When the Hottest Real Estate Commodity Turns Cold

Go back 5 years give or take and Billionaire’s Row in New York City was the place to park your Dollars, Rubles, Yuan, Reals, Euros…….. This once non-descript thoroughfare of 57th Street from Park Avenue to 8th Avenue (5-crosstown blocks) suddenly changed its image from a mixed-use retail/gallery strip to one where mega-tall residential towers catering to the uber-wealthy could purchase condominiums with helicopter views and no invasive questioning by persnickety co-op boards.

While some suggest 425 Park started the trend, 157 West 57th Street was considered the pinnacle of the multiple opportunities. The mega-tall designed by French architect Christian de Portzamparc included a luxury Park Hyatt Hotel on the lower floors and opulent residences delivered in vanilla shell condition on the upper floors. Of note, the towers being built on the former Steinway site as well as Central Park Tower above Nordstrom’s have yet to receive their Certificate of Occupancy.

It was in January 2015 when the news broke; a duplex penthouse at 157 West 57th closed for a record price in excess of $100M (of note the record has been broken by Ken Griffin’s purchase at 220 Central Park South). The duplex penthouse is 10,923 square feet and spread across the 89th and 90th floors officially closed on December 23, 2014. Of note the buyer, Michael Dell of Dell Computers fame.

Fast forward to 2020. While multiple buildings on Billionaire’s Row wait for their Certificate of Occupancy the real estate market decided to take a breather. Last month, June 2020 the most expensive sale of the month was at 157 West 57thStreet. Unit # 88, a full floor condominium located just below Michael Dell’s holdings sold for $28M! The 6,231-square-foot apartment features four bedrooms, four bathrooms and a powder room, along with floor-to-ceiling windows that provide panoramic park, water and cityscape vistas. Impressive?

Of course, until one does a look back i.e. the same apartment sold in 2015 for $47.4M. Simple math a 41% loss! Did I mention the HOA not including taxes were at the time of purchase $12,600/month or in excess of $150,000/yr.

There are countless other examples filtering out of New York City of similar purchases within the last decade taking substantial losses upon resale. While some may suggest New York City is an anomaly especially considering all the headlines advising real estate’s resiliency I would be more cautious.

In real estate downturns and corrections the deluxe and luxury market shows the first sign of fatigue (and notably is the first market to recover). Losses experienced at 157 West 57th may be notable due to the amounts yet should send a message of caution into the larger marketplace.


Foreign Investment in US Residential Real Estate Plummets

In the late 1980’s my thesis for my Political Science degree was titled Direct Foreign Investment in Downtown Denver. In the late 1980’s while the Denver regional economy was decimated by the downtown in oil prices and subsequent move by industry players to consolidate in Houston and Calgary what was interesting is the long-term commercial real estate holdings by foreign nationals including Germany, Mexico and Canada. Some owned whole buildings; others owned land-leases and so forth.

Foreign investment in the United States dates back to the Revolutionary War when France lent money to the United States. More recently the foreign investment activity has been active in residential real estate. Of course the blockbuster deals in New York i.e. purchases by Russian oligarchs, South Florida by South Americans and California and Vancouver by Chinese make the headlines. Yet even here in Denver smaller investors from around the world have been purchasing real estate, which I mentioned in an earlier blog.

When our US Dollar is weaker against other currencies coupled with our Rule of Law orientation AND deeds real estate in the United States is attractive. As the US Dollar is the currency of choice around the world as stable and reliable so goes our real estate. Yet recently inflows of foreign capital into our real estate markets are lessening.

During the last two years foreign investment in U.S. homes has plummeted due to as a strong U.S. dollar, threats of trade wars and a global economic slowdown. Also currency controls in China concerning outflows from the country and constraints on Russia nationals.  Added to this is are additional constraints concerning tracking of monies used to purchase real estate.

Foreigners purchased $77.9 billion-worth of existing houses in the year from April 2018 through March 2019, a 36% drop from the previous year and half the amount spent in 2017, according to an annual report released Wednesday from the National Association of Realtors.

Since crawling out of The Great Recession in tandem with growth of incomes in China, Chinese buyers have been the biggest spenders from other countries on U.S homes. However deteriorating trade relations i.e. tariff threats and stricter regulations from the Chinese government have successfully stymied the flow of Chinese investment in U.S. real estate. Of note speculative real estate projects in China are also starting to face headwinds.

By NAR’s estimate, total sales to Chinese buyers fell to only $13.4 billion, a six-year low in the year through March. That’s less than half of what they spent from 2017-18.

In addition to deteriorating relations with China, a strong U.S. dollar and shifting economic conditions are largely to blame for the slowdown.  A strong dollar makes it harder for foreigners to purchase U.S. homes or even travel to the U.S. In one of the more extreme examples of the past year, a Brazilian buyer would now need to spend 22% more Brazilian Reals to buy the same house in the U.S. than they did a year ago.

With U.S. median home prices rising by 4% on average during April 2018 through March 2019, U.S. home prices measured in British Pound, Euro, or Chinese Yuan rose by 5% and by more than 10% when using the Indian Rupee or the Brazilian Real currencies” according to the NAR report.

After Chinese buyers, Canadian, Indians, Mexicans and British buyers spend the most each year on existing homes in the U.S., respectively—all of which pulled back from buying homes over the past year.

British buyers spent the most of any nationality per home, with a median sale price of US $510,700. Still, their activity in the U.S. housing market has dropped off by around two-thirds over the past two years, according to the most recent figures. The issues surrounding Brexit and the subsequent weakness of the British Pound may be partially to blame.

Florida was the most popular destination, with one-fifth of all foreign buyers headed to the Sunshine State where British accented English co-mingles with Russian, Spanish and Portuguese. California came in second, attracting around 12% of all foreign sales, followed by Texas and Arizona.

While Colorado does not make the top inflows concerning foreign currency into real estate foreign investment is a component of our real estate markets. As mentioned in Denver we have foreign buyers purchasing rental homes. In the mountain resorts foreign purchasers are quite prevalent.

The decrease in foreign investment is not necessarily a negative as markets including Vancouver and Toronto are readjusting downward and becoming available to local purchasers versus investors and speculators. If I were developing on Billionaire’s Row in Manhattan and along the east coast of South Florida I would be a more than a little bit concerned.

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.




Could Greenwich CT be a harbinger of the overall luxury housing market

Greenwich CT. may not be the most familiar community to those of us who live west of the Mississippi. A wealthy commuter suburb for Manhattan, Greenwich has historically been one of the gilded enclaves of wealth and prosperity for multiple generations looking for a beautiful leafy green suburb and attractive state income tax laws. Yet recently Greenwich and other wealthy commuter suburbs of New York City have witnessed challenges to their historical demand for luxury housing.

Over the weekend The Wall Street Journal ran an article titled ” Wealthy Greenwich Home Sellers Give In to Market Realities”. The lead paragraph reads as follows:

After four years on the market, and three price cuts, a stately Colonial-style home on Greenwich, Conn.’s tony Round Hill Road is being sold in a way that was once unthinkable in one of the country’s most affluent communities: It is getting auctioned off. Once asking $3.795 million, the four-bedroom property will be sold May 18 with Paramount Realty USA for a reserve price of just $1.8 million.

Even the wealthy are not immune to price adjustments. According to Realtor.com there were 45 properties in Greenwich priced at more than $5 million that had their price reduced by 10% or more in the 12-month period between April, 2018, and March, 2019. Not to worry Greenwich continues to be one of the wealthiest communities in the United States and its reputation is intact.

However there are winds of change that may be longer-term concerning wealthy suburban enclaves and their demand for the upwardly mobile and those who have attained status of being counted within the wealthiest 1% of earners.

Property Taxes: The revised federal tax code reduced deductions concerning real estate taxes. While many pundits believed the revision was to penalize the New York Tri-State region where many suburban communities have tax bills exceeding $10,000 annually even on a modest home, the reality is here in Metro Denver the $10,000+ real estate tax bill is becoming more common in neighborhoods such as Denver Country Club and in suburbs including Cherry Hills Village and Castle Pines.

Changing Lifestyle: While the pinnacle of affluent home ownership used to be a large home with acreage surrounding for croquet and lawn tennis more and more affluent are flocking to the inner-city i.e. Billionaires Row in New York City, One Hyde Park and even here in Denver high-rises such as The Four Seasons in Downtown Denver as well as homes in Cherry Creek North known for their enormous size on lots more akin to a postage-stamp.

Concerning Greenwich the news gets worse: The median price for a home in Greenwich dropped by 16.7% last year to $1.5 million in the fourth quarter of 2018. On the luxury end of the market, characterized by the top 10% of sales, prices dropped by 18.8%. 

In addition, the average time a luxury home sits on the market in Greenwich is 357 days from its most recent price adjustment. The only segment of the market performing well appears to be smaller, entry-level homes close to the train station, which are being snapped up by a new generation of buyers. The lowest priced condos currently on the market in that area start at around $330,000, according to Zillow.

Should we be concerned in Metro Denver? Maybe. The blockbuster sales of 2016 and 2017 have not been replicated in 2018 and 2019.  In prior blog posts I have provided evidence based on public sales records how some sellers are taking real dollar and inflation adjusted dollar losses on their luxury homes in the most in-demand neighborhoods of Central Denver and Cherry Hills Village.

Of note with the stock market continuing to gain value and the economy seemingly running on all 8 cylinders seems to defy logic that luxury real estate should be lagging. While I do not read tea leaves I do review sales data; if I were considering dropping a few million on a home in Metro Denver at present I may want to take a breather.