dry cleaners, are finally arriving. And everyone goes to Brooklyn! BAM and the new Barclay Center, the Brooklyn Museum and the fabulous Botanic Garden, draw Manhattanites like never before. Bushwick is today what SoHo was when we moved in 1977, and only last week a $650,000 floor through apartment in Bedford Stuyvesant elicited 28 offers in less than a week!

One of the wonders (and there are many) of life in the world of residential real estate is that our finger is always on the pulse of the evolving city. When my mother tells me she would not feel safe wearing her jewelry out in the evening I have to remind her that the city she fears is simply no longer there. We experience little violent crime in most of our residential neighborhoods. Areas I did not even know existed as a young man now attract many of our customers with beautiful properties, vibrant street life, and cutting edge cultural events. And every day I wake up excited to see what will happen next.

For brokers and buyers alike, 2013 may shape up to be the year of fewer real estate alternatives.  In both the Manhattan and Brooklyn markets, inventory in most neighborhoods has plummeted in the last few years, and there is not much indication that the situation will be changing any time soon. In Manhattan, the market remains stratified, with the one bedroom market still oversupplied while larger properties are as scarce as hens’ teeth, while in Brooklyn the market seems tight throughout.

The small apartment marketplace continues to offer  the largest number of available properties. Studios and small one bedrooms, especially in the East Side corridor beginning at 96th Street and stretching all the way down through Kips Bay into the 20s, do not sell quickly, and there are many choices. Interestingly, recent analyses appearing in both the Wall Street Journal and the New York Times have noted that this segment of the market is also slow for rentals, and that as a result rental prices have come down slightly for these smaller units. It’s a rare occurrence when both rental and sale prices in a particular segment are simultaneously slow; it clearly indicates lower demand for this type of property across the boards. Why should that be? While we can only speculate, several of my agents have suggested that the weakness in the job market may be to blame. Younger people, who are typically the occupants of these smaller apartments, are not finding the Wall Street jobs which used to be so much easier to come by. Fewer of them are moving to the city. And more of them are living with their parents to save money as, even when they are employed, their opening compensation packages are less rich than they were six or seven years ago.

As buyers move from the one bedroom into the two bedroom market, inventory drops dramatically. Here there is very little supply. And my agents tell me that there is a resurgence in a phenomenon they have not seen for a number of years: the move to the suburbs. I believe there are a number of reasons for this. First (and probably most important) the housing recovery in the tri state area outside the city has been far slower than the recovery IN the city. So you can sell your two bedroom and, for similar dollars, buy a four bedroom house. Second, as young families are feeling more economically squeezed, many feel less able to afford one or two private school tuitions. So they are attracted to the towns with good public schools. Many of these couples would RATHER remain in the city – for working couples the lifestyle is much easier. But with so few three bedroom apartments available, and at such high prices, it sometimes is simply not an option.

In the larger apartment category, the lack of inventory feeds on itself. Two bedroom buyers, if they are not prepared to move out of town, don’t sell because they cannot find decent three bedrooms. Three bedroom buyers do not sell because they cannot find decent, affordable four bedrooms. And the owners of the large co-ops, at least for now, won’t sell because they do not want to have to pay the newly increased capital gains taxes which went into effect on January 1. Not to mention the fact that there are not many two or three bedroom units, either for rent or sale, to which they can move.

Of all the neighborhoods, inventory seems to be thinnest on the Upper West Side. A recent article in the Wall Street Journal noted that there is only a five month supply of inventory there, which is a historic low. For example, buyers for large prewar co-ops on Central Park West quickly learn that there is literally nothing to see. And there was also nothing to see last month, or the month before. Asking prices all over town are escalating in response to this scarcity, and it seems increasingly likely that buyers will be responsive and pay more to obtain a place to live when there are so few options. That said, and while 5% to 10% year over year increases seem steep but possible, I doubt that most buyers will purchase properties which are coming on at 20% over last year’s prices. Even in today’s scarce inventory environment, pricing still needs to have some relationship to the comparables and price history of similar units.

One final note: financing and appraisals can still be challenging. Banks are still hyper-vigilant about the customers to whom they make loans, and high credit scores and strong income are a must (the same is true of landlords.) Fortunately, appraisals are beginning to catch up with last year’s values, although they are not yet reflecting the price increases we see coming at us since the first of the year. Given the banks’ post-recession conservatism, I have some concerns about appraisals for new deals in the months to come.

In a seller’s market like this one, well priced inventory moves fast. But sellers and their agents are, by definition, ambitious; they don’t want to leave any money on the table. It is too soon to say whether the new price levels at which properties are being placed on the market are achievable. In the condo market there have been some extraordinary successes (like Walker Tower in Chelsea and 200 E 79th St) while other buildings seem to be struggling to reach their ambitious price goals. In a tight market, prices go up. As to how much, and how fast, we will have to wait and see.

“Can I get into the building?” In recent years I hear that question more and more from anxious buyers of New York City co-ops, who have all read or heard horror stories about seemingly qualified people whose purchase applications have been turned down by co-op Boards for no apparent reason. Unfortunately there ARE some baffling turndowns, and never more so than in 2012. But usually the careful preparation of a Board package and some knowledge beforehand about the building will minimize the risk. Here are a few things you need to know:

* New York City has the most stringent fair housing laws in the country. And co-op Boards are no less liable than any other landlord. So it is actually ILLEGAL for them to deny admission to an applicant based on race, color, creed, marital status, sexual orientation, or numerous other criteria. The law prohibits the Board from rejecting a single woman because they do not know whom she might marry, or a gay couple because they ARE a gay couple. While it is true that Boards do not have to give a reason for a turndown, they have no wish to be sued. So they cannot ask you questions (as one Board member did a number of years ago of an Orthodox Jewish couple) like “Do you need to use the stairs on Saturdays?” And please, if you feel your rights are being violated, assert them! It creates a better world for us all.

* Most turndowns have to do with either money or the terms of your occupancy. If you plan on using the apartment for six weeks a year, find out in advance how the building feels about pied-a-terre buyers. If you are buying for one of your kids, make sure the building permits that usage. Do you have a huge dog? Check it out in advance. Some buildings interview the pets! Has your sixteen-year-old daughter been boasting on Facebook or Twitter about the beer pong at the parties she likes to throw when you are out of town? Clean it up.

* The best reference letters are from people who really know you, live in similar co-ops to the one on which you hope to buy (where ideally they serve or have served on their own Boards), and know the neighborhood. The letters cannot be perfunctory. They should present you from as many different angles as possible: history, philanthropy, family, recreation. And increasingly, Board members actually contact the references, so tell your friends to be prepared.

* Many Board rejections are financial. That said, the range of monetary expectations varies enormously from building to building. Interestingly, in the super luxury market, the Board requirements are usually less stringent. For example, many of the buildings where apartments sell for $20 million or more do not require tax returns. On the other hand, some buildings where apartments are far less expensive have a list of requirements and reports as long as your arm. As a buyer or seller, you must make it your business to understand what the building’s financial personality is. Will the Board count bonus money in reviewing your income? (In the wake of the recession, some won’t.) Are they looking for a two or three time multiple of the purchase price in liquid assets? Do you have a very large income which you can use to offset the fact that your asset picture might not be so strong? Do you have a friend or business associate who lives in the building or is friendly with a Board member who can vouch for you? Frequently deficits in one area of your financial profile can be made up with advantages in another.

* Above all, make sure that every part of your submission is clear and complete. There is no second chance. If you need to write a cover letter (or have your accountant or attorney write one) to make sure the intricacies of your presentation pull together, please do so. The clearer and more transparent your circumstances, the better your chances.

Finally, work with an agent who knows her stuff. The better firms have a multiple review process for packages, in which a manager has to sign off on the package before it is sent to the co-broker for review. This makes it that much more unlikely that something important will be forgotten. Your agent is your best advisor on how to dovetail the elements of your presentation for maximum impact. Be sure you choose an agent with the experience and expertise to make that package speak for you!

Warburg Realty Fourth Quarter 2012 Market Review
Frederick Peters
President, Warburg Realty

During the last quarter of 2012, the New York real estate market buzzed with activity. An extraordinary culmination to an already strong year, November and December saw closing after closing as sellers hurried to take their capital gains before the looming tax changes on 2013. This desire to capitalize on lower tax rates made 2012 one of the strongest years ever for the already active Manhattan and Brooklyn marketplaces.

More than anything else, our market continues to be driven by inventory shortage. (See the chart below from Urban Digs for a comparison of inventory levels over the past four years.) This trend is likely to continue in 2013 as owners of larger properties become more reluctant to sell them into the new increased capital gains tax environment. Even in the studio and one bedroom markets, which have been awash with apartments in recent years, the combination of high rents and low interest rates have driven a substantial amount of absorption (although in these categories, more than others, considerable inventory still remains, especially on the Upper East Side east of Third Avenue.) 2012 saw the return, in force, of competitive bidding, as many properties of all sizes received multiple offers from buyers eager to make their purchases as the economy gradually improved and their housing options became tighter and tighter. An interesting sidebar here is that, while prices did rise during 2012, the sense of excess which characterized 2006 and 2007 has not been visible in most areas of the marketplace. Co-ops, in particular, have not seen huge price increases with the exception of a few trophy sales at the ultra high end of the market. Prices are strong, but even when numerous buyers vie for the same property they all keep their heads. People just don’t want to overpay!

Click here to see Data Chart provided by UrbanDigs.com

This moderation has been less visible in the condominium market, especially for the trophy properties like 15 Central Park West and One FiftySeven. This fact illustrates the growing schism between local and long-distance buyers, both in what they choose and what they are willing to pay for it. The ultra luxury condominiums in the 59th Street axis attract foreign buyers (can Steve Wynn be considered a foreigner?) paying huge prices with flight capital. In this rarefied atmosphere the market witnessed several sales for over $10,000 per foot. But when one moves 20 blocks uptown, to 79th Street, the two new condominiums going up there are selling for substantially less than half that number. Why? Because the 50s and low 60s appeal to foreign buyers, while 79th Street, the heart of the Upper East Side, appeals mostly to local residents. These two constituencies have different sized pocketbooks AND different feelings about real estate purchases. For non-U.S nationals, many of whom own multiple homes, New York is both a fun place to visit and a safe haven for their money, and it is still cheaper than many of the world’s other great cities. New Yorkers, on the other hand, are mostly buying because they want a home and, like home buyers everywhere, they don’t want to pay too much for it. At Walker Tower, the hugely successful and extraordinarily beautiful new condo in the old Verizon building on West 18th Street, you see a mix of both. Hip foreigners, Hollywood stars, and local successes are all paying $3000 per foot or more to live in Chelsea’s hottest building.

The Brooklyn market continues to be one of the city’s big success stories. Neighborhoods which many Manhattanites had never heard of a few years ago, like Windsor Terrace and Fort Greene, now boast multiple million dollar home sales and highly competitive market environments. Cultural institutions like the Brooklyn Academy of Music and the Brooklyn Museum attract a larger and larger following, and world class events now take place at the newly completed Barclay Center at the nexus of Flatbush and Atlantic Avenues. Brooklyn has become firmly entrenched, not as an alternative to Manhattan, but as a cultural and residential destination in its own right.

Any review of the last quarter of 2012 must also acknowledge the devastation caused by Hurricane Sandy in late October. Sandy has called into question the viability of some of the city’s (and New Jersey’s) most popular waterfront neighborhoods. The devastation in the Rockaways and Red Hook, the extended periods without power in parts of Tribeca and the flooding in Alphabet City and the Lower East Side all illustrated the city’s overall lack of preparedness for what seems likely to be a recurring problem in the years to come. How these neighborhoods deal with rebuilding and restoring their infrastructure, and how the city, the state, and the country address the need to safeguard these densely populated, low lying coastal areas, remains to be seen. But change is needed if these neighborhoods are to remain viable for both residential and commercial use.

And now we leave 2012 and enter 2013 with the threat of the fiscal cliff averted, at least for now. Although much work remains to be done to put the nation’s fiscal house in order, I am still confident about our market’s prospects for 2013. All over the nation, real estate sales show improvement. Inventory is down and purchase prices are slowly rising. I don’t believe even a drive over the fiscal cliff will derail the economy for long. Congress will have to backtrack and address its issues during the first quarter of 2013 if they cannot arrive at some agreement in the next 24 hours. So we may well see a bumpy first quarter. Stocks will seesaw and jumpy buyers may move to the sidelines. But overall our local economy and our housing market are essentially stable and are on course to deliver another year of solid sales.