IN BETWEEN SEASONS
The question that I’ve been getting lately, pretty much every day, is some version of, “Has the market slowed down?”
A legitimate question, no doubt,
as some signs point to a slower market.
At the moment, though,
I’m finding it challenging to come
a definitive answer.
In the past few years, the market really has revved up almost immediately in January, so there is
a tendency to feel like if things are selling then there’s some kind of problem.
A couple of weeks ago, I attended an event where a couple of the smartest guys I know in real estate were asked, “If the real estate cycle were a baseball game, what inning would we
I’m not sure I loved the answers.
The first person said he thought it was the sixth inning: that while there were signs that the end of the game was close, there still seems
a ways to go.
The second, less rosy initial response caught me more off guard: “The game is already over.”
This got me thinking.
Like last year,
so far this year,
we don’t see the inventory yet.
We still seem to be in between seasons.
Football is over, baseball hasn’t begun, and just like sports fans who aren’t into basketball (though anyone could love this buzzer beater
from the weekend), we seem to be in a little bit of a holding pattern.
too early in the year to tell where we are.
But I opened the analogy of being
between seasons, where football is the hyper, high energy, roaring real estate market, and baseball is the slower, methodical market that makes some
viewers want to change the channel.
So let’s explore it a bit.
THE TWO MINUTE DRILL
Football games end with comebacks, rarely with a whimper.
Usually one team is pushing to get down the field before the clock runs out, in what often is
called a two-minute drill –
using clock-stopping techniques to take full advantage of whatever time remains.
That same urgency has been in the market for some time,
a combination of lack of inventory and low mortgage rates.
Since inventory levels have not changed – if anything, they’ve gotten LOWER in many neighborhoods –
what could explain lower levels of urgency in the market?
This is what we’re seeing now.
First, mortgage rates no longer appear to be going up very much, if at all, in 2016.
There had been an expectation that rates would rise
as much at 15-20%, and when the Fed raised rates at the end of 2015, everyone just assumed that mortgage rates would begin an inevitable climb.
But they actually are
DOWN significantly since that time.
Run a Google search.
almost as low as they were, if not lower than, in 2013.
Second, stock market volatility finally has
caught up with buyer psychology.
Both stock and real estate markets have been
on the rise
over the last few years.
While there isn’t 100% correlation between stock and real estate, a flat 2015 in stocks certainly has given buyers reason for pause in purchasing real estate – at least at the very high end.
And that’s what we’ve been seeing.
Movement north of $5mm has slowed
What used to be $10mm and up has crept into lower price tiers.
Buyers view the stock market with a bit more pessimism, and understandably so.
I don’t claim to be a stock market expert, and I have tried time and again to avoid predictions about the real estate market, too.
lots of weakness in the global economy, and that will impact the US.
Even if NYC looks like a safe haven for investors to buy hard assets like real estate, savvy purchasers are scouring for any deal to be had in a way we haven’t seen.
Put another way, buyers have become more patient at the plate.
Which brings me back to the baseball part of this analogy.
Probably a stretch, but there you go.
I’m seeing this patience at most price points, with the majority of bidding wars and insanity under $2mm.
But only when we start to see some leaves on the trees will I be willing to stake out a stronger position.
Sounds like a fun minor league baseball team, no?
I went to a conference on Real Estate Crowdfunding last year.
I was reminded about it last week, speaking to the owner of one of the local websites for crowdfunding, a lovely guy who has sold almost $100mm in projects in two years.
In short, crowdfunding as it relates to real estate deals allows investors, in theory, to diversify their investments by putting smaller amounts into more deals, either by holding the debt on an investment (mortgage, note, etc.) or by funding the equity (the downpayment, as it were).
All of these deals are development deals of some kind, where the developer is buying, fixing, and selling the project.
You can call it “flipping,” if you are into that term.
There are plenty of TV shows
hyping the concept.
In the case of the site I was discussing the other night, the developers have been buying houses in Brooklyn – in
Bed Stuy, specifically,
or further out.
Apparently the developers are well-known to the website’s investment committee, which may
one guy, but who knows.
So they are less-risky bets, in theory.
OR – they are known through people that are known.
Does any of this sound fishy to you?
I happen to have been looking with an eye on investing out there in Brooklyn, so I’ve been asking everyone about those neighborhoods, and I’m still learning about them.
Yes, in Bushwick everyone is pretty concerned about the L Train going out of service.
If you’re an optimist, you say, “Yes, but that’s not the only train.”
As an investor, and an advisor to investors, perhaps I take a less rosy view.
A couple of thoughts on the entire crowdfunding concept.
Once there is enough money available to
support crowdfunding sites in the first place, it’s clear that banks are making it too difficult to get conventional construction financing.
too many people are
trying to flip houses in Brooklyn).
Or the buyer/developer is
for conventional financing.
Not to mention, you have to do your research on the strength of the crowdfunding platform itself.
Who runs it?
Is there a risk that for some reason they might go under, making it challenging to administrate the investment?
As Tom Hanks would say in that 1986 gem, “Big,” I don’t get it.
I mean, I do get it, but I don’t understand what I’m missing here.
It seems to me, too,
that the exit strategy for these crowdfunding flippers grows too focused on one type of buyer.
Unless you’re a pioneer and are buying to live in one unit, and rent out the other, these facts alone gave me pause in looking at the neighborhood for investment today.
That is, the long-term buy and hold at today’s rates may be sound for a primary home buyer.
But with so much inventory to choose from at 5% rates in Brooklyn, I grow concerned.
These returns were 6% and 7% a year ago.
All of these returns are predicated on finding renters willing to pay between $1000 and $1300 a bedroom to rent in these neighborhoods.
What if fickle millenials change their minds about what neighborhood is fun, or if
too many apartments become available to choose from?
Those 5% returns become 4% returns pretty quickly.
Move to the other end of the process.
If you hold the “note” on a project, and the sale of this fix-and-flip house happens, great.
You either get the mortgage paid off (usually a slightly lower rate of return) or get paid on the more speculative part, investing in the flipped house.
Either way, you get paid and you move on to the next deal.
HOWEVER. What happens if the deal goes South?
Even if you own the mortgage – and eventually you own the busted development through the mortgage – you don’t own the debt yourself.
It’s broken into lots of tiny $5,000 and $10,000 increments (or perhaps even smaller!).
Who administrates that?
Did you intend to be a receiver for a busted development?
It’s a bit easier on the equity side.
If the deal goes sideways, then you probably lose all of your money.
Either way, I’m not sure that crowdfunding investors (or some flippers, for that matter),
even are considering what happens when the music stops.
BRISTOL PALM BEACH
I went to a presentation a week or so ago for an absolutely incredible development right on the water in West Palm Beach: The Bristol.
What can I say? I was totally enamored by the 25-story building, if not a little sad that my quaint
West Palm Beach is taking a turn toward Miami.
As more people move to Florida, and move South and West generally (not just snowbirds), these fully serviced doorman buildings continue to grow in appeal in Miami and Northward.
A few other thoughts.
First, it’s great that developers of a Florida property understand the connection between Florida and New York City buyers, at this size and pricing level – 4,000 to 9,000 square feet starting at $5mm. Second, I wonder why we don’t get more of these presentations in Manhattan,
and further, why NYC development had not really been given the road-show treatment across the globe before.
I hear that this is changing.
More on local developments as things hit the market in March.
For now, I am hearing that sales have stalled fairly significantly on some truly fabulous luxury properties.
The 421a tax abatement program ended
at the beginning of the year, with negotiations stalled to extend it.
Buildings with already reduced taxes won’t be affected.
But new buildings, whether rental or condo, aren’t getting any tax abatement right now.
And so what’s happened?
No developers will be building more rentals.
What we see coming on line in the next 12-24 months will be
all there is until something gives.
Essentially, the cost of building anything but condominium will be too expensive.
Land is too expensive, though commercial brokers predict it will drop in 2016.
Labor is too expensive, too.
Let’s take Manhattan, where land has been too expensive for anyone to build rentals, unless they’ve owned the land for a while.
Some developers claim they are not proceeding with developments, and that they will continue to operate as rentals or hotels.
These make for good headlines, if you’re looking for the apocalypse.
In Brooklyn, land
much cheaper, and we’re about to see a massive number of rental buildings hit the market.
Rental prices are
predicted, generally, to come down a bit in 2016, a retrenchment of sorts.
And as the urgency in the sales market steps down, lower rental prices won’t be a strong motivator for purchasing, either.
Bear in mind, though, that rental prices
still, by most standards, are
pretty darn high.
Bringing back the baseball season analogy.
Some developers are “trying to make trades,” making moves to get ahead of any potential shift in the market.
But you have bring a sense of humor into this. One developer bringing
to market a
rental-to-condo conversion feels that the value play at 89th and 1st Avenue on the Upper East Side starts at $1500 per square foot.
Perhaps buyers will agree.
It’s a lovely building, and other successful ideas include offering
a lot of 1- and 2-bedroom condominium units, which are pretty hard to find.
Don’t forget, though, that you have to add another 2-3% on top of that price ($45 per square foot or more) for new development closing costs.
That $1500 per square foot starts to move up to $2000 per foot as soon as you get to 3-bedrooms, too.
My question for you:
Do people actually want the real estate market to take a turn for the worse?
I am not sorry to say that we’re not there yet.
1-bedrooms are selling briskly.
2-bedroom properties under $1mm definitely are selling.
3-bedrooms under $2mm are flying, too.
Four bedrooms under $3mm?
They don’t exactly exist
in any real number, but anything that approximates that
For those sellers who are looking to hit singles and doubles –
that is, pricing things realistically – they will see success. Those sellers aiming for the fences?
Keep looking for that pitch, but be wary of the curve ball.