THE STATE OF THE MARKET

AN INSIDER’S VIEW OF THE LATEST TRENDS IN LUXURY RESIDENTIAL REAL ESTATE

BY ELIZABETH STRIBLING,
PRESIDENT, STRIBLING & ASSOCIATES

In New York City, all conversations ultimately lead to real estate. This fall, speculation about the state of the real estate market has been rampant. Prompted by a national spate of magazine cover articles and locally featured front page stories, New Yorkers have been assaulted over the past several months by a dizzying media barrage of warnings about an impending real estate bubble.

Interestingly, there were similar ominous cover story articles in magazines even back in 2002 such as the November 4, 2002 issue of Fortune predicting a fall in real estate. However, at that time, residential real estate simply continued to rise. Today, what’s really happening? How high can prices go? Have we finally reached the top? Should I sell? Should I wait to buy? Does the famous bubble really exist? If so, will it burst, or just slowly drift down to a soft and safe landing? Questions abound.

The Core Strengths of the New York Market

Dire warnings about a monumental real estate collapse simply do not seem warranted in New York City. The local economy is good, crime is down, employment figures are up, and New York City is a destination city with an almost full hotel occupancy rate.

All of the national articles about “flippers” who speculatively invest in second home condominiums in Florida and Las Vegas and then quickly sell do not apply to our local marketplace. First of all, high Manhattan prices discourage speculators. Secondly, strict cooperative board requirements prevent such buyers from even purchasing cooperative apartments, and most New York condominium developers require a purchaser to close on a unit before they can resell it. Even after closing, the double transfer taxes for a first-time condo seller who wishes to “flip” the unit are not favorable for a quick profitable re-sale.

New York City purchasers buy to live in their sought-after property and this creates a stable market. However, if indications are encouraging that the New York property market is not about to plunge, is it about to tumble?

What Do the Recent Manhattan Sales Figures Tell Us?

Third quarter residential sales statistics were released in early October and the local media seized upon one aspect of the numbers and, almost gleefully, announced the beginning of “bubble trouble” in Manhattan.

A proper analysis of the overall statistics themselves provides an explanation of the true meaning of these comparative numbers.

The third quarter showed a significant shift in the percentage of smaller apartments that were sold versus larger units, and therefore the overall average price was weighted down due to lack of activity at the upper end of the market. Thus, the figures released by Miller Samuel, one of the appraisal firms that provided recent statistics, noted a 12.7% drop in the average sales price from $1,317,528 in the second quarter of 2005 to $1,149,813 in the third quarter. However, it also must be noted that the average price per square foot for the same third quarter reached an all time high of $984, thus rising 1.4% from the previous quarter.

In addition, prices for studios and one bedrooms leapt 10%, and overall apartment prices are up 10% from last year at this time. The average Manhattan sales price in the third quarter of 2004 was $1,044,166, according to Miller Samuel, compared to the higher 2005 third quarter average price of $1,149,813.

In the upper end of the market, there were very few sales compared with the previous quarter and thus the average price of a four bedroom or larger apartment came down to $6,823,346 in the present quarter compared to $10,639,792 in the previous quarter which included several very expensive sales. However, again, this lower quarterly figure was higher than the same quarter a year ago when the average price of a four bedroom plus apartment was $6,745,007.

In conclusion, although the average price for the third quarter of 2005 was down, it was the higher number of sales in studios and one bedrooms versus a lower than usual amount of sales in the larger luxury category that tipped the average downwards.

That said, it must be noted that overall inventory is rising, and, in general, apartments are taking a longer time to sell. Most of the increase in inventory is due to a wealth of new condominium units that are coming on the market due to a vast increase in new condominium construction throughout the city. Thus, the present rise in inventory does not reflect nervous sellers anxiously placing their apartments on the market due to a fear of a declining market but rather the biggest building boom in years.

How readily this creation of new housing will be absorbed will depend on market conditions as each development project comes to the marketplace. Naturally, geographic location and the luxury of finishes will dictate pricing; as neighborhoods expand throughout Manhattan, there should be a wealth of choice providing a variety of price-points throughout the city for future new condominium residences.

The fact that apartments are taking longer to sell may simply reflect over-ambitious pricing by sellers. After four years of double-digit price increases, the residential market appears to be stabilizing, albeit at a high-level plateau price point. Today, sellers can no longer simply add ten percent to the last comparable apartment that sold, and expect a ready sale due to an ever-rising market.

Armed with information carefully culled from website browsing, buyers are now beginning to make lower offers or no offers at all on properties that they believe are too highly priced. After several years of having to bid the asking price or even above on desirable new offerings, buyers are beginning to negotiate a bit more often. However, if property is fairly priced, negotiation room is still low.

Price reductions are also more prevalent but usually indicate initial overpricing rather than a declining market. Pricing, in any market, is always just as important as location. In fact, pricing is the number one most important factor in a successful sale. Today, in a real estate market that is no longer frenzied, and where the message is perhaps even mixed, pricing is more important than ever.

The Rental Market Grows Stronger

Meanwhile, at the same time that the sales market remains strong, the rental market is rapidly gaining strength. Vacancy rates have dropped to below 1%, well below the 2% point where rents historically begin to rise.

Many purchasers who have been priced out of the sales arena have retreated to the rental market. Certain sellers have chosen to rent rather than buy a new apartment, either betting that prices will come down or, in the case of new retirees, choosing to use the proceeds of their sale as retirement investment income. Also, brokers are beginning to see multiple offers for the same rental unit occurring with more regularity.

The only area of the rental market that is not seeing a lot of activity is the super high end, above $15,000 a month. However, whole townhouses or duplex or triplex units within houses, priced between $6,000 and $12,000 a month, are readily being leased.
It is predicted that the rental market should remain strong for the near future as very few new rental buildings are being built in the city, and many older rental buildings are being converted to condominiums.

Soaring land prices and the costs of new construction are prompting developers to build more lucrative condominiums versus rental units, and equally, the huge difference between the return on a rental building and the rewards of a condominium conversion are too tempting for many landlords, or recent new owners, of rental buildings to pass up.

In the future, if interest rates increase, as they no doubt will, many potential buyers will opt to rent; however, if a rise in rates does drive sales prices downwards, other buyers and investors will choose to return to the sales arena. In the meantime, the rental market is not only truly healthy for the first time since the aftermath of September 11th, but it is robust and strong.

Top-of-the-Market Townhouses Are Selling

Another segment of the residential market that shows enormous strength is the townhouse market. As the city continues to be safer with crime rates falling each year, buyers are flocking to townhouses and pushing prices rapidly up along the way. In the last three months, three townhouses on East 64th Street have each either closed or entered into contract at over $20 million, and a fourth house on the same street has sold at just under this $20 million figure. Rumor has it that an additional house on East 67th Street has also just issued a contract at over $20 million.

Clearly, luxury townhouse living is at the top rung of the Manhattan lifestyle. The motivation for townhouse buying is not just a quest for privacy and outdoor garden living but also for just plain space. A super-wide house – 25-feet-wide and up – can provide much more square footage than a comparable four to five bedroom cooperative; such a house can offer 10,000 square feet of living space. In fact, owning a wide, or even better, a mega-wide house has become the Manhattan status symbol of the moment.

If a typical townhouse is 18-feet-wide, anything below that is thought to be on the small side, and proportionally, a 20-foot-wide house becomes the entry-level standard of luxury buying. Thus, an even larger 22-foot-wide house is deemed extremely spacious and a 25-foot-wide house is called a mansion.

Ambitious tycoons scout for even wider houses, a rare breed indeed. Often, the only way to obtain such a mega-mansion is to create it yourself. The opportunity to do just that exists today on tony Sutton Square.

Recently, an owner of an already luxurious 25-foot-wide house overlooking the verdant and exclusive Sutton Square community garden (neighbors include the Secretary General of the U.N.) decided to purchase the home next door. This adjacent property was not an ordinary residence but actually two houses that had already been combined into a 41-foot-wide mansion. Deciding not to proceed with the renovation work to join the properties, the owner has now placed the original three adjoining houses on the market for $42 million.

Architectural drawings are available that show just how a rich and lucky buyer could create a 66-foot-wide palace of 20,000 square feet. With sweeping river views, and access to an exclusive private garden, this could easily win the award for trophy house of the year.

Townhouse Living with Luxury Tower Services

The demand for the privacy of townhouse living has even entered the apartment market arena. All over town, developers of new condominiums are offering townhouse living within their newly constructed high-rise buildings.

Whether called maisonettes, after the prestigious duplex apartments that dot the fancy cooperative buildings up and down Fifth and Park Avenues, or townhouses or town homes, these ground floor residences are designed to offer apartment dwellers the best of both worlds: a private entrance with the prestige of a separate exclusive space and the white glove services of a condominium building.

Recently, new condominiums such as Morton Square in the West Village, the Link in the West 50’s, the Arcadia on East 79th Street and First Avenue, and the TriBeCa Summit in TriBeCa have offered such custom townhouse units for sale. Continuing this trend, future new condominium developments such as The Highline 519 on West 23rd Street will also feature townhouse living. Uptown, the Senneca Terrace on East 112th Street will offer 1,300 square foot one bedroom townhouse duplexes with an 800 square foot outside garden.

For those buyers who want the ultimate prestige of living in an established cooperative building with the exclusivity of a private residence, the answer is the previously mentioned traditional maisonette apartment. From time to time, such unique apartments come on the market. Currently, such a listing is to be found at 72nd Street and Park Avenue in one of Manhattan’s most sought-after Candela-designed cooperative buildings.

Featuring an exceptional 36 foot drawing room and 11 foot ceilings on the ground floor, this stately 11 room duplex is offered for sale at $8,250,000. Whether in a long-established cooperative, or a brand new condominium, this hybrid form of an apartment/townhouse dwelling has never been so popular.

Wealth of New Construction in Chelsea Typical of Many Neighborhoods

Throughout Manhattan, neighborhoods are pushing beyond their traditionally defined borders and re-inventing themselves in an explosion of residential construction. Even nondescript former commercial areas are being transformed into glossy new residential corridors.

The skyline is changing throughout the city. Among Manhattan neighborhoods, certainly the most popular girl at the dance today is Chelsea.

Revitalized with big-box stores and trendy restaurants, Chelsea has replaced the Upper West Side as the destination address for young professionals. New zoning has led to the creation of 2,000 new apartments and the future development of the Highline will push the limits of Chelsea farther north.

Meanwhile, the side streets of Chelsea are about to see a wealth of new residential construction and condominium conversions of former industrial buildings. At 420 West 25th Street, between Ninth and Tenth Avenues, a former 100,000-square-foot printing plant is about to be transformed into Loft 25, where real downtown loft living will be created in Chelsea.

Nearby, Chelsea House, a 13-story 64-unit condominium tower, will rise at 130 West 19th Street between Sixth and Seventh Avenues on the site of a former parking garage. Other new side street developments include The Paradigm Building at 146-148 West 22nd Street, the Soma at 116 West 22nd Street and the Bluehaus at 245 West 19th Street.

In close proximity to hip neighborhoods such as the Meat Packing District and SoHo, the clamor for Chelsea is loud and clear. This is especially notable after the previous two years when there were dire predictions that rental housing in Chelsea, especially along Sixth Avenue, was overbuilt.

Today, in contrast, sales prices in Chelsea are rising, and last year’s rental prices were consistently among the strongest in the city with the lowest vacancy rate. Following the arrival of trendy art galleries from SoHo to western Chelsea in the late 1990’s, the face of Chelsea has transformed into the hot new neighborhood of today.

New Residential Construction Surges on the West Side

Meanwhile, as Chelsea is the star of the current season, the entire west side of Manhattan is contemplating a burst of construction that is sure to lure many new occupants.

On the Upper West Side alone between 59th and 72nd Street, in the area between Lincoln Center and the Hudson River, more than a dozen new developments are planned or being proposed over the next two years. On the heels of the successful Time Warner Center at Columbus Circle, sites have been purchased on West End Avenue and Amsterdam Avenue with plans afoot, pending approval, rezoning permits and in some instances negotiation of air rights, that would transform the Upper West Side skyline.

Already on Central Park West, a two-wing glossy condominium residence is being built on the former Mayflower Hotel site at Central Park West between 61st Street and 62nd Street. Designed by Robert A.M. Stern, the future Fifteen Central Park West will consist of The House, a 20-story building, and The Tower, a 43-story tower, and offer super-luxury apartments overlooking Central Park and also Broadway.

Many large high floor duplex apartments facing Central Park have already gone to contract at around, or above, $40 million - how’s that for a view commanding a top price? Additional Upper West Side developments include those of Fordham University which has submitted plans that will include two tower residential apartment buildings on their campus on West 60th-62nd Streets between Amsterdam and Columbus Avenues, and the Empire Hotel, located between Broadway and Columbus on West 62nd- 63rd Street, which is slated to be demolished and replaced with a residential building.

If all of the currently projected Upper West Side developments are realized, billions of new construction dollars will be spent, and thousands of new apartments will be created.

Construction of new residential towers is already radically changing the tone of two major west side thoroughfares: West 42nd Street and West 34th Street. On the far western stretch of 42nd Street, a 61-story 550-unit condominium tower entitled The Orion at 350 West 42nd Street is scheduled for completion in the spring of 2006. Featuring a fitness center, screening room, lap pool and business center, The Orion is aiming to offer luxury living in an area not previously known for a high-end residential lifestyle.

Meanwhile, several other condominium towers are planned for 42nd Street on Tenth, Eleventh and Twelfth Avenues as well as a condominium on 43rd Street and Eighth Avenue. Completion of these buildings would open up a whole new frontier of Manhattan residential living for bold city pioneers.

Equally, as the western area near Times Square is poised to be transformed into a residential neighborhood, plans are also underway to change the personality of Herald Square. At present, the enormous 692-unit Herald Towers at 50 West 34th Street is being transformed into mostly studio and one bedroom condominium apartments. This conversion aims to attract young singles and couples to live in what has previously been a commercial shopping corridor.

Several blocks away, a new rental building called Tower 31 is also under construction at 9 West 31st Street. Designed by Costas Kondylis, this 41-story tower will bring 283 new rental apartments to this neighborhood in 2006. Shoppers beware; the neighborhood is changing.

Fifth Avenue Below 42nd Street to Be Transformed
by New Residential Buildings

Nearby, Fifth Avenue between 26th and 38th Streets has been dubbed “SoFi,” for South Fifth Avenue. Who would have believed this residential transformation possible until recently?

Residential development in this area was initially spearheaded by the Madison Belvedere, a 404-unit 50-story rental building that was built in 1999, and followed several years ago by 425 Fifth Avenue, a 67-story luxury condominium tower designed by Michael Graves. Today, SoFi is about to explode with new development projects. 325 Fifth Avenue, a glass-encased 250-unit condominium residence, is rising out of the ground between 32nd and 33rd Streets. Almost sold out, it will offer amenities such as a swimming pool, fitness center, and screening room.

Other developments about to sprout up include the Sky House, a 54-story condominium on the former parish house site of the “Little Church Around The Corner” at 11 East 29th Street, and Park South Lofts at 43-45 East 30th Street which will have 40 luxury lofts converted from a former factory.

Demand for residential property is high all over town. Throughout Manhattan, neighborhoods are on the march as they expand and assume fresh new faces to create this sought after supply.

Which Way Is the Real Estate Market Headed?

Will the demand be sustainable, or will a large infusion of new condominium construction and conversion tip the market? Opinions differ, but it must be remembered that condominiums only represent a tiny percentage of overall housing in the city.

Meanwhile, the city population is growing each year. Since 1990, New York City residents have increased by over 900,000 people and city officials are predicting that the city population will reach 8.4 million by 2010, up from approximately 8.1 million today. This is a dramatic contrast from the decades of the 1970’s and 1980’s when the city was losing population.

Today, overall economic conditions are good in New York City. The economy has rebounded and recently Standard and Poor’s gave the city an A+ rating on its debt. This year, Wall Street profits are projected to hit $14.4 billion, which should yield the big bonuses that historically have alway bolstered the residential real estate market.

What predictions can be made? Will the market go up? Probably not. Will the market go down? Probably not. Maybe we’ve finally reached a more normal and balanced real estate marketplace, whatever that means.

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