Posted by Jonathan J. Miller -Wednesday, May 16, 2012, 3:34 PM
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Crazy?
In the past few days there have been some pretty serious announcements of high end sales in the Manhattan apartment market. First there was the $52M co-op sale at 740 Park Avenue and then there was the $70M condo sale at 50 Central Park South. The former was a record – the highest sales price of a co-op apartment in Manhattan history and the second was a near record sale for a Manhattan condo. One could say this $70M sale was the highest arm’s length condo sale in history since it appears from what I’ve read that the $88M sale at 15 CPW a few months ago was more of a global divorce strategy play.
In appraising we use the “paired sale” technique to extract what certain amenities are worth. One could argue that these 2 recent sales were very similar:
- Both were about 10,000 square feet.
- Both are duplexes (2 levels).
- Both had terraces.
- Both located on well known streets/addresses.
- Both were located in pre-war buildings.
- Both sold at about the same time.
- Both appeal to an affluent buyer who doesn’t require financing.
Simplistically speaking the key differences are the form of ownership (co-op v. condo) and the view. The 50 CPS property has full frontage on Central Park, the most sought-after view in Manhattan. The 740 Park Avenue is located on the 12th and 13th floor has city views that do not clear the roof lines of most buildings in the immediate area.
In our market, the premium for a Central Park view can be about 25% of an apartment’s value. In our co-authored research paper on Manhattan co-op v. condo value with NYU Furman Center, the inherent difference in value between a co-op and condo after controlling for all differences is about 9%.
25% + 9% = 34%
This 34% total is pretty consistent with the 34.6% difference between the $52M co-op and the $70M condo sales prices.
So the numbers aren’t so crazy after all.
- Wynn lands Ritz-Carlton penthouse for $70M [The Real Deal]
- Park Avenue co-op sells for record $52.5 million [CNN/Money]
- Fertilizer King Rybolovlev Sued By Wife For $88 Million 15 CPW Purchase [NYO]
- The Condominium v. Cooperative Puzzle: An Empirical Analysis of Housing in New York City [Miller Samuel]
Posted by Jonathan J. Miller -Tuesday, May 8, 2012, 10:10 PM
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Always fun to speak with Deirdre Bolton on her show. The producers positioned us to speak on the main floor in the middle of a lot of activity – talked luxury housing market.
Posted by Jonathan J. Miller -Wednesday, April 25, 2012, 9:28 AM
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Quest Magazine asked me to write an intro piece on the luxury housing phenomenon i.e. “Real Estate Renaissance” followed by a number of housing types from the markets they publish within. Quest is a beautiful magazine with some interesting editorial perspectives and great visuals on high end real estate.
Here’s what I wrote (I’m arguably the driest writer in the magazine, but hey, it’s how I think):
Real Estate Renaissance: Jonathan Miller – April 2012
One of the primary characteristics of the U.S. coastal housing markets, after the dust settled from the collapse of Lehman Brothers, has been a sustained period of high-end market strength. Trophy properties are seeing new demand.
The sudden end to an era of reckless bank underwriting and subsequent entry into a period of fiscal austerity was expected to disproportionately crush the luxury housing market. Easy access to credit allowed for many consumers to live beyond their means.
The onset of the credit crunch led to the overnight evaporation of the secondary market for jumbo mortgages, too large to be purchased by ailing Fannie Mae and Freddie Mac. While the federal government focused on the former GSEs, little attention was given to improving access to mortgage financing for high-end housing. Banks now have to hold jumbo mortgages in their own portfolios rather than offload the risk to investors hungry for bigger returns. The much tougher jumbo mortgage financing requirements were expected to bring a collapse of high-end housing prices and grind sales activity to a halt. But that isn’t how it played out. The price spread between high-end and starter homes has expanded over the past several years despite irrational mortgage underwriting standards for jumbo mortgages. In fact, a remarkable number of home purchases at the high end of the market have been paid with cash rather than obtaining mortgage financing at commercial banks, thereby bypassing the lending industry’s legacy of poor lending decisions in the prior decade. The global accumulation of wealth during the global economic boom enabled many investors after its end to seek out luxury housing in the U.S., helping coastal markets outperform others.
The weakness of the U.S. dollar against other foreign currencies, specifically in Europe, South America, and Asia has brought investors to U.S. soil in droves. Initially, this was viewed as a currency play where wealthy foreign investors were simply taking advantage of the sharp discount for U.S. housing. While the favorable exchange rates may have tipped the balance towards the acquisition of U.S. assets like housing because of the perceived discount, investors were also moving their assets into a relatively more politically and economically stable environment.
Will the use of cash in housing purchases continue? It seems likely, perhaps out of necessity. Rational jumbo mortgage underwriting standards and the creation of stable secondary market for jumbo markets is not expected to return for years. Once those problems are eventually resolved, the widening gap between luxury housing and the balance of the market could very well widen further.
Posted by Jonathan J. Miller -Monday, April 9, 2012, 12:03 PM
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New York Magazine does a really great job taking a visual approach to how I look at value by changes in floor level and views in Manhattan high-rises. I selected 301 West 57th Street (here are some view photos from a random listing in building) for the analysis since it has views of Central Park to the northeast, and it is a typical 1980’s development with (nearly) continuous unit lines from bottom to top. New development in the last decade abandoned that design approach by shifting towards larger units on higher floors.
Love how it turned out. Enjoy!
[Source: New York Magazine]
Posted by Jonathan J. Miller -Tuesday, March 13, 2012, 12:54 PM
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As shown in the above Bloomberg chart based on our Manhattan data and the NYS Comptroller’s, Wall Street Comp/person and the Manhattan luxury market show similar trending. Not speaking to causation here.
Bad news for sellers? So the logic follows that with a decline in compensation per person in 2011 – largely from a poor second half 2011 performance, luxury prices could slip a bit in 2012 and perhaps the following year if things continue as they were. I said:
“People are making decisions a year or more down the road because they’re getting their deferred cash,” he said. “We may see a little weakness in 2012,” and “next year could be weaker based on this trend of lower compensation.”
However…
Good news for sellers? Some view Wall Street’s poor performance in the second half of 2011 as an anomaly, and with bond trading now on the rise, bank performance could be better next year (or the same if another second half plunge occurs). If the former occurs then there is more potential for greater Wall Street comp and perhaps better luxury housing market performance. I like the above debt chart because it really illustrates how much the industry fell in the latter half of the year. The WSJ reports:
For the first time in a year, traders and bankers are optimistic about the future following a dark second half of 2011. Layoffs, pay cuts and public outrage against the financial industry undermined morale at banks and securities firms, while economic malaise throttled banking and trading businesses.
Smaller Wall St. Bonuses Mean Cheaper Condos in New York: Chart of the Day [Bloomberg]
Bond Trading Revives Banks [WSJ]
Posted by Jonathan J. Miller -Thursday, January 5, 2012, 8:47 AM
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Source: Refinery29 via Curbed
The $88M sale of a Manhattan condo a few weeks ago brought the finishing touches to a year long adventure with records broken and people wondering how on earth some individuals have so much money to spend on housing.
Well there are and yes they do.
And we are not talking about:
-The luxury market (Manhattan starts at around $3M)
-or even the top 1% (Manhattan starts at about $10M)
Throw in a couple of $48M sales and we are really talking about the top .025%.
The numbers are surreal to most and it may cause some to start talking to themselves or wondering if they chose the right career path or rationalizing why these people must be miserable.
Here are the questions that I get asked (not about the career path part but about the trophy property sale part):
Q: Is this a market trend?
A: No, its a market phenomenon. A handful of “one-off” sales that happen in clusters.
Q: How long will this last?
A: Who knows. I wouldn’t be surprised of more of the same in 2012.
Q: Is this a sign that the housing market is back and we are out of the woods?
A: No. It’s a sign that people will spend more than $10k per square foot on housing (and they must be miserable and unhappy.)
Posted by Jonathan J. Miller -Monday, November 28, 2011, 10:00 AM
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[click to expand]
Knight Frank’s research of high end housing markets across the globe shows many of the markets are expected to cool in 2012. They produce an impressive amount of great research on real estate across the globe. I provide some insights within this report.
This process (report) highlights a key risk –
that prime markets will ultimately be undermined by domestic economic reality, with a convergence between prime and mainstream market performance. If the euro was to collapse, or a similar catastrophe was to strike, all bets really would be off and we would expect much weaker performance across all of our prime markets.
Key findings
- After two years of growth the world’s prime markets look set to cool in 2012
- Our forecast for 2012 is evenly split with 44% of the cities monitored forecast to see price falls, 44% likely to experience price rises and 12% expected to remain unchanged
- Given the global economic turmoil it might seem surprising we are forecasting price rises in 44% of the cities monitored. In many of these cities the critical factor is a lack of quality new supply. We expect this to be particularly evident in London, Paris, Moscow, Nairobi and Kuala Lumpur.
- In those cities forecast to see price growth this will be underpinned by the flow of capital from the world’s troubled regions and a desire amongst the wealthy to target property and other real assets over financial products
- Over 60% of the Asian cities monitored are forecast to see price falls in 2012 as government measures aimed at dampening speculative demand start to take effect
- The Eurozone crisis is considered a high risk for 60% of the cities covered. Political and security issues present the greatest risk to the housing markets in the Middle East and Africa.
- Interest rates, high inflation and consumer debt represent the smallest risk to the world’s luxury housing markets reflecting the affluent, more equity-rich buyer profile for this market.
Prime Global Forecast [Knight Frank]
Posted by Jonathan J. Miller -Tuesday, November 15, 2011, 10:00 PM
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Always a pleasure to visit Bloomberg HQ. Deirdre’s got a new show and I like the format – more time for one-on-one discussion. Today we spoke about how the NYC metro area and Miami is fairing.
As an added bonus, I earned another mayorship on foursquare…
Posted by Jonathan J. Miller -Tuesday, November 1, 2011, 6:30 AM
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[open report]
Knight Frank released its Global Cities Index that compares the high end market across the planet. I contributed the New York metrics from the Elliman Report series I author.
Weakening consumer confidence from the European debt crisis and US economic problems are taking their toll.
Prime property in the world’s global cities has been tagged a ‘safe haven’ investment by savvy minded investors for the past three years….
The report shows that the rate of growth is cooling after 3 years of robust gains.
There are now clear signs however that luxury property prices around the world are collectively softening for the first time since the global recession hit in 2008/09. Fears concerning unresolved sovereign debt issues both in the eurozone and US look to be having an impact on buyer confidence.
The big demand drivers from foreign investors in the US seem to be the weak US Dollar and global instability in the financial markets.
3Q 2011 Prime Global Cities Index [Knight Frank]
3Q 2011 Prime Global Cities Index Press Release [Knight Frank]
Posted by Jonathan J. Miller -Saturday, January 22, 2011, 12:01 AM
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Last weekend there was a widely talked about article in the Sunday NYT called “Why Your Next Place May Cost More” that covered the recent plunge in building permits.
The experts quoted in the NYT article all seemed to exude an alarmist tone that prices were going to jump next year because no significant new product was being built but they completely disregarded product that has not been sold yet or the limited financing available to consumers to spur demand. In other words, permits dropped because demand is limited. Its not some sort of random event. If there was a shortage in a year as suggested by the experts, then permits would explode starting right now.
[click to expand]
Here’s the theme of the NYT piece.
“But starting in 2012, after most or all the new projects that were stalled or delayed have finally sold out, the supply of new apartments will take a decided dip, and prices for all apartments could start to rise significantly again.”
Here are a few of the quotes in the piece.
“We tend to go through these cycles where, when you finally come out of a recession, there’s a shortage of inventory,” said Gregory J. Heym, the chief economist for Halstead Property and Brown Harris Stevens. “You usually expect the slowdown to come over a couple years, but this was like slamming on the brakes. So to start up again may take awhile.”
Actually its just the opposite. For example, it took 7 years to unwind the inventory in the 1989 housing crash until 1996. Inventory was bloated in 1992 through 1995 – prices were soft and there was very limited new development. The recession ended 5 years earlier in 1991. After the 2001 recession inventory increased for another 2 years and only peaked because of the onset of the biggest global credit bubble in history.
Gary Barnett, the president of Extell Development and one of the few developers who continued building through the downturn, said the lack of inventory was more pronounced now than in previous recessions. “In the early 1990s,” he said, “there was a big overhang of things that had been built in the late ’80s, but when things stopped this time, it just fell off a cliff.”
The number of building permits “didn’t go from 10,000 to 6,000,” he added, “it went from 10,000 to nothing. So we don’t have the overhang and no big inventory to work through. That’s why the market recovered much more quickly than people expected.”
Not exactly. Permits fell below 500 in 1992 (373) and 1994 (428) after the 1990-1991 recession and didn’t return to “normal” levels for 5 more years.
However housing prices didn’t rise for another 8 years after the end of the 1990-91 recession.
[click to expand]
While I agree its a very dramatic drop in permits but permits don’t necessarily correlate with what gets built. I also don’t see us in this predicament forever. Actually the permit filing drop is the much needed visual for the credit crunch. Its not a sign of shortage, its a sign of surplus.
Why file an application for a building permit if commercial lenders aren’t financing new condo development in any meaningful numbers? Why? Because lenders see shadow inventory (they are holding it); they see high unemployment (even though NYC is improving); they see individual buyers unable to get financing in new development in large numbers to create the demand needed to absorb yet new condo construction. As I said before – if it were so obvious that prices would spike in 12 months and there would be a chronic housing shortage of new development, don’t you think permits would explode right now?
Here’s a contrarian piece that was provided by the NY Observer by Matt Chaban: We’re Running Out of Apartments! (Well, Maybe Not)
If commercial banks aren’t willing to lend now, and it takes at least 2.5 years to get a project online, even if current unemployment, shadow inventory and the ongoing credit crunch were ignored, then it would be 2014 before we see meaningful new construction volume.
Or am I using the wrong equation? Help me understand, please.
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