Warburg Realty First Quarter 2012 Market Review

The New York real estate market has shaped up in an interesting configuration during the first quarter of 2012. While the condo market in Harlem, priced appropriately after a couple of years of settling, has seen substantial absorption, and while apartments and townhouses all over Brooklyn are seeing multiple offers and prices over asking, the co-op markets on the Upper East and Upper West Sides, the raw real estate material from which the boom began, has a strong top and a firming bottom but a weak middle. There is, so to speak, a hole in the donut.

At the upper end, the three months which have just ended continued the trend which was already strong during the latter half of last year. There has been a dearth of good properties for sale above $10 million, and most of those which were on the market last year have been sold. The much anticipated apartments at 907 Fifth belonging to the late Huguette Clarke came onto the market three weeks ago, and the jewel in that crown, the soaring property on the top floor with windows facing the Park which stretched the whole length of the building, lasted less than a week before being sold in excess of its $24 million asking price. The good property goes fast, and when it doesn’t, there is a problem either with the price or the property. These buyers did not need a good bonus year to afford a purchase. They already have the money.

At the other end of the market, activity has also picked up, though for very different reasons. For the studio, one bedroom, and small two bedroom market with prices under $1.5 million, the lowest rental vacancy rates in recent history have driven rental prices up to a level at which buying simply makes more economic sense. While financing can still be difficult to obtain for these buyers, many of whom are first timers, we see an ongoing reliance on the Bank of Mom and Dad. The recovery of the smaller apartment market, moving as it has hand in hand with the thawing in the national real estate market, in consumer confidence, and in job growth, has been one of the halcyon stories of early 2012.

The market which is experiencing more difficulty is the broad one between the high and low described above. Neither fueled by high rents, nor buoyed by the extremely and enduringly rich, many six, seven, eight, and nine room properties priced between $2.5 million and $7.5 million are spending six months to a year on the market. They face a number of challenges. First, this market has actually declined slightly in overall value since Memorial Day of last year. When the overall news is positive, it is difficult for sellers to make the necessary price adjustments to keep the property competitive. But the pool of buyers for these units isn’t so deep. My agents report to me that, when they bring on exclusives in this price range, there are 15 showings the first week, eight the second, three the third, and then the phone (and e-mail) more or less go dead.  If these units are not sold to one of the buyers out there waiting, they may be on the market a long time.

What factor distinguishes the buyers for these properties from their less expensive and more expensive counterparts? Here, more than anywhere else, we see the effects of the changes in the finance industry.  Up until the fall of Bear Stearns (four years ago last week, amazingly enough!) these apartments were the bonus buys. Fueled with the big handful of cash from their bonus, mid- and upper-mid-level Wall Street financiers would buy apartments into which to move their expanding families. Now, with the industry so contracted and the cash portion of the bonuses all but gone, that simply is not happening any more. So what buyers there are for these apartments want great buys, or great condition, or both.

The notion of stretching for an apartment is gone. And no-one does renovations piecemeal anymore. Thirty five years ago, when my wife and I bought our apartment, we painted it ourselves. A year later, we did the kitchen, a few years after that, air conditioning. We actually decorated a decade after the purchase, and then did the bathrooms a decade after that. But now no one does THAT, so every price is calculated with the cost of an immediate renovation, including carrying costs for two homes while the work is being done. This often leaves buyers and sellers far apart. Thus many of these apartments languish on the market, even as their much bigger and much smaller counterparts are being snapped up.

Heading into the next quarter, we at Warburg do anticipate that the gradually rising economic tide will help float all boats. Realistic pricing remains key in ALL markets, but perhaps nowhere more than in the $3 million to $7 million range. With a smaller constituency of buyers, many made anxious by fundamental changes in the way the finance industry operates, sellers in the donut hole will have to be very realistic about what the market can offer them in the current environment.