THE STATE OF THE NEW YORK CITY RESIDENTIAL REAL ESTATE MARKET

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

BY ELIZABETH STRIBLING,
PRESIDENT, STRIBLING & ASSOCIATES

Fall has brought a brisk upbeat to the New York residential real estate market. After a long and essentially quiet summer the pace of sales began to slowly build up steam in October and now, in early winter, has gained noticeable momentum.

Despite dire media predictions, the dreaded real estate bubble simply has not burst on our local scene. The question is whether it ever even existed. Today, a gradual but steady renewed sense of confidence in purchasing property has returned to the city.

Apartments that had lingered on the market for over six months or longer are suddenly beginning to sell. Equally, many brand new offerings are going
to contract in less than a month if initially priced correctly for today's astute buyers.

Meanwhile, the overall inventory of available residential listings is shrinking slightly. According to a recent survey by the appraisal firm Miller Samuel, the number of co-ops, condos and townhouses on the market in Manhattan decreased 3.6 percent over the summer months.

Does this mean that the real estate market is actually improving? If so, what accounts for recent bold headlines proclaiming that the New York residential market is plunging? Where is the disconnect?

Certainly, there has been a real estate downturn in heavily speculative markets such as Nevada, Arizona and southern Florida. However, what do the latest local statistics actually tell us about the state of the market in New York City?

A Very Active Market by Historical Standards

Indeed, the third quarter statistics did show a drop in the average price of a unit over the previous quarter. Various reports showed this decline to vary from 7 to 10 percent. What the media failed to herald was the fact that the average price of a unit had actually increased over a year ago.

The Miller Samuel appraisal report placed the average sale price at $1.3 million at the end of the third quarter of 2006, down 7 percent from the previous quarter, but up 12 percent over the $1.15 million average sale of a year ago. If anything, the recent slowing of the rise of prices is a natural evolution of a more balanced market.

The press has overdramatized an inevitable drop in prices by portraying it as a catastrophe. In fact, the New York City housing market is adjusting in an orderly process. The boom years of 2004 and 2005 were accelerating at such a rapid pace that continued growth could not be sustained. If the overall national housing market is now slowing, on average it has simply returned to the activity level of 2003 which was a very good year. This is a cyclical rebalancing rather than a crash.

Interest Rates Remain Quite Low

Most importantly, mortgage money remains affordable. By historical standards, mortgage rates remain low and should provide a cushion against a dramatic downturn in the real estate market. Do not forget that the bleak real estate market of the late 1970's was fueled not only by an oversupply of inventory but equally by mortgage rates of 16 to 18 percent for a fixed rate loan.

Today, the combination of slightly lower prices and affordable mortgage rates should lead to a natural self correction of the housing market, and serve to re-stimulate the buying process. Even the gloomy forecasts of a rash of foreclosures due to the recent popularity of adjustable rate mortgages has not occurred.

As monthly payments on these loans have begun to balloon upwards in recent months, many borrowers are simply refinancing with new adjustable rate mortgages that keep monthly payments low. These borrowers believe that by the time their current mortgage rate goes up either their income will have increased or they will have moved and thus sold, or simply refinanced the loan again.

This philosophy has resulted in a recent surge in mortgage refinancing, and has assuaged fears that rising interest rates would produce either foreclosures or a cut in consumer spending. Naturally, such refinancing is based on the belief that housing prices will continue to rise in the future, but in the meantime has served to bolster the current market, or at least put off the day of reckoning.

New York City's Economy Remains Strong

Today, New York City is flourishing with a strong local economy, low unemployment, and a record year for Wall Street, where year end bonuses have increased very substantially over last year. Dismal predictions by the media for the local housing market have simply ignored these positive factors.

The current uptick in the residential marketplace may be a valid knee jerk reaction to these more promising signs of the times. Armed with still affordable mortgage money, and aware that prices have decreased slightly, buyers are back in the New York City residential marketplace after a long summer break.

Sales Prices Have Stabilized

Clearly, this renewed activity is a result of a more balanced market. Gone are the frenzied days of 2004-2005 when a buyer had to offer the full asking price the first hour an apartment was listed, all the while praying that his bid would not be topped. Today, the average number of days that an apartment is on the market has stabilized at approximately 150.

Buyers have time to reflect and comparison shop before committing to a thoroughly thought out choice. Sellers have realized that property must be realistically priced to sell, and, even then, sellers must be willing to negotiate nominally. During the height of the market in 2004, property either sold at above asking prices or at only 1 percent below the ask. Today, there is a negotiability factor somewhere between 3.5 and 5 percent on average. This is a far cry from the all too standard negotiability of 15 to 20 percent in the early 1990's.

Today's modest percentage of negotiability clearly reflects a stable market. That said, there is an increasing demand and desire for blue chip property. Whereas all property moved at a fast clip in the boom years of 2004 and 2005, today's buyers are much more selective and finicky.

Location counts. Condition is valued more than ever; lengthy and costly renovation is avoided at all costs. The price of an apartment overhaul has skyrocketed and boards have become more onerous in allowing major construction or combinations. Views and light are coveted more than ever. With more time to make a decision, buyers have become more choosy.

Just as the word negotiation has re-entered a seller's vocabulary, developers of new up-to-the-minute light filled condominiums have also realized that they must consider some concessions for certain units within their offerings.

In some instances, a portion of the closing costs have been assumed by a developer to jumpstart sales. Other developers have lowered asking prices on lower floors to encourage initial sales while raising prices on higher more generally desirable floors.

Some developers may give a slight discount to a buyer who buys several units within a new offering to offset their future personal construction costs. However, just as some sellers refuse to budge on prices, many developers hold firm. Although the principle of negotiation has come back to the overall real estate marketplace, it is certainly not the prime factor in successfully concluding a deal as was often the case in former less healthy markets.

A Soaring Rental Market

The big news of the current New York residential world is the roaring strength of the rental market. The city's economy is strong and its unemployment rate, at under 5 percent, is at its lowest point since 1988. As mortgage interest rates rise, some potential buyers are choosing to rent rather than purchase.

Today, the demand for rental property has reached a crescendo. As a result, the vacancy rate for rental apartments has dropped below 0.5 percent, and rents are rising in a tight new rental market. The monthly threshold for a decent one-bedroom apartment has escalated from $2,500 to a hefty $3,000 on average throughout the city.

Landlords are even beginning to turn existing long owned properties into new luxury rental buildings or in some instances may even consider converting an already in the pipeline condominium development into a rental building. After many years of a stagnant rental market, the rental arena has once again revved up in the landlord's favor.

Strong Super Luxury Sales Pace

The super luxury sales market is also noticeably strong. The upper echelons of this rarified world are experiencing record prices. The top tier luxury benchmark price of $10 million has increasingly been replaced with sales in the even higher ultra-luxury category of over $20 million.

According to recently released public data of cooperative sales transaction records, resulting from a new state law enacted in July, there have been nine cooperative apartments that have sold in excess of $20 million so far in 2006 with several more pending. In addition, there has been a record breaking house sale of a whopping $53 million in October 2006 for the legendary 20,000 square foot Harkness House at 4 East 75th Street. With sales of this magnitude, it is clear that New York City continues to be the trophy address for the rich and famous.

Many Manhattan Neighborhoods See Surge of New Construction

New York has always been a unique place like no other. Its drawing power alone continues to sustain its real estate in good and bad markets.

From far uptown to the tip of downtown, neighborhoods throughout the city continue to be transformed. Harlem, Chinatown, Wall Street, Hell's Kitchen and the far west side of Chelsea are all experiencing a burst of new energy. In fact, Harlem is on a boom ride. The revitalization that began ten years ago with the sale of architecturally important brownstones has erupted today into a wealth of new residential and commercial construction.

Gone are the brownstone bargains of yesteryear. New condo construction is underway all over Harlem. Condos on Central Park North command as much as $1,200 a square foot. Market rate rentals are being constructed on both the east and west sides of Harlem. The megastore Target has just signed a lease for 135,000 square feet at East River Plaza, a new shopping center on a six acre site adjacent to the FDR between 116th and 119th Streets. Commercial space in the center of Harlem is fetching rents close to $150 a square foot. Harlem has never been hotter.

Meanwhile, a neighborhood as seemingly contained as Chinatown is suddenly experiencing a transformation into a much more diversified area. Close to Soho and the Lower East Side, Chinatown has become an alternative address of choice for many non-Chinese New Yorkers. Within the last two years, five high end condominium buildings have opened in Chinatown, and upwards of eight more are presently being built or on the drawing boards.

Offering a variety of amenities, these various offerings often cost as much as $1,000 a square foot, a figure which has rapidly become the average for the city. Equally appealing to the affluent Chinese community, these new luxury condominiums often feature well ventilated kitchens with top-of-the-line stove exhaust hoods to accommodate the special needs of Chinese cooking.

Designated zoning in the area will protect the low lying scale of the neighborhood, but new luxury condos are rapidly springing up that contrast sharply with Chinatown tenements of an earlier era.

Another changing neighborhood is Wall Street, which today has more residential condominium developments than investment banks.

During the past 10 years, lower Manhattan has dramatically transformed itself from a business community into a 24/7 residential and mixed use district.

Upscale luxury retail shops such as Hermes and Tiffany as well as trendy gourmet restaurants have moved into the area. In fact, lower Manhattan is the fastest growing residential community in the city; from just 22,000 residents in 2001, there will be a projected residential population of 42,000 in 2007.

Downtown has also become a global tourist destination. At present, there are 2,500 hotel rooms located downtown with an occupancy rate of over 89 percent; many new hotels are currently planned to meet the increased desire of visitors to stay in this area. Let us just hope that the rebuilding at Ground Zero can move forward in a timely fashion to bring acceptable closure as well as renewed hope to our city.

Branding of New Developments

As residential buyers broaden their geographic parameters to consider all neighborhoods of the city, developers of new condominiums are placing increased emphasis on branding to create a special buzz for each new luxury offering. This is noticeable all over Gotham. In some instances it is an evocation of the quality craftsmanship of the past.

At The Parkwood, developer Henry Justin and designer Alan Tanksley emphasize the classic detailing and artisanal attention of a prewar bygone era in contemporary half floor lofts located at 31 East 28th Street, just steps from Madison Square Park. Equally, it could be cutting edge up-to-the-minute modern detail that lends distinction to a new building.

At Loft 25 in Chelsea at 420 West 25th Street, RAL offers unique all glass tempered kitchens manufactured in Italy by Schiffini that have never been seen before in New York City. Creating another distinctive twist, Gramercy Property Group has transformed a 1905 carriage house at 406 West 45th Street in Clinton into sleek new apartments, while retaining the original exposed brick walls and timber beams reminiscent of the gaslight age.

The ultimate concept of branding may be found at The Hit Factory at 421 West 54th Street which is presently being converted into condominium lofts by HF Sponsor Corporation.

The legendary Hit Factory was a mythic recording studio, where scores of platinum and gold records were recorded by such luminary artists as John Lennon, Billy Joel, The Rolling Stones, Madonna and Bruce Springsteen. Displaying multiple platinum and gold albums that were actually recorded on the premises in the new condo lobby, The Hit Factory Condominium will spin a new modern residential identity to the vibes of its rock roots. How groovy is that? In the growing and increasingly competitive world of current condominium development, distinctive branding is essential. As geographic boundaries blur, buyers respond more and more to the special atmosphere that best suits their own personal lifestyles.

Market Balanced Between Buyers and Sellers

With a healthy choice of new development and resale property all over New York, and slightly more bargaining power, today's residential buyers are more in the driving seat than they have been in recent years. However, many potential sellers maintain a wait and see attitude.

Without the motivating factors of a job change to a new town or a personal family crisis, many sellers simply are not listing their property until they perceive that the residential market is on a strong rise again. All said, we seem to have reached a back to normal market with a fairly evenly balanced tension between buyers and sellers. Perhaps this is what is described as a soft landing.

The Right Broker Makes All The Difference

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