NYC's Real Estate Market Adjusts Downward
Updated: Dec 2, 2020
COVID-19 has residential real estate markets firing on all cylinders across much of the United States with more attention turned to home as a place to live, work, and play. Fueling the boom is white-collar (at-home-pajama?) corporate employment that has been insulated from the heavy toll on the in-person retail and experience economy. Additional contributors are that the stock market is at all-time high, mortgage rates are near all-time lows at just 2.85% for a 30-year fixed, and white-collar workers are able to ‘Zoom’ business afloat from home without the commute to the urban city center. While many suburban markets reach new heights – stories of buyers losing out on otherwise average Long Island homes 20% over ask are commonplace – Olde New York has taken a healthy dip. Which begs the question: What real estate trends have emerged for the bruised Manhattan market?
While our real estate market is diverse there are pockets of overlap that impact homebuyers right now. For several years retail has been battered by the rise of ecommerce and that’s a trend that was only exacerbated with the latest post-COVID adoption of online shopping by older consumers. In evaluating cooperative housing – the dominant form of home ownership in Manhattan – it’s crucial to pay attention to the commercial leases that used to be viewed as a strength in shareholder ownership. Now more than ever it’s important to understand: Who are the commercial Tenants? What portion of shareholder income is generated by them? Are they up to date on their rent? And how many years are left on their lease? To most the prospect of renting real estate is a matter of racing to sign a lease for an apartment for a year or two. But these commercial leases are nuanced financial instruments that can establish multi-million-dollar commitments over the course of ten or twenty years (or longer). The stakes for retail and office leasing are vastly higher and in the event of a vacancy or non-paying Tenant it’s often up to the shareholders to pick up the tab through an assessment or increases in maintenance and/or common charges. Asking the right questions can prevent surprises in the due diligence period. They can even move the target to buildings that are self-sufficient without retail which may prove a better investment in the medium-term.
Holding back some would-be-buyers in New York City is rental vacancy which has surged to 6.14 percent with 16,145 available units as of November 2020 – typically it’s 2-3%. When a renter’s existing Landlord is offering three months free to renew a current lease it can help persuade city residents to stay in place and not invest in home ownership. I have been encouraging these clients to make the jump under the current economic climate and recently their confidence has been buoyed by new developments: the election of Joe Biden will increase the likelihood of local and state budgetary bailouts in Democrat-leaning states and progress on the vaccine translates into a return-to-normal that’s within sight over the next 12 months. When corporate executives are back in the office – even if on a modified four-day-a-week basis – a traditional, perhaps boring, choice will come into play for many. Will there be a commitment to a 2-4-hour daily commute from the suburbs to Manhattan each day or does it make sense for one’s lifestyle to be closer to work and sacrifice square footage at home? My expectation is that with a physical return to work there will be a rapid reduction in rental vacancy and a surge in demand for urban home purchases once the missing feet of New York City are back on the ground.
As we get further away from the lockdown period I’m seeing pending sales return to their pre-COVID March levels. Broadly speaking the discounts for apartments in the $500k-$2m can range from 6-15% from the peak of the real estate market in 2015. New development condominium discounting for $3m-10m apartments is even steeper and there’s significant ‘off-market’ incentives which may include sponsors paying years of common charges, transfer taxes, deeded storage cages, paid parking, attorney fees, and construction credits. These incentives are ‘off-market’ and not formally recorded as developers try to protect the sacred price-per-square-foot documented online. Similar to the outflow to suburban markets like Westchester and Long Island there has been stability in pricing for ‘premium’ pockets of Brooklyn with close proximity to Manhattan. Anything with shades of greenery like a townhouse or apartments with outdoor space has fared well in neighborhoods like Park Slope and Brooklyn Heights where long-time Manhattanites pursue comparatively greater value for sheer space.
So, where’s the most opportunity? Ironically, it’s premium Manhattan locations that have historically appreciated over the long-term which are garnering discounts. Compressing demand is that a number of would-be-buyer Manhattanites are simply camped out for the short-term in places like Long Island, Westchester, and even Mexico while they work from home. Supporting this is that just 10% of employees have returned to the office. Of note is that even in an environment that so heavily harangued dense urban living at the onset of the pandemic these residential assets haven’t completely fallen off in value. This demonstrates long-term resilience and continued interest in the cultural and professional promises of New York City. On the contrary the outflow of city residents to the suburbs whether temporary or permanent has put suburban homes in an inflated and almost bubble-like territory. Long-term trends like population growth, increased life expectancy, and intrinsic supply constraints will continue to prop up city housing prices and allow for appreciation. This is despite recent setbacks from tax policy changes, oversupply, and COVID which have defined the last five years.
The broad-based fear of March-May 2020 has largely dissipated but NYC’s residential market has adjusted downward as buyers purchase seller’s recent acquisitions at a discount. For more information on recent deals or if you have questions about the market please feel free to ping me at any time at 646.939.7375.
The Roebling Group