More Pain On The Horizon For New York's Scuffling Luxury Condo Market
A perfect storm of regulations, taxes and excess supply means there could be more struggles ahead for New York City’s troubled luxury residential market.
Developers’ rush to build ritzy condominiums over the last few years caused a well-documented oversupply in the city. Sponsors and sellers at the high end have been forced to cut prices and offer incentives to score buyers — and there is little suggestion the challenges will ease any time soon.
There are still scores of new units hitting the market, and factors like rent reform laws and possible new taxes — not to mention a general election this year — will further dampen the market.
"Buyers are in control but have a lot of uncertainty to process," said Jonathan Miller, CEO of appraisal firm Miller Samuel. “I’m dubbing this ‘peak uncertainty’ — there are so many variables spinning around … the new rent law, the mansion tax, and the pied-a-terre tax has been floated again.”
In the last quarter of the year, sales of Manhattan condo and co-ops priced at $5M and above fell sharply, per Miller Samuel’s figures.
The fourth quarter of 2019 had the lowest overall share of quarterly cash buyers in five years — an indication that investors are pulling back, Miller said.
To put it in perspective, in the first two quarters of the 2019, 80% of buyers in the over $5M market were paying cash. That plummeted to 44% in the third quarter, and Miller believes skittishness around New York lawmakers' recent legislation of the real estate industry is to blame.
“The political zeitgeist is very anti-luxury … It’s beginning to take its toll,” Miller said. “It’s a wet blanket on top of an already challenged market.”
Right now, new development inventory in Manhattan is at 7,050 units, according to Halstead Development Marketing’s 2019 report, released last week. With absorption at its current rate, that represents 74 months of inventory — more than six years.
There are nearly 6,000 units in development that haven't yet been released to the market, Halstead found. That figure comes off the back of a series of headlines last year pointing to the glut of residential products on the market; in September, The New York Times reported that one in four apartments in the city was unsold, most of which were asking for multimillion-dollar commitments.
"The entire year was a struggle,” Olshan Realty President Donna Olshan said. “You had to lower your price by 10% before you can even find a buyer."
Her company's data shows the number of contracts signed on residential properties priced $4M and above dropped 16% between 2018 and 2019, reaching its lowest point since 2012. Last year, contracts signed on properties asking $10M or above dropped 11% from the year before. This year, she said, moving units will come down to price.
"It has to be priced aggressively,” she said, adding the federal government's capping of deductions for state and local taxes, known as SALT deductions, was devastating for the new York City market. “Then it got fueled by other public policy events, sprinkle on top of that a lot of overpriced inventory — you’ve got a perfect storm. We are not going to get out of this cycle until prices get reset lower.”
Aside from the city’s tighter rent regulations — which sparked fury from the real estate community, but don't directly affect the condo market — the mansion tax, also passed last year, requires buyers of multimillion-dollar homes to pay a higher real estate transfer fee.
Part of the state budget, the mansion tax was enacted instead of a much-feared "pied-à-terre tax," which would have levied an annual fee on luxury homes that weren't the owners' primary residence. While scuttled last year, the pied-à-terre tax is reportedly still in the cards for lawmakers this year, which looms large over the luxury market.
Still, real estate players, ever the optimists, say that not all buildings are the same, and every neighborhood is experiencing its own supply-demand dynamics.
And certainly, there have been some outliers in the last year. In January 2019, Ken Griffin bought a penthouse at 220 Central Park South for $238M, shattering previous records for the highest price ever paid for a home in the United States. Last month, a penthouse in the same building sold for $92.3M.
“It's been a bit of a roller coaster,” Compass broker Vickey Barron said. "And when I say that, I mean, some unexpected turns come out of nowhere; it’s doom and gloom. And then out of nowhere comes a deal or a buyer that shows up for a high-priced ticket item."
Many developers have been offering lucrative and cutting deals. Extell Development, for example, up until Dec. 31 offered to pay the carrying costs on some apartments at its luxury Brooklyn Point project at 138 Willoughby St., and launched a rent-to-buy program at its luxury apartment tower One Manhattan Square last year.
Halstead Property Development Marketing President Stephen Kliegerman said he feels cautiously optimistic about the residential market this year, even in light of the negative stories, because of an uptick in the last quarter of 2019.
“I think one of the things you are seeing is different market segments, different areas of the city are behaving and performing differently,” he said. “It’s also about the quality of the projects — definitely some developers that have adjusted their expectations in order to meet the market.”
He agreed that on a broader level, the politics du jour will not favor the luxury segment.
“New York, although thriving in many ways, is seeing a major shift in ideologies," Kliegerman said. "Part of that is putting a lot of burden on the real estate industry because real estate taxes are carrying a lot of the programs that are being proposed."
There is a sentiment among the luxury segment that the city is being punitive, which could be driving some buyers to other states, he added.
“The tenor in New York right now is leaning towards there is a negative tact of being someone of means," he said. "I think some people are thinking, ‘Maybe it’s time for a change.’”