Softness In Manhattan’s High-End Condo Market Might Be Overhyped
The buzz about the pending tanking of the upper reaches of Manhattan’s luxury condo market has reached a fever pitch in recent weeks, with news like the Chetrit Group’s exit from its planned condo conversion at 550 Madison Ave and Extell’s reported $162M drop of its sellout at One 57.
Is the sky falling? And if not, what should this part of the market expect in the coming months and years?
“I am of the opinion that there has definitely been a slowdown on the foreign front,” says Belkin Burden Wenig & Goldman partner Craig L. Price, who advises both buyers and sellers of high-end condo units.
Craig says one cause of the slowdown could be new Treasury Department regulations requiring luxury units bought in all-cash deals through LLCs to disclose the identities of buyers.
Those restrictions took effect on a trial basis this March. Despite the new law, data on the nationality of buyers isn’t currently available.
“Anyone who says the foreign buyer is dead is severely mistaken,” says Compass president Leonard Steinberg. (We snapped Leonard with Magnum Real Estate Group founder and principal Ben Shaoul. His team is handling marketing and sales at Magnum's Luminaire condo conversion project at 385 First Ave. in Gramercy.)
Leonard says if there’s been a recent dip in foreign buyers of condos in the city, it’s leveling off, and it’s largely due to numbers that came out last fall indicating the growth of China’s economy had slowed from 12% annually to around 6%.
And, of course, some high-end projects have found demand from foreign money accounts for a lower share of the total sellout of a project than even they expected.
Craig says another reason for any dip in foreign buyers may be uncertainty over the presidential election.
He tells us just in the last few weeks, sales have started to move faster for the clients he represents who are buying in the $5M to $10M range. He notes that may be related to the relative certainty that we now know we’re in for a Clinton vs. Trump contest in November, and after the general election, there may be another round of things picking up among foreign buyers.
Leonard says if either candidate wins in November, inflation is likely to happen eventually, because both support a higher minimum wage—which he says would be a healthy thing for the high-end market.
“Inflation and price appreciation cure all ailments,” he says. “Are there some developers at the high end who have overpaid for land? Yes. But if they can hold onto those projects for 10 years and not lose money, no big deal.”
The best leading indicator of real estate value is land—especially in development, says Arent Fox partner Mark Fawer.
He says in some places in Manhattan, land prices are down as much as 20% to 25% off their peaks, and where that’s the case, he says, developers are adjusting their expectations on what kind of returns to get two to three years down the line.
Across the market, the numbers don’t necessarily support the idea that sales of high-end units in the city have slowed. Q1 of this year actually saw a 19% jump in the median close price of all luxury apartments—that is, those in the top 10% of the market over Q1 ’15—according to a report by the Corcoran Group.
Below $10M, a commonly used definition of “ultra-luxe,” Q1 ‘16’s median luxury price of $6.6M suggests there have been plenty of high-end sales.
Outliers have actually nudged the average condo price in Q1 up—and not by a small amount. A Douglas Elliman report puts the average close at $8.3M, a 14% increase over a year earlier, during what might fairly be called the zenith of the city’s ultra-luxe building boom.
And last week, an offering plan surfaced showing Vornado is planning to bring to market a 23k SF penthouse at 220 Central Park South with a you-gotta-be-kidding-me ask of a quarter of a billion dollars.
Hedge fund manager Ken Griffin has been rumored as the mega-unit’s prospective buyer.
Ben Shaoul’s view is that the higher end of the market—which, as he is at pains to make clear, isn’t his corner of the sandbox, precisely because it can be so risky—doesn’t face a demand issue, but it may face a pricing issue.
Since the price per SF a developer can get tends to go up the larger the units are in Manhattan’s market, Ben says some developers have pushed the threshold beyond what the market will bear.
“Look, there are situations with developers where they priced units too high,” Ben says.
“They got too greedy, and they may have been afraid to lower prices because of the perception of some impact that might have on the market, or just out of ego.”
Ben, whose focus is on the $1M to $3M range for Manhattan condos, says he’s lowered prices at a project he is developing 100 Barclay St.
“We mispriced a bunch of apartments. We pushed to sell them in a different environment,” he says. “We just repriced them. We made a mistake, and now I’m getting bids.”
He says the same kind of thing may have to happen in the upper echelons of the condo market.
“People talk about surplus. There’s no surplus of units,” Ben says. “This is New York. Everybody wants to be here.”