While Luxury Buyers Chase ‘COVID Discount,' Developers Insist Prices Can't Go Any Lower
Developers in New York City with pricey luxury apartments to sell were facing an uphill battle in 2020, faced with a supply glut and waning demand. The hill has only gotten steeper the last two months.
The luxury residential market entered 2020 saddled with challenges. A well-documented oversupply has been a persistent problem for years, but increased rent regulations, amped up state and new taxes on luxury purchases — plus the uncertainty of a presidential election year — made buyers reluctant.
With the city frozen by the coronavirus pandemic, transactions have ground to a halt. Buying activity has dropped by around 70% since mid-March, Corcoran Group President and CEO Pam Liebman told Bisnow. Last week there was just one contract signed on a Manhattan apartment asking at least $4M, according to data from Olshan Realty.
Just 14 contracts for apartments costing more than $4M were signed in the last six weeks, compared to about 135 during the same period last year.
Sponsors who were already cutting deals and dangling incentives to buyers will be under even more pressure, particularly those with hefty loans coming due. But real estate's relentless optimism hasn't dimmed much, sources said, with many developers holding out for better days.
“New York City is the dream, but right now it is in nightmare conditions. We just have to wait for it to pass,” said Olshan Realty President Donna Olshan, adding that there were a few more contracts signed on luxury properties this week. “You have to be realistic. The buyer pool has shrunk, and the buyers out there are looking for good value.”
Some developers have already responded to the pandemic, with Extell Development last week offering discounts as high as 20% for still unsold units at its 815-unit project One Manhattan Square.
The developer, which is building two of the most high-profile condo projects in the city in Central Park Tower and Brooklyn Point, said in a release that the discount was in response to “global conditions caused by COVID-19." HFZ Capital Group has reportedly weighed selling discounted units in bulk at its Bjarke Ingels-designed condominium the XI, The Real Deal reported.
Compass broker Vickey Barron predicts a jump in “rent-to-own” style offers at many luxury developments as economic conditions become more strained.
“[Developers] are going to have pressure from their lenders,” she said, adding that some will fare better than others. “None of them are worried because they always tell themselves it is all going to be fine. That’s how they get out of bed each day … [but] money has to come in somewhere.”
While sales volume increased in the first quarter of 2020, it was largely because sellers had begun to reduce their prices, according to appraisal firm Miller Samuel. The number of closed sales in the borough was up 14% year-over-year in Q1, but the pandemic only set in in the last few weeks of March and has not yet shown up in the sales volume figures.
The median sale price was just over $1M, the third straight quarter of decline.
Miller Samuel CEO Jonathan Miller told Bisnow listing inventory for luxury homes — the top 10% of the market — dropped by nearly 25% in the first quarter, a time when it almost always rises. Miller estimates it will take more than six-and-a-half years years to sell all of the new development inventory that is available in the city, even without taking the pandemic into account.
At least 2,000 new condominium units will become available by the end of this year, most of which will be priced at the higher end of the market, according to Miller Samuel data.
“What you will start seeing when the luxury market returns is pent-up demand,” he said. “But the pent-up demand will be modified by job loss.”
He noted that the low number of transactions make it impossible to really figure out price implications.
“We are in the period of price discovery,” he said. “Logic says there is an impact on pricing, but there is literally no empirical evidence yet.”
Corcoran CEO Pam Liebman said there are buyers who are expecting a “COVID discount” and making lowball offers.
“Buyers are being very aggressive, they are coming in and bidding anywhere from 10 to 30% below the ask, claiming this is what they are calling a ‘COVID discount,'” she said on Bisnow’s podcast this week. "Sellers are saying, pricing was already down, and it’s certainly not down another 20 or 30%."
Liebman, whose company is marketing Hudson Yards’ luxury residential offerings, where a penthouse at 35 Hudson Yards is asking $59M, said not all developers are under pressure.
“Unless they have debt breathing down their neck, which eventually may happen to some of them, they don’t just turn around and say, ‘fine, give it away,'" she said. “Developers are eternal optimists and many of them just [think] things will get better. I’ve had many people just say, ‘I’ll just wait.’ But nobody knows if waiting is going to work out well.”
Brokers and developers have pointed to an uptick in people browsing properties online and making inquiries, though they admit it is rare that those translate to a multimillion-dollar deal.
“I’m less somber than I was eight weeks ago,” said David Juracich, a principal at JDS Development. “I am surprised how many inquiries we get, and we’ve already had a lot of offers. In some cases, it’s just people trying to get a cheap deal, but if you have 10 people giving a low bid, six of them will move a little more, then one will step up."
His company is one of the developers of the supertall Billionaire's Row tower 111 West 57th St., where a penthouse is asking $57M.
“The country is suffering, but there are always pockets of people doing well," Juracich said. "Many people who have been in their apartments for two months are looking for an upgrade."