RESIDENTIAL more, but because many developers were forced to stop building during the recession, experts say there is still more demand than supply. The average new development price last year was $2.5 million, according to Corcoran Sunshine Marketing Group, more than 30 percent higher than the average price of $1.9 million in 2007. Barbara Denham, an independent economist who has worked for several large commercial real estate firms in New York City, said she believes that prices have room to go higher than they did in the last cycle “given how sound the lending market has been.” Brokers said the fact that prices are rising more slowly than they did in previous cycles is a good thing. “In previous cycles, I saw a steep rise, almost a straight line going up,” said Douglas Elliman broker Jacky Teplitzky. “In a market where prices go up so rapidly, the chances of those prices coming down in a drastic way are also quite high.”
An “L” shaped recovery The past few up markets came crashing down in response to global economic events. Five years into the boom of the 1980s, for example, the 1987 stock market crash plunged the city into a deep recession. The dot-com crash in 2000 halted a subsequent up-cycle, a downturn that was exacerbated by the World Trade Center attacks on Sept. 11, 2001. Most recently, the U.S. housing bubble that burst in late 2007 led to the collapse of Lehman Brothers and other investment banks in 2008, helping usher in a global financial crisis and setting off a multi-year real estate decline. Given that each of the last three booms were halted by such unique circumstances, their duration bears little impact on how long today’s up-market will last, sources say.
How much did prices rise by during past booms? 1982 to 1987: 25% 1998 to 2001: 83.7% 2003 to 2008: 115.8% 2013 to present: 19.4% Source: Miller Samuel. Data is for Manhattan and includes all residential sales.
Urban Digs’ Rosenblatt said booms tend to mimic the equity markets. This boom, he said, will keep going “as long as stocks are doing what they’re doing.” Still, the market’s personality during a bust, and its subsequent recovery, can hint at what’s to come. For example, following the 1980s bust, the market experienced a “V-shaped” recovery — meaning that it dropped fast, but then bounced back quickly, mirroring the vertical shape of the letter V. “The longer [the bust] goes, the harder it will be to recover,” said David Frame, an assistant professor of real estate at Baruch College’s Zicklin School of Business. “If it’s short … people can get through that,” Frame said, offering the example of someone who is renting an apartment but then gets laid off. “Maybe you can borrow some money or use savings. … If it starts going on for three or six months to a year, those resources tend to get used up.” According to Frame, the current recovery has been “L-shaped” in the sense that the economy didn’t bounce back quite as fast. The New York City real estate market, analysts recall, began to percolate around the end of 2010. That movement, Miller said, was prompted by buyers and sellers believing the Bush-era tax cuts were about to expire. Prices then “moved sideways” for several years, meaning they were
relatively flat, until 2012. In early 2013, Miller said, “People got off the fence and we started to see the mood change.” Craig Lazzara, a senior director at the ratings agency Standard & Poor’s, said the slow and steady price increases since indicates that the growth is “sustainable rather than a bubble.” “The rate of increases are still positive, but they’re going up at a decelerating rate,” Lazzara said. “At a certain level, I think it’s good.”
Absorbing supply While the rebound of the 1990s moved at about the same clip as the current rebound has, it was followed by a bust characterized by a massive amount of overdevelopment. “Because of overbuilding and high conversion activity of the 1980s,” Miller said, “it literally took seven years for the oversupply to be absorbed.” Today, there’s not the same level of concern about new units being absorbed, given the city’s inventory shortage. “Other boom markets have seen a large amount of development that’s behind the surge in prices, but here, only now are we starting to see a decent amount of new development,” said Greg Heym, chief economist at Terra Holdings, the parent company of brokerages Brown Harris Stevens and Halstead Property. He said there’s currently a 4.4 month supply of apartments in Manhattan. Last year, more than 2,400 new units hit the market and this year, nearly 6,000 new condos are set to come online, according to Corcoran Sunshine. But that’s far less than the 8,000 units that launched in 2007. Plus, new development still accounts for just 10 percent of sales in Manhattan, according to Miller. At the peak of the last boom in 2006, he said new development and newly converted residential units accounted for nearly 58 percent of sales. Stephen Kliegerman, president of Halstead Property Development Marketing, noted that the same tighter lending standards that are affecting homebuyers are being applied to developers as well, resulting in a slower expansion of new development. “Lenders are more prudent than they had been in the past,” he said. Also, there’s less developable land. According to Miller, new development market share could reach 20 percent, but he said it is unlikely new development market share will reach 2006 levels. During the last cycle, developers flooded the market with studios, one- and two-bedrooms. “The units [developed today] are bigger,” he said. In fact, the booms of the last three decades have each had distinct characteristics in regard to new development. In the 1980s, for example, there was a massive frenzy among developers to convert rental apartments to coops. During that 10-year span, 3,000 rental buildings in Manhattan and more than 242,000 rental units were converted into co-ops, according to a 1998 New York Times report. “Landlords were just cashing out,” said Donna Olshan, president of Olshan Realty, noting that landlords were offering tenants the opportunity to buy co-ops in the building at a steep discount. Olshan — who purchased her own rental apartment around that time for $28,000 and flipped it eight years later for $225,000 — said that this led to huge bump in the sales volume. The condo boom in the early aughts, meanwhile, also ushered in the age of the amenity-laden apartment. That boom started a market-share shift between co-ops and condos. Condos now make up 40 percent of the market, compared with 30 percent in 1989. Co-ops, which made up 70 percent of the market in 1989, now represent 60 percent of the market.
How long did prices rise during past booms? 1982 to 1987: 5+ years 1998 to 2001: 3+ years 2003 to 2008: 5 years 2013 to present: 2 years Source: Miller Samuel. Data is for Manhattan and includes all residential sales.
Nowadays, of course, new development is skewing toward larger and more expensive condos. “New development and luxury [are] rising faster than the overall market,” said Miller. “It’s not a proxy for anything else; it’s more of a side effect of the last decade’s hangover.”
Leaning toward luxury As a whole, today’s market is far more dependent on luxury buyers than ever before. Unlike the early aughts, when anyone could get a loan, stricter mortgage requirements this time around have given all-cash buyers a leg up in the market, and demand from wellheeled buyers is fueling the development of luxury condos. That’s all well and good, unless that pool of buyers dries up. Today, the average luxury pad is 4.3 times as expensive as the average Manhattan apartment, according to Miller. That gap has grown. For the past three decades, he said, the luxury market was three times the price of the rest of the market. In fact, the luxury market has grown so rich that in the past decade, a new price category has emerged for apartments priced $10 million and up. In the 2014 fourth quarter alone,
Manhattan median sales prices YEAR
MEDIAN SALES PRICE
INCREASE YEAR OVER YEAR
1995
$235,000
n/a
1996
$257,000
9%
1997
$275,000
7%
1998
$275,000
0%
1999
$339,500
23%
2000
$450,000
33%
2001
$487,000
8%
2002
$500,000
3%
2003
$449,000
-10%
2004
$560,000
25%
2005
$669,750
20%
2006
$727,000
9%
2007
$825,000
13%
2008
$900,000
9%
2009
$795,000
-12%
2010
$803,907
1%
2011
$802,413
0%
2012
$830,000
3%
2013
$835,730
1%
2014
$900,000
8%
Source: StreetEasy. Data is for all Manhattan residential property types.
Continued on page 126
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