Manhattan Market Movers
Green shoots in the 2012 market, the rise of the foreign buyer, and new insights into the age-old question of condos vs. co-ops
By Michael Gross
Why did the homebuyers cross the ocean? To get to the other side, of course, where foreign currency covets luxury in close proximity to Central Park, Madison Avenue, Lincoln Center and Broadway, and everyone—New Yorkers especially—comes out a winner. Earlier this year, seven of New York City’s real estate royals met with Manhattan Media’s chairman Richard Burns and me to discuss the current state of our housing market. Right now, that market is (perhaps surprisingly) strong, high-end condos are up but they’re also increasingly scarce, and though Upper East Side co-ops may seem down since bonus babies and flight capital don’t like board scrutiny, the smart money says they’re ripe for a revival, because although this is a global city, it’s an ever-more-family-friendly town, too.
Participants (in alphabetical order):
Dorothy Herman, President and CEO, Prudential Douglas Elliman
Kathryn Korte, President and CEO, Sotheby’s International Realty
Kelly Kennedy Mack, President, Corcoran Sunshine Marketing Group
Wendy Maitland, Managing Director, Town Residential
Frederick Peters, President, Warburg Realty
Diane M. Ramirez, President, Halstead Property
Elizabeth Stribling, President, Stribling & Associates
AVENUE: There is a lot of experience in this room, and I am wondering if this current time period reminds you of any other time in New York real estate? Fred?
Frederick Peters: A year of two ago reminded me of the early ‘90s. But today we’re actually moving into somewhat uncharted territory. That is mainly because we haven’t had a marketplace which has been impacted by globalization in the way today’s marketplace is.
Elizabeth Stribling: New York, more than ever, has become the most cosmopolitan city in the world. About 30 percent of our condo purchases are made by foreigners. There are always pockets of people from all over the world, and our latest insight at Stribling is the British are coming to Brooklyn.
Dottie Herman: Yes, we compete in a global market. If you compare prices to any other city that competes in that global marketing, like London or Hong Kong, New York is cheaper. There are more foreigners here now than in the peak of the boom. Even if we think we are going through uncharted times as a country, it is still a lot safer bet h an any other place in the world.
Kathryn Korte: I would say the current period shares similarities with the summer of 2003, when we finally began to move out of the economic landscape that occurred in the aftermath of 9/11. Back then we saw New Yorkers recommitting to New York. Now we are seeing an influx of foreign money and foreign buyers. Initially there were many Russians entering the market, but now there are more buyers from Asia, the Middle East, India, and Australia. There is a greater focus on wealth preservation now over investing, which many buyers view as a safe haven.
Diane Ramirez: Every time period is a little different. We are starting to see some conversions, which we really have not seen in a long time, not since the ‘80s. Some rental buildings have changed hands and will be very exciting new product. But I think we might see more rental buildings converting and we have not even heard that word in a long time.
FP: There was at one time concern about an inventory overhang, but we actually have a relatively serious inventory shortage. This fantasy that there were going to be thousands of unsold condos depressing the market for years to come just turned out to be completely wrong.
ES: In fact, in 2013, there is going to be a shortage of new condominiums.
Michael Gross: Is that shortage because of the dip in construction?
ES: The current supply is being quickly snapped up, because what people want today is the latest finish, the most modern construction, the least in need of renovation. And most of the new developments are going to have fewer than 100 units. So, we don’t have a lot in the pipeline.
Wendy Maitland: What I see in our market today is that it is much more segmented than it was, say, five years ago. There is a lot happening at the very high end of the market, and less in the more cookie cutter type of product.
Kelly Mack: Over all, the whole market, at ever price category is very strong. Everyone is talking about the high end of the market because there were about 94 deals done last year at over 10 million dollars, which is amazing. But the issue right now is lack of inventory, across the board.
AVENUE: Statistically, the overall market through the end of 2011 was flat. But average prices in the luxury category, which is defined by the top 10 percent of sales, were up three percent. So, does that jive with what you’re saying in terms of supply and demand? You would expect it to be higher. Dottie?
DH: It is almost a doughnut. The middle market is the weakest. But still, I don’t think that it is a real estate problem. I think what we have is a financing problem. The boom market, around 2006, would not have existed without financing. I’ve lived through a lot of different markets, and I don’t hear anyone saying, ‘I don’t want to buy real estate. I don’t trust real estate.’ I haven’t heard that for a couple years. People are sold on New York City. But financing is a problem.
DR: The number of available units continues to decline market wide. The areas and sizes with the lowest level of inventory are poised for price awareness.
KM: The condominium market operates a little differently. Condo pricing has increased about 5.9 percent per year over the past 25 years, but last year, it increased 6.5 percent. Scarcity of new product is now driving up prices.
AVENUE: Here’s an eyebrow-raising stat. The attorney general approved 609 units for sale last year. In 2006, they approved just shy of 24,000.
KM: More than 8,000 new development units were brought to market in 2008. Compare that to last year when just 286 new units were introduced. Construction financing is unlocking for strong developers, so we expect 1,500 units to hit the market annually for the next few years. That’s an improvement, but far below the historical average.
FP: How can we predict anything but a shortage three years from now? We’ve returned to the pre-construction sell-outs. Who would have guessed that three years ago?
AVENUE: Let’s turn to the age-old question of condos vs. co-ops. Do you have a preference?
WM: Clearly, cooperative deals traditionally are more arduous, although I think the condo boards are inching up. I think we all have to give kudos to our co-op boards, which helped protect New York compared to every other market in the world.
ES: You can convince a co-op buyer to look at a condo, but you cannot convince the condo buyer to look at a co-op.
AVENUE: In terms of sales since 2005. Co-ops have risen 3.2 percent. Condos, 16.5 percent. That tells a story.
FP: Condos have a few outlier sales, which I would guess would skew the numbers somewhat. I wonder if it would be as extreme if you remove the outlier sales.
MG: Are the co-ops loosening a bit as the condos are tightening? Are condo boards behaving like co-op boards and vice versa?
FP: My observation is with big ticket sales in the past year, there is a big de-emphasis on the finance industry. In 2006, every expensive apartment was bought by a finance person. Now, the finance people are no longer in the forefront. This is relevant to your question because co-ops are looking at bonus income differently now. If you can’t afford the apartment with your salary and the money you have already accumulated, they are not taking your bonus into account the way they used to. That is a sea change.
DH: People like new. I also think people not from New York City have a problem with someone telling them they can’t sell their apartment to whomever they want. At some point in time, the co-op boards may loosen up, as older people retire and new ones come on, but I am not seeing it yet.
DR: I have always said the co-op boards have to change. The next boards has to make the process easier, and it has never happened. The close financial scrutiny of the co-op boards gets tighter and more far reaching. Income and assets are looked at near term and not at the long term value. It makes the ownership more insulated to a downturn in the financial market but very restrictive to the general buying public.
ES: I think a lot of the snobbery is gone. As long as a person is not disruptive, they’ve got some liquidity in the bank, they pay their bills on time and don’t have a huge dog that is going to bit the neighbor’s children, they should get into the building.
MG: Will there ever be a movement for co-ops to convert to condos?
ES: No, because there are 32 people more or less in that building, and if they all have to pony up to pay off the mortgage, they won’t do it.
KK: You’re always going to have a market for co-ops. When a co-op listing comes to the market like the new 2 East 70th Street penthouse, the demand is fantastic. That being said, the condo market has really taken off, as condominiums have great stature now. The trend I see in the condo market, which I think is wonderful for New Yorkers, is that there are more condos now with large floor plans and layouts that are ideal for family living, which are quite different from the shiny new pied-a-terres that might be more appealing to foreign buyers. So even if New Yorkers have lived all their lives in a co-op apartment, condos offer a fun change of pace.
MG: Are we looking at a situation where there are going to be many peaks of the pyramid, instead of just the Fifth Avenue, Park Avenue Candela, Emory Roth, carpenter buildings alone at the top? Will living in a Stern building, say, become just as desirable as living in a Candela building?
WM: Desirable to whom is the question, There are people who like Birkin bags, and people who prefer Balenciaga. There are always going to be different peaks and different styles.
KM: The high-end co-ops are never going to be replaced. There is always going to be a very strong market for that. But the buildings that trade for the highest prices right now, many of them surround Central Park, which is not surprising, and many of them are newly built. New buildings are designed to meet the expectations of today’s buyers. They are larger spaces with more light. They have advanced heating and cooling systems, brand new pipes, large eat-in kitchens with family rooms, tons of amenities, tons of service. Time Warner Center was one of the pioneers. Columbus Circle was not seen as desirable back when it was first being developed. When we put it on the market, we wondered if we would see the Fifth Avenue and Park Avenue buyers. It was the first time those people even considered coming to the West Side.
KK: For many years, the new development was in TriBeCa and SoHo and on the west Side, like Riverside Drive. What’s happening now is a resurgence of the Upper East Side, with buildings like 737 Park and 150 East 72nd, and more family-oriented buildings and apartments. The Upper East Side is going to make its comeback in its own way.
RB: So, let’s talk about the foreign buyer. Who are they? How do you draw them in?
DR: We have a great video library that has been incredibly appealing to clients—especially the international market. We went into it five years ago with full commitment. We are selling to the international client on video including a feeling for the surrounding area through our neighborhood videos. They are buying because the video is so true to what it is that when they come here, they are not disappointed when they actually visit the property.
DH: Our sales force is very representative of New York City, so my Russian sales agent generally helps Russian customers. Our website also attracts people. So, we’re not advertising specifically to a foreign buyer because you don’t need to.
FP: Everyone shops online.
ES: the foreign buyer is no different than any other.
MG: Are they first home buyers, or second, third, fourth?
KM: all of the above. Last year, we sold a billion dollars of new development and 22 percent of that was to international purchasers, up from 10 to 15 percent several years ago.
WM: Where are the rest of the buyers coming from?
KM: Entertainment, media and technology are growing categories. Wall Street, though still very important, has decreased from 35 percent before the downturn to about 23 percent now. There’s also significant crossover between the city’s most exclusive buildings like One Beacon Court, 15 CPW, and Time Warner Center. International money shifts based upon global economic events. In 2006, much came from Ireland. Now, buyers from Asia comprise a third of the international pool and South America is rapidly gaining ground.
MG: With people grasshopping from Park Imperial to 15 CPW to Time Warner, and more and more foreign buyers, does New York remain a community or is it just becoming a global beehive?
DH: It is still a community. Certainly, you can choose to live somewhere where you don’t know your neighbors. But families have grown up in New York, too. We should be grateful that it is a global city because, during the recession, we got bruised, but we did not get killed.
WM: It’s not a competition. There is no other Paris. There’s no other New York. No one is going to say, ‘Should I buy in Shanghai or Brooklyn?’
AVENUE: At the end of the year, what are we going to say about 2012 in real estate?
DH: It is an election year. So I don’t think anything significant will change this year. We are moving ahead, it is a healthy, perhaps even healthier market than we had in the boom.
WM: I agree that it is a healthy market. Globally, New York represents safety, quality and stability in the context of what is happening in the world.
KM: I think the biggest story of the year is going to be One57. They have had a tremendous start and there is a lot of pent up demand for very high-end luxury product. Because of the lack of inventory we are going to see upward pressure on pricing continue. If the appreciation mimics that of the last 20 years, we are going to be at the peak or just above it in 2013.
DR: We have had a great 2010 and 2011. I think 2012 will be very good as well. Not great, but good. I see all markets moving, the two-bedroom and up. If it is a good apartment and priced well, which is key, good location and in good condition, it is off the shelf in milliseconds. We’re starting to see bidding wars, and the prices of the bidding wars are starting to go over asking, which we have not seen for a few years. I see another good year, a solid year, but not big jumps.
FP: We signed two and a half times as many contracts in January, 2012 as in January, 2011. We have had the lowest vacancy rate in the rental market that any of us can remember. We have all been waiting for that to flip, for people to go back into the sales market with the smaller apartments. That is starting to happen. I am usually pretty gloomy as a prognosticator, but I think that 2012 is going to be quite strong, both in terms of volume and in terms of pricing because demand is outstripping supply.
ES: We’re going to have a good, solid, strong year. I agree that it is not going to shoot through the roof. People are still worried about the global economy and what is going to happen in this country. I think it will be slightly stronger than 2011.
KK: I think people will say there were green shoots. If we do as well as we did in 2011, I’ll be very happy with five to ten percent more growth. Anything beyond that, and I’ll be tremendously happy. We’re entering a healthy market. I’d like to see it continue.
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