To anyone who’s visited New York City in recent years, a glut of high-rises featuring equally sky-high prices is no surprise. Every section of the city has been inundated with luxury development since the real estate market upticked in 2013. From the pencil skyscrapers jacked up over rivals to secure a Central Park view to southern Manhattan and Brooklyn, some 16,200 condos have been built (NYC is a condo town) within 682 buildings having a total value of $32 billion. Adding to the supply are another 5,617 units coming online in 63 buildings still under construction (some percent have already been sold).
Of the completed buildings, easystreet.com reports that roughly a quarter of units remain unsold. That’s 4,109 unsold, multimillion-dollar condos collecting snazzy dust. Equally troubling are the 4,640 units that have been purchased by investors and turned into nose-bleed rentals. That equates to 54 percent of condos completed since 2013 owned by someone seeking to profit in the near- to mid-term. That’s a lot of blood to bathe in whenever our next recession hits.
A New Class of Buyers
Think of it as trickle-down. A recession will not only spook the buying market, it will cause high-flying tenants to pull back spending as well. Investors purchasing in new buildings aren’t making a big profits on rental income, they’re banking on appreciation. However with percentages so high, competition to cash-out between fellow investors and developers will be a race to the sale.
We’re talking big numbers here. The median price for these new high-rises is $2.3 million in Manhattan and $1.1 million in the greater city. It’s not like the average New York buyer is waiting in the wings to snap up a bargain. The eventual bloodbath will price New York bankers, lawyers, and executives into the market as the global elite seek tax evasion elsewhere. Rank-and-file New Yorkers may have a front row seat, but no chance of buying in.
The Mansion Tax
The coming-down-to-earth of prices will also benefit second home buyers from around the country. This is especially true for those wanting to avoid the New York City “mansion tax” that’s a newly graduated scale of between 1 percent and 3.9 percent of the purchase price of a home from $1 million to over $25 million. New York State has had a mansion tax since 1989 at a flat 1 percent for any property above $1 million. This means New York City’s new system retains the 1 percent rate for homes under $2 million. This means a slight drop in the $2.3 million new building median price to $1,999,999 nets a $50,000 savings in tax.
The Resale Market
But new construction isn’t the only thing for sale in the city that never sleeps. The resale market has its sales, too. And in the third quarter, median sales prices were down 8.2 percent to $1.025 million. Transactions were also down 14.2 percent from the prior year, though much of that is being blamed on the rush to avoid the mansion tax earlier in the year.
Compared to 2018, sales were down in every price tier except the least expensive sub-$500,000 market where they increased nearly 5 percent. Units closing above $2 million were down by “double digits.”
Given this accumulation of data, I find Compass CEO Diane Ramirez’s comment to the New York Times unbelievable, “I think we’re at the bottom, or at least very close to it.”
Certainly the mansion tax coupled with the cap on state and local tax deductions crimped some. But international investment is broadly down as the feds seek to unmask LLC investors, engage in presidential trade wars, and native countries begin cracking down on offshoring assets. There are simply fewer crooks to sell to.
Wait And See
I don’t think New York is remotely close to seeing a bottom in the luxury market. Between fewer buyers and an ever increasing glut of units, the luxury condo market inches towards its fate. Mix in the inevitable recession that some see sooner rather than later, and those wanting a second home in New York City should bide their time.
Other large cities are feeling similar pain. London has seen price increases decline since the 2016 Brexit referendum until finally turning negative this year. But London also faced luxury overbuilding coupled with anti-money-laundering legislation scaring international buyers with something to hide and high-paying Brexit-related job relocations. I also see London property being wait-and-see when/if Brexit makes its final lap.
Watch And Learn
For Dallas, I think it’s a time to view these scenarios as a warning. Building solely for any one economic segment unnecessarily exposes a city to uncertainty and a certain brittleness in their real estate markets that’s pretty avoidable. Dallas doesn’t have a condo glut (although all that is built is ultra-luxury), its greatest exposure is within the rental market. Given that rentals are by nature more transaction-based, they can more quickly adjust to a changing market if the debtholders allow them to be, ultimately being more dispassionate than individual owners of personal property.
Selective opportunity for selective homebuyers and tenants.
Remember: When I’m not stirring up trouble in Dallas, Texas or Honolulu, Hawaii for Candysdirt.com and SecondShelters.com, I’m off scouting interesting locations for a second home. In 2016, 2017 and 2018, the National Association of Real Estate Editors recognized my writing with three Bronze (2016, 2017, 2018) and two Silver (2016, 2017) awards. If you’re a Realtor with second home clients who’d like me to feature their journey, shoot me an email firstname.lastname@example.org. Be sure to look for me on Facebook and Twitter. You won’t find me, but you’re welcome to look.