April 29th 2010
Real Estate Weekly
New York City’s real estate market came dramatically back to life during the first quarter of 2010. As buyers and sellers grew more in sync regarding value, absorption increased. Demand outstripped supply in several areas of the market, fueling competitive bidding. Many of the areas of the city which were hardest hit during the recession, like Harlem and Williamsburg in Brooklyn, began to recover, seeing sales increase as developers reduced their prices to entice a customer base struggling with both less cash and less available financing. In many ways financing and its complications remain the biggest impediment to market recovery.
A word about the financing situation: as I noted in my last market update, the banks, regardless of loan size, tend to be using Fannie Mae and Freddie Mac guidelines to make their decisions. These guidelines, mostly fashioned for cash-strapped garden apartment complexes around the country, have little applicability in our very specific New York City marketplace. The requirement that associations (both condo and co-op) build a 10% contingency into their budgets lest some major piece of equipment fail, for example, simply is not relevant for most of our buildings, which have both the capability to assess and the capability to borrow against lines of credit which are almost always already in place. It is the same with some of the insurance requirements. And the decisions about which buildings are approved seem to vary not just from lender to lender but also from mortgage banker to mortgage banker and from week to week.
An additional problem results from the use of traveling appraisers. These appraisers, many coming from well outside the city, do not understand or account for the nuances of our market at all. Recently we had an appraiser mark down the price a buyer had agreed to pay for one of our developments in Harlem because he noted that “Harlem is a declining market.” One thing I can tell you with confidence, three months into 2010, is that Harlem is not a declining market. THAT news is eight months old. Similarly, an eight room property in the West 80s had been reduced by renovation to six larger rooms. The appraiser, also from out of town, comp’ed it against other six room apartments, therefore coming in with an appraised value several hundred thousand dollars below the agreed on price. The owner was compelled to accept a price reduction a month after the contract was signed if she did not want the buyer to walk away.
In spite of the perception of out of town appraisers, our market is NOT declining. In fact, the market has continued to improve through the first quarter of 2010 in virtually all segments. There do continue however to be differences in the rate of improvement based on both property size and location. And the two overall types of product which make up our marketplace, resale inventory and new development inventory, continue to behave quite differently. Let’s talk about resales first:
In the small apartment market inventory remains high. Studios, one bedrooms, and small two bedrooms are not experiencing much price appreciation, especially in the co-op market. There is still substantial depth of inventory east of Third Avenue on the Upper East Side and in Midtown, as well as in Harlem. Prices for these units have not appreciated in any significant way from the lows they experienced eight to ten months ago. However, absorption is improving, and these markets are approaching a tipping point past which prices may once again begin a modest rise.
Five to ten room apartments, especially on the Upper East and West Sides and in the Village, are enormously in demand and very few are coming to the market. The same is true for the mid-sized lofts in Tribeca, especially those in the older “real” loft buildings. Thus in the first quarter of the year we have seen a big uptick in competitive bidding, especially for particularly well located and well renovated product, with many deals made at or just above the asking prices. Sellers have become so much more realistic about value in the last year that buyers often make their offers within 85% to 90% of these prices, and then they may have to move up fast. The days of offering 25% or 30% below the asking price and waiting the seller out seem to be over.
While there continues to be little activity at the upper end of the market, there have been some landmark deals. A gutted 5,200 square foot condo high above Central Park recently sold for $33,000,000 – close to $6,000 per square foot. This deal is a testament to the continuing power of foreign buyers in our condo market. There have also been a number of co-op deals struck recently for $15,000,000 and above. While this market is also extremely low on inventory, the paralysis which held hostage throughout 2009 seems to be easing. There are buyers out there seeking big properties, they are frustrated about how little is available, and they are ready to act – but not to overpay!
Much has been written about the “shadow inventory” in the new development market: all of the units which developers couldn’t sell over the last eighteen months which were either rented or removed from the market. While this overhang does pose some threat to the improving health of the residential market, the danger is mitigated by the lack of construction currently underway. Over the next three years, the market will gradually absorb these units while, because of the loss of tax abatements for developers, as well as the change in the market and the lack of new build’able sites, the total inventory of units is unlikely to increase too much.
That being said, many new developments still carry substantial unsold inventory and realistic pricing is their only option for encouraging sales. Several projects have been repossessed by their lenders and the writing seems to be on the wall for a number of others. In such an environment, everything is negotiable. Of course, the closer a development gets to being sold out, the less negotiable the developer is likely to be. Absorption is improving, but the land of new development still remains a land of opportunity for the flexible buyer.
We anticipate a continuation of the same trends in the second quarter. Financing will be problematic. Buyers will continue to queue up for five to ten room apartments. The ultra luxury market will continue to improve and show increases in the number of transactions. And little by little, smart buyers will absorb the new development inventory at appropriate prices.
In this business there is no such thing as “business as usual,” but at least today we find ourselves back in a market we can understand.