First Quarter 2011 Market Review

The first quarter market reports from many of New York’s major real estate firms came out last week, much covered in all the major press. As always the reports contain an interesting mixture of relevant fact, out of date closing information, and conjecture. So let me add my own voice to the mix:

Activity in Manhattan and the more easily accessible parts of Brooklyn and Queens gradually heated up over the course of the first quarter. In January, slow transaction volume continued a trend which had built throughout the second half of 2010. After a booming four months through April of last year, no doubt reflecting both pent-up demand and a real sense that prices had dropped sufficiently to align buyer perception and value, the market slowed in May and remained slower, with occasional spurts, for the balance of the year. A number of commentators viewed the end of the first-time buyer housing credit as the reason for this slowdown and it is true that timing could lead one to this conclusion. But my opinion, stated before in these reports, is that actually it was the program trading glitch on May 6th, causing the stock markets to plummet, which took all the air out of the balloon. After all, for most New Yorkers, the size of the first-time credit relative to the cost of purchasing even a starter apartment was insignificant. But a fast market is all about confidence. And the May 6th debacle effectively removed confidence from the equation.

In February of 2011, sales volume began to increase. And competition became particularly stiff for the larger, more expensive co-op and condo units costing in the multiple millions. On the co-op side, this phenomenon has been driven both by a resurgence of pent-up demand and a historic lack of inventory. Also, many New Yorkers are cash rich after the last few years, in which bonuses on Wall Street have been strong (although largely deferred) , the better hedge funds have returned to profitability,  lawyers in certain practice areas have been busier than ever, and the stock market is twice where it was two years ago. As we haltingly emerge from recession, many also seem to feel that spending money is not in such bad taste.

So the newly emboldened co-op buyers are competing for a tiny pool of good listings all over town. In Tribeca, in Park Slope, on Park Avenue, and on Riverside Drive, appropriately priced apartments have been receiving bid after bid. And in March, this phenomenon took a new turn: for the first time in years, buyers were once again bidding over the asking price, sometimes way over. Recently a house in Windsor Terrace, near the south side of Prospect Park, went to contract for 15% over its asking price with 10 bidders. And we are increasingly seeing similar outcomes all over Manhattan, where the properties are attractive and the prices are right.

The upper end condo market, through differently driven, is similar. Global instability always drives foreign nationals toward the relative safety of U.S. investments, and we are once again seeing money from all over the globe pour into our real estate market. (The only exception is the Middle East, where for a variety of reasons investors are more likely to put their money into London.)  Add to this buyer pool a large number of home-grown users drawn to the beautiful amenities and high end finishes of the newer condos, and overflow interest in the few available properties results. For much of the last three months, brokers could not even get an APPOINTMENT at The Laureate, the newly built condo in the West 70s. And prices there have been increased several times. Similar experiences abound all over town with larger units in the better condos.

For smaller postwar units all over town, a different story emerges. Whether co-op or condo, these units abound and are still being treated by buyers as a commodity. In THIS market buyers are driven by price and pit one seller against another. Mortgage money is still not easy to get and buyers feel no urgency with so many choices. East of Third on the Upper East Side, Midtown both East and West, Murray Hill, Kips Bay, Flatiron, the Flower District, all these areas still have many one bedroom units available. In Harlem, price reductions and negotiations have led to some absorption, but there are still plentiful units for sale. Here too, however, the specialty market is firming up, as townhouse shells are going to contract at or close to $1,000,000 for the first time in several years.

And all the while, the rental market thrives. Vacancies are low, rents are high, and many New Yorkers still prefer renting to enduring the uncertainties of the sales market. We are still primarily a rental city. Nonetheless, those who rent in the belief that the sales market will adjust downward once again are, in my opinion, hoping in vain. In my last quarterly market report I predicted that inventory would remain tight and prices stable during 2011. I was wrong. Prices are on the upswing, driven by the imbalance between minimal supply and substantial demand. While several luxury rental buildings, including the Carleton House, 737 Park Avenue, and 150 East 72nd Street, seem highly likely to be converted to condominium ownership over the next few years, this will not be enough to satisfy the rising demand for high end, well located property. With the tax laws no longer favoring new construction, there are few shovels in the ground. I now believe we are at the beginning of an upswing in value in our market, hopefully gradual, which should lead into the next up cycle.

So there it is: a divided market. Rentals are expensive and vacancy rates are low. Small postwar unit sales all over town are slow with buyers leveraging prices one against another. Larger co-ops and condos, especially the older co-ops and the newer condos, are in short supply and much in demand. And now it is spring, when the market historically heats up. Stay tuned…