Sotheby's Real Estate New York City, USA
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Dominic Longcroft | Sotheby's International Realty - New York

Newsletter No. 11 | October / November 2016

Castle


Dear Friends,

You would have received this Newsletter on the 9th November, I wanted to update and advise that following the surprise election result of Donald J Trump being elected as the 45th President of the United States, I have found there to be no change since my research below:

I have found that developers are now offering free rent and paid attorneys’ fees as prices have fallen in the New York City real estate market. While it sounds like a flashback to the dark days of 2009, it’s actually happening today for different reasons in various sections of New York City’s residential markets.

Over the last year (2015-2016), the real estate market has been characterized by prices that appeared to be on a never-ending upward spiral. Now the tables have begun to turn. In many cases, it’s the buyers and renters who have the advantage. While a year ago, I was being told, “If you want to see my property, you’ll need an appointment” - now, I’m receiving invitations from developers to view their properties.

Both condominium developers and landlords are sweetening their offers by including concessions to attract buyers and tenants, as well as brokers. This indicates that the market is changing and developers are feeling the pinch. Certainly, in some pockets the residential market is trending upward and fellow brokers are reporting bidding wars for affordable luxury condominiums (‘condos’). However there are broad sectors where buyers and renters have newfound leverage.

This is not 2009. In the immediate aftermath of the global financial crisis, buyers were submitting offers 20% to 40% below asking price and demanding that developers return their deposits and release them from contracts. That is not the case today. It should be noted that it is rare for the New York City market to favor buyers, however that is where we are now: we are in a buyers’ market. I hear this from numerous colleagues: “If you are a buyer in this market, I would definitely buy now.”

Below is a survey of some of the key factors influencing today’s real estate market and how the market has changed from a sellers’ to a buyers’ market.

Facts

  • There is a surge in supply.
       - Inventory is beginning to mount up in at least in two key segments:
       - New development condos in Manhattan; and
  • Rentals and Downtown Brooklyn properties are flooding the market.
  • In Manhattan, new development inventory surged 27% to a total 973 units on the market in the third quarter of 2016, year-over-year after four quarters of decline.
  • There could be five years of excess condo inventory sitting on the market by the end of 2017, according to an analysis released earlier this year by a NYC appraisal firm. That oversupply could spell trouble for the developers who are looking to sell condos quickly as concerns mount about softening in the market.
  • Consequently, buyers have more options to choose from, and more time to decide what to buy.
  • Developers miscalculated by hoarding ‘shadow inventory’ in early 2015, as the pace of sales began to slow (‘shadow inventory’ describes properties that are either in foreclosure and not yet sold, or that owners are holding off putting on the market until the market improves). By September 2015, there was approx. 67% year-on-year increase in Manhattan’s shadow inventory, bringing the number of shadow units up to over 3,500 units. By comparison, more than 6,000 actual Manhattan units were listed.
  • The shadow inventory trend is now reversing as developers have no choice but to list some of that inventory on the market. Although keeping some units off the market can help make supply seem scarce and thus more desirable, those sponsors eventually need to start listing the units.
  • The rental market is also oversupplied. In both Manhattan and Brooklyn, rental inventory ballooned by more than 30% in September 2016, and grew some 17% in Queens. The situation is expected to intensify in the coming months.
  • There will be pressure in the market as a result of the oversupply of available units. It will take longer for units to exchange hands. The most marked consequence at present is in the incentives being offered to convince buyers.

The slowdown

  • Investors need only look to a handful of prime Lower Manhattan neighborhoods to see evidence of the slowdown, most notably at the high end of the market.
  • To date in 2016, condos in the $1 to $3 million range have remained on the market for 26 weeks (approximately the same time they took to sell in 2014). However higher-priced condominiums, those ranging from $6 to $50 million now remain on the market for approx. 50 weeks (36% longer than in 2014, when they remained on the market for some 32 weeks).
  • In Manhattan overall, condominiums and co-ops spent approx. 80 days on the market in the third quarter of 2016, up over 8% from 2015.
  • The absorption rate — which measures how many months it would take to sell all active listings — stood at just over six months. While within the range of normal, that is 37% longer than 2015.
  • Manhattan rental vacancies are also on the rise. In September 2016, approx. 2% of available apartments were empty: the highest vacancy rate since September 2009

Incentives

  • With inventory up, the market is flush with developers and owners working to entice buyers and renters to sign on the dotted line. In the last two years, large numbers of new constructions have resulted in a sharp increase in supply.
  • Some 30% of all landlords offered some type of concession in September 2016 — 10% higher than last year. Concessions last reached this level more than 6 years ago, in June 2010, when a flood of condos that had been converted to rentals hit the market. Concessions include free rent periods, free storage units and parking spaces (and luxury offerings such as gym memberships, concierge services and social clubs are also being offered).
  • Sources report that some sellers will offer to pay all or a portion of the buyer’s attorney fees and mortgage-recording tax, which can add 1.6% of the unit’s cost to the final purchase price.
  • The closing cost on a $1 million apartment could be $50,000. Those out-of-pocket costs are scrutinized by the million-dollar buyer. The goal for sellers or landlords, of course, is to preserve the face value of their property — even if it means taking a financial cut elsewhere, while maintaining prices for the rest of their units. This is usually the first sign that will ultimately lead to price breaks.

Price reductions

  • Once the pool of incentives dries up, some owners have no choice but to drop prices.
  • One example is the new development, One57: there, an apartment went into contract for a substantial loss on a unit purchased for $32 million in 2014, with a final 2016 list price of around $25 million. This effect can be seen in properties priced above $3,000 or $4,000 per square foot in some of the best buildings, and also for properties priced above $20 million.
  • On average, Manhattan condos and co-op listings were discounted only approx. 3 percent from their last list price in the third quarter of 2016, although a number of high-end properties are seeing far steeper price reductions.
  • For example, the Residences at Ritz Carlton at 50 Central Park south: the owner of a 4,500-square-foot resale condo has lowered the listing price every five months since it was first listed at $50 million in May 2015. After the most recent drop in July 2016, the listing now stands at $35 million, a 30% discount.
  • It should be noted that the condo market is not set in stone and that some units, particularly in the lower price points, are seeing steady increases in prices per square floor, where the competition is greater. Sources report, however, that as the top of the market cools, these price cuts will have a trickledown effect on the rest of the market.
  • Manhattan median rents fell 1.2% in September 2016 year-on-year.

So in conclusion, if you are looking to buy and apartment in Manhattan, my advice would be not to wait too much longer. New Yorkers are renowned for their impatience and the moment they feel confident they will jump back into the market and we will see prices being driven up once again.

I would like to wish you a wonderful Thanksgiving with family and friends.

Dominic


Disclaimer: This advertisement does not suggest that the broker has a listing or has done a transaction in this property or properties. Sotheby’s International Realty (SIR) advertises this property as a referring agent only, and SIR does so with the consent of the listing broker. SIR will be referring buyers to the seller or local listing broker for the property who will provide information about the property and negotiate any agreements for the purchase of this property. Any information provided by SIR about the property was provided to SIR by the seller or local listing broker and has not been verified by SIR. Buyers should consult with their legal counsel or local real estate professional concerning the property or any resultant transaction.

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Copyright © 2016 Dominic J. Stoddart Longcroft | Sotheby's International Realty - New York | www.dominiclongcroft.com