Yes the Sky Does Have a Limit

For those old enough to remember The Concorde, the supersonic passenger airplane passengers traveling at 60,000’ were treated to an astonishing site of the blue sky below turning ink black above and viewing the curvature of the earth. So what does this have to do with real estate?

I have always believed the deluxe and luxury real estate market was and is an indicator concerning the future of the overall housing market. I have noticed anecdotally when markets are climbing out of recession the deluxe and luxury real estate shows early activity as it seems astute buyers understand the opportunities these properties offer in an up-cycle market.  I also find the same concerning markets that have crossed the pinnacle and are now on the downside of the curve. In Denver during the past 18 months we have witnessed a slow-down concerning the upper-end of the market including longer days on market and price adjustments: below is an example:

461 Race St:

  • 9/17: Placed on Market $4.85M
  • 6/18 Reduced to $4.65M
  • 8/18: Reduced to $4.1M
  • 4/19: Relisted $3.85M

My concern is a recent statistic concerning Billionaire’s Row in New York City. (Full disclosure I used to reside in a building adjacent to 220 Central Park South one of the buildings included in Billionaire’s Row).  While not actually a row the moniker concerns a section of Midtown West Manhattan bounded by 55thStreet on the south to Central Park South on the north, 5thAvenue on the east and 8ThAvenue on the west. Of note 432 Park is included in Billionaire’s Row as though east of 5thAvenue it does back onto 57thStreet and was also one of the first condo buildings to sell units for over $50M USD.

The construction of 157 West 57thStreet completed in 2014 (a mixed use structure with a Park Hyatt on the lower floors and condominiums above designed by architect Christian de Portzamparc many believe was the catalyst for the moniker and due to savvy marketing reinvigorated a bland congested segment of Midtown Manhattan and turned it into the supposedly most desirable address in the world in a similar league of One Hyde Park, Peak Road, Avenue Foch and other prestige addresses.

Subsequent to 157 West 57thStreet other towers are being constructed. I use towers conservatively as many are taller than the Empire State Building one mile south a defining structure of the Manhattan skyline.  Height sells as many of the buildings promote their unobstructed view of Central Park to the north as a selling point (as the structures tower over the neighboring mostly pre-war apartment and office buildings.

Yet of interest is a report from Miller Samuels a respected appraisal and market guidance firm based in New York. The New York Post nailed it: “Swank apartments are begging for buyers on Manhattan’s “Billionaires’ Row” — with more than 40% sitting unsold in towers that top out at 100 stories.

Concerning 157 West 57thStreet as mentioned prior, only 84 of its 132 pricey condos have been bought — leaving more than a third of them still on the market and none under contract. Six other nearby buildings (as noted above) have as much as 80% of their units available, the figures show, with the total value of all the unsold inventory estimated by one analyst at between $5 billion and $7 billion.

Another building that’s set for completion next year — Central Park Tower, at 217-225 W. 57th St. — will put an additional 179 apartments on the market.

Back to market forecast. As mentioned having been through three market cycles in my real estate career I truly believe the deluxe and luxury market is a forecast for the overall housing market. As one broker in NYC mentioned: “This happened in 1988 to 1992, when there was a glut of condos that didn’t sell. They were smaller and less expensive, but it led to bad times”.

The issue with Billionaire’s row could be timing. Yes a glut of condos all coming on-line with prices starting at $7,000 USD per square foot and some breaking the $10,000 PSF price. The reality is there are only a finite number of prospective buyers in the world at that level of wealth. Coupled with world events i.e. sanctions on Russia, limiting of currency departing China, increasing but below inflation oil prices, South American money heading to Miami, uniform cash thresholds,  reality is the finite market for these units continues to shrink.

Is Billionaire’s Row an anomaly? Of course. The first to the party i.e. Time Warner Center and 432 Park Avenue seem to have done OK. Those joining the party subsequently and potentially in haste should be concerned.  As developers, their success is their sales. However with leveraged capital and banks/financial institutions providing working capital exposure the risk is spread. However at some point mortgages need to be paid, asking prices may have to be slashed and as I have shown in past blogs re-sales have incurred losses.

Am I concerned about the developers and the banks? On a micro level, no. I am concerned about the fallout from massive defaults to empty buildings to job losses as when such real estate does not sell the multiplier effect does impact down the food chain.

During the Internet bust of the early 2000’s Alan Greenspan warned of irrational exuberance.  Prior to The Great Recession that begins in 2008, real estate on all levels was suddenly considered a commodity. Is the lack of sales activity on Billionaire’s Row a harbinger of the overall real estate market? When the deluxe and luxury market sneezes there is a good chance the overall market will eventually catch a cold.

 

 

 

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