Something I wrote a few days ago- If I were to sum up the Real Estate Market in few words, I would say “Summer? What Summer?”
I meant that despite this being the hottest summer on record, the market seems to have continued apace.
Now that we’re in August, I’m not sure that’s exactly true, but the essence is.
The market has hardly slowed down until the last couple of weeks.
Brokers whom I’ve polled perhaps are taking vacations now, so don’t be surprised if response time is a bit longer- but for most of my team’s listings, we are still seeing significant interest.
Last month we discussed if I felt there would be a real uptick in properties hitting the market in Autumn.
What I’ve seen so far is that many sellers, especially of condominium property, are trying out VERY high numbers.
While I’d like to focus on large condos this month, the conversation tends to drift towards the Real Estate Porn that gets press anyway.
The $100mm new listing, both in Midtown and in Tribeca; the gorgeous properties in the West Village at the former Village Nursing Home; my firm’s new offering at 18 Gramercy Park South– which according to Will Zeckendorf (whom I visited with last week) should come to the market in the fall; and many more.
The condo market is extraordinarily strong right now: If you were a buyer looking for a 4 bedroom condominium in a central part of Manhattan, with a minimum of 2500 square feet, your $5million budget would not go anywhere. There is no inventory, and many people vying for what is available.
And so it goes, new inventory is coming onto the market asking $2500 per square foot, or $3000 per square foot.
Instead of going with the strength of the market, I thought that I would take the other side.
Or at least try
Who are buying these units?
Can this be sustained?
Is this going to come back down?
What would drive things back down?
Is there a breaking point?
I spent time last month writing about incentives/motivations/deterrents for sellers.
These are the motivators that we hear and communicate to buyers about what may or may not be driving the market.
Are these motivators real?
This will be Part I.
Part II will be some thoughts about inventory.
First, Let’s talk about what’s getting buyers off the sidelines and why they are choosing to pull the trigger on such high-priced units:
1 ) Rates
Let’s not kid ourselves.
When banks are loaning money, even money for which there is no tax benefit (i.e. any part of a mortgage over$1.1mm), at these rates, why wouldn’t people be interested in taking advantage?
Further, foreign buyers are qualifying under many lenders’ current programs.
Is this really a motivator?
I would not put it at the top of the list for most high-end buyers.
It’s a great thing, but not the main thing.
2) Rental prices
Especially for 3bedroom apartments or larger, when someone looks at the dearth of rental listings, purchasing becomes very interesting, and see above about rates.
$15,000 per month for a well-located apartment rental, with a commission of $25,000 on top. These numbers add up very quickly.
Psychologically, there is a tipping point, too.
I think this is more of a motivation in the $2mm-4mm space, and these buyers tend to move into cooperatives if they can.
There’s no real motivator here towards condos.
3) Tax advantages
Many salaried buyers have few tax shelters other than home ownership.
Dodd-Frank regulations, which I touched on in my Mortgages post, has created a ton of higher salaries that used to be small salary plus higher bonuses, which have major tax consequences.
Now, it’s a real mess for these employees who need to find ways to manage their tax liability.
I would think this is a somewhat important motivator, but again- this is a sideshow for the high-end condo buyers.
4) A hedge against inflation
If we’re just talking about the high end, a big purchase in NYC is about a hard asset hedge while rates are low. However, how low a return will justify the purchase?
Banking on appreciation may justify a 1-2% return, while some buyers are content to enjoy a big purchase while they wait for inflation to take hold.
Other commodities are more volatile.
Buying into a REIT isn’t nearly as sexy.
I would argue this is probably the macro thought process that many investors and buyers are going through, and one of the main, if not THE main drivers of the purchases right now.
High End pricing seems to be anticipating inflation more than any other segment of the market.
5) New York as safe haven
London was crazy this August, so let’s go to New York!
And while we’re there, maybe we’ll buy something!
Clients in hospitality reporting a strong summer in NYC, with hotel prices reaching new highs.
But these tourists, swarming the city in this heat, are spending money on more than shopping.
New York remains a safe haven, especially when it’s not the most expensive real estate on the planet.
This is likely the top or second driver to the overall strength of the condo market right now.
Even this morning, the Wall Street Journal had a piece about investors in China looking to other real estate markets.
Many markets such as Germany appeared interesting, and with the Euro’s being beaten down will still be interesting.
But the volatility of the region makes the USA, and NYC especially, very interesting.
Many buyers at this level are simply not able to buy in a coop.
Local buyers are also becoming more averse to the disclosure and scrutiny required by cooperatives.
I am regularly surprised by the hurdles coop boards place in front of very qualified buyers.
Forget the social scrutiny- just the financial component is enough to drive buyers into the arms of new condo developers.
This is a side motivator- surely buyers would prefer to buy wherever is least expensive.
Cooperative units are not a bargain at the high end, and one cannot use as a return, except on appreciation.
7) Trophy Buyers
I’m thrilled that owning a condo as a part-time residence in Manhattan has become so popular.
Take that idea and put it on steroids.
And we have some monstrous purchases happening.
This is likely a driving force for 2-3% of purchases, but probably most, if not all, of the $50mm and up purchases right now.
So, yes, it’s a big factor.
8) Staying in the city
Big families who can live anywhere, are staying in Manhattan.
With outsized, successful businesses, competition is so fierce for large units.
Is this a driving force for the condo market?
I would say it’s only a factor in that it makes the transition from one apartment to another easier- it becomes about location, quality of finish for a busy buyer who doesn’t want to renovate.
I would put it behind inflation fears.
9) Taxes in the suburbs
If you’re going to send your kids to private school, why pay $100,000 in taxes?
Perhaps it makes more sense to put this money into a condo in the city.
I don’t think this a motivator at the high end whatsoever.
So, so far the only major driver is the fear of inflation, to my mind.
Is that strong enough motivation? Are there enough foreign investors who are loving New York City?
I would argue that yes- there is enough money coming into New York, and already here, to make the high end move.
And I don’t see it changing or shifting unless something cataclysmic takes place.
Part II to come, and we’ll talk a bit about inventory.