Warburg Realty Third Quarter 2010 Market Review

2010 has been a year of contradictions for Manhattan real estate and the third quarter embodied many of these contradictions. We saw a slow summer market which nonetheless featured several high profile, high priced sales; we saw interest rates devolving to their lowest point in a generation; we saw the rental market weaken; and in spite of everything as we move into the fourth quarter we have an overall market which, like the old Timex ad, “takes a lickin’ and keeps on tickin.’”

By June 30th our market had slowed considerably from its active pace earlier in the year, as the beginning of summer coincided with worries about the global economy. Sales remained sluggish throughout July in our marketplace, as buyers in all categories once again adopted the wait and see attitude which had characterized their behavior in late 2008 and much of 2009. Interestingly August was slightly better, in spite of the fact that the stock market was swooning during much of the month. There continued to be little inventory, with nothing new coming to the market, and contract signings picked up from July; some sellers saw the confluence of low interest rates and the possibility of higher capital gains taxes in 2011 as indicators that the moment to make a deal had arrived. At the same time brokers began to become aware of a countervailing trend, which grew in September, and which once again harkened back to the months after Lehman Brothers collapsed: a lack of similar perception between buyers and sellers about value. In September, as the stock market and inventory both rose, this trend gained momentum. Many sellers believe the market is strong, and there is little reason for them to compromise about prices, while many buyers, reading the data throughout the media on the poor national performance of real estate since June, have been inclined to hold back or look for bigger concessions.

While the market behaved quite consistently from sector to sector, there were a few significant variations which I want to note:
* As I mentioned above, the rental market weakened over the course of the summer. Ordinarily as sale slow rentals pick up, but in this environment that has not been the case. Some bigger landlords were offering to pay commissions (what we call an “OP” or “Owner Paid” deal) which the industry had not seen very much in 2010. Demand seemed to be stronger at the upper end of the market.

* One and two bedroom sales were definitely slower during the past three months. These units, which had been absorbed briskly throughout the late winter and early spring, were definitely affected by more cautious buyer behavior over the third quarter.

* As is typically true, sales of six to ten room properties (and the loft market which coincides with them) slowed considerably over the summer, but activity has picked up since Labor Day.  Seller ambitions have definitely escalated here, with properties coming on to the market 10% and even 15% higher than the last similar sales earlier in the year or late last year. It can often take several months before a seller is convinced that these ambitions are outsized and most properties are simply not selling for more than they did six to nine months ago.

* While the luxury townhouse market remains largely inactive (the much noted and highly discounted sale on E.70th Street notwithstanding) there is more sales activity in the ultra luxury sector than at any time in the past two years. Numerous sales in excess of $10,000,000 and several in excess of $20,000,000 occurred in September, suggesting that, even as uncertainty about the global economy continues, those at the acme of the financial pyramid have not had a bad year and don’t believe that there will be a double dip.

Looking forward, I predict that we will see a continuing but measured influx of inventory over the next six months. While there is no urgency in today’s market, and I don’t foresee urgency entering the market, I anticipate that the steady rate of sales we have seen over the last two months will continue. Overpriced properties will sit, but realistic sellers, many of whom want to be done by December 31 of this year to avoid possible adverse tax consequences, will command strong historic prices for their properties. No-one knows exactly how the November elections will turn out, nor how those results will impact the economy as a whole. Republican gains in the House and Senate will likely mean less legislation, and less legislation usually help the stock markets to remain perky, which in turn adds to consumer confidence across the boards. On the other hand, many of the Wall Street firms are looking at hiring freezes and possible additional layoffs. So the road ahead is unclear. That said, we have been lucky in New York: our residential real estate market was late to be hit and early to recover in the recent recession. We at Warburg have confidence in that recovery, gradual and halting as it may be, so we see stability with minimal price growth ahead.