What's UP with Manhattan Real Estate?

Or a better question is……Why is New York Residential Real Estate up? We were recently trying to raise some money for some other developers doing a real estate project in a very desirable southern community that isn’t well known to Yankee financiers. A real estate investment banker we spoke with said “Yeah yeah everybody who needs to raise money has some great project in a real estate market that is still going strong, but you look in the newspapers and residential real estate all over the country sucks”. As a generalization, I guess he’s right. The question becomes for the markets that are still doing well – the Wall Street Journal recently pointed to Portland OR, Seattle WA, Boise ID, Raleigh and Charlotte NC, and Austin TX., is What’s driving it and will it last? At least, Can you feel comfortable as a buyer that you are not making a terrible timing error in these remaining strong markets?

For Yankees you don’t have to look any further than the Big Apple to find a residential real estate market that is still strong. According to the Real Estate Board of New York (REBNY) – in its just launched quarterly report of citywide residential real estate conditions sales price rose significantly for New York City Apartments in Q1 2007. Average prices rose 23% to $745,000 during the quarter. The median price – a statistical figure which tries to identify the middle of a range without undue influence of $20MM apartments or those sold for $1 – was up 20% to $450,000. By the way, when a mean price is way above the median, sales of super high price apartments are dragging the average price up from what the “middle of the pack” price really is. The average sales price per square foot rose 14% to $733. Condominium prices per square foot were even more robust, up 19% to $791. REBNY has included a bunch of other data on the boroughs, one-to-three family homes, coop sales etc. I’ll cut to the chase…they are all good, with Manhattan condos being the best.

Explanations? Press articles talk about New Yorkers not being spooked by the sub prime lending market debacle Yada Yada Yada. Irrelevant. Markets are made up of buyers and sellers. On Wall Street on a good day in the market some would slyly opine it was because there were “More buyers than sellers”. But that’s completely wrong. There are always an equal number of buyers and sellers. The question is who wants it more or who is potentially a buyer and potentially a seller. What decides these factors is PRICE. The rest of the country had a great run up in prices, but lots of supply was brought on, satisfying many potential buyers. As real estate got less and less affordable due to increased interest rates and higher prices, bidding wars stopped as people didn’t want the properties as badly. Then potential buyers dropped off altogether at certain price levels. In Manhattan this hasn’t happened yet despite the soaring prices. Why? The market has trouble delivering large amounts of new supply, due to lack of available land, zoning regulations, availability of construction, labor/material costs (which makes new building hard to justify without ever higher prices) and recently tighter construction loan lending standards. As one developer I know likes to say “They ain’t makin any more of Manhattan”. In fact, according to one NYC real estate appraisal firm total housing units in Manhattan only grew 1.6% from 2002 to 2005, while total owner occupied housing grew 3.5%. New York is a unique market in other ways. Interestingly, 67% of New York housing stock is rental property, double the level of the country overall. Free market rentals (non-rent controlled or stabilized), which truly respond to supply and demand constituted only 33.3% of the rental market according to the 2005 New York Housing Vacancy Survey. So the relationship between renting and buying in Manhattan is also a bit dysfunctional. Lastly, for a number of years Manhattan has existed in a “state of housing emergency” with a vacancy rate below 5%.

Bottom line is Manhattan is a place like no other. It has been perpetually in a tight housing situation. With Wall Street profits continuing to be strong and very active mergers and acquisitions and commercial real estate markets driving the legal and banking businesses, New York City employment continues strong. The strength, albeit more moderate, in the boroughs is a reflection of the tight Manhattan market for rentals and sales. In contrast, it’s not that surprising that the Tri State Area suburbs, where supply is more plentiful, are in the same residential real estate rut the rest of the country is in. That rut will only get worse if employment slackens, which looks like the only thing that will throw Manhattan off its current upward trajectory.

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