The Manhattan Inventory Argument
A: So whats the deal? I know Manhattan is an island, that the 421a abatement is being phased out, and I have argued for years here on this blog about the many differences between NYC real estate and other local markets, but can inventory rise significantly? I mean, is it possible? I have had many discussions with people who say "no, it can't". How strong is this "tight inventory" argument anyway and how may factors change? Here are my thoughts.
I was on a showing with a buyer the other day, and as I normally do after seeing the property, we went to the roof to check out the building's communal deck. This was a 30 story building in Gramercy. As my client observed the usefulness of the roof deck, I was looking at the Manhattan view and thinking quietly to myself...Damn! There are a ton of building's with a ton of units!
I started to wonder about the 'tight inventory' argument that you hear so often for Manhattan real estate. I even discussed 'tight inventory', which was and to an extent still is true by the way, here on this site many times. Sure, inventory is rising and we can deduce why by looking at the credit crisis and weaker macro forces, but how far could it really go?
So I turned to appraisal extraordinare Jonathan Miller for his best guess on how many residential apartment units there are here in Manhattan. His guesstimate, and it is just a guess so feel free to comment if you have a source for total residential units in Manhattan, is about 300,000 total units; that is all co-ops + condos. Remember, condops are co-ops with condo rules/bylaws.
Peeking at UrbanDigs Charts, I see total active inventory for Manhattan at about 7,763 right now. This would mean that only 2.5% of the total apartments in Manhattan are currently listed for re-sale (pie chart on right; assuming 300K total residential units + 850K total rental units; feel free to direct me to source that could confirm these #s)! Hardly a market that has a glut of inventory! While it is all relative (since inventory is up about 40% during a normally active wall street bonus season), think about what could happen with inventory! Miller explains to me:
We typically see an average of 3% to 7% of a building's units turnover in the course of a year (sales) so that seems reasonable that about 2.5% of the housing stock is listed for sale. Inventory levels are currently below 2006 levels but if sales continue to remain at lower levels, the potential for an increase above 2006 levels is very possible.Often I get asked by readers at what level would fierce seller competition kick in, forcing asking prices to come down in order to move property. I think I said somewhere between 8,500 and 9,000 or so; keep in mind this was when total inventory was about 6,250 or so. Boy, I need to revise that big time!
Fierce seller competition occurs in local markets where buyers simply go on strike and are no where to be found. This is hardly what I am seeing right now in Manhattan. While buyers here may be cautious, we still have a healthy mix of buyers that most other local markets cannot claim. But, that doesn't mean this can't change! Confidence can change very quickly and almost every broker I know now understands how relative confidence is to sales volume! Most brokers are behind the curve because they focus on selling the product at hand and their own personal real estate business; nothing wrong with this is there? But there is a lack of brokers out there who are ahead of the curve and advise their clients to observe the changing environment in order to achieve their goal; rather than be behind the curve and play catch up. Applying this phenomenon, Manhattan is a marketplace where brokers frequently overstate a property's worth on the open market in order to secure a signed listing agreement; after all, sellers rather hear that their apartment is worth more than worth less (see TrueGotham's piece on "Grossly Overpriced Property...The Kiss of Death")! In my opinion, overpriced properties are going to contribute to a sustained rise of inventory throughout 2008; especially resellers of recently closed new development units.
Today, the 'inventory is tight' argument holds less water than it did in the past few years for one very big change ---> decline in macro conditions that led to a decline in buyer confidence. Inventory is rising because sales volume is just not keeping pace with new listing inventory as buyers have become more cautious. While I would not say that inventory is overflowing, it seems to have the potential to do so if conditions worsen.
Assuming the 300,000 total residential units in Manhattan is somewhat accurate, then current inventory is at 2.5% of the total pie. With a building boom bringing many units to market as new developments are completed and units are closed, I would expect this number to rise a bit, and total inventory to rise with it! I stated many times that I expect 2008 to be the year Manhattan inventory reverses course; and so far it is. But to say that fierce seller competition is here and sellers are fighting with each other to lower their prices, is far from true. Yes, you are seeing pockets of distress and some in building competition, but it is not generalized for all of Manhattan.
Inventory will have to soar to well above 10,000 units at the very least, for us to see some level of fierce seller competition. As I looked out from that roof deck at all the buildings in Manhattan, I tell you, it certainly is possible. Did it happen yet? NO! Will the new 421A rule + credit crisis eventually slow development (recent story in The Observer about permits rising in 2008 as last chance to take advantage of 421a exemption; via Curbed)? YES! Will that make Manhattan inventory tight no matter what? NO! There are enough total units out there that should an economic slowdown deepen and persist, inventory could rise significantly.
Time will tell. For now, let's at least know what it is we are dealing with.