Thursday, October 8, 2009

Manhattan Real Estate Still In Flux

My article published in
Note Jim Cramer's comment !

Third quarter Manhattan market reports recently released by the city’s top brokerages showed a slowing rate of price decline while transaction volume increased. Manhattan has lagged the nation in real estate price declines. The ongoing question is when Manhattan would hit bottom. Nobody knows because when we do, the bottom would have been over. Consensus seems to be that the rate of decline is slowing. However, a recovery is still not on the radar.

Manhattan 3Q’09 Market Reports

The reports showed that prices declined compared to a year ago. The declines were less or flat compared to last quarter. This shows the rate of decline has slowed. Prudential Douglas Elliman, Corcoran Group, Brown Harris Stevens and Halstead report that average apartment prices declined between 10 to 16 percent compared to the same period last year.

Dottie Herman, CEO of Prudential Douglas Elliman, even said that the worst is over for Manhattan. Prudential’s market report showed that transaction volume, at 2,230 units, increased 46 percent compared to the prior quarter, signaling buyers are back in the market. The median sales price of a Manhattan apartment is now $850,000, a 1.7 percent increase compared to last quarter but still 8.4 percent lower than the same period last year. The average price per square foot is $996, a 16.5 percent decline compared to last year and 5.7 percent decline compared to last quarter, another example of a slowing rate of decline.

Brokers attribute the increase in activity to declining prices, the stock market, improved consumer confidence and the first time homebuyer credit. The increased activity also shows that the steep post-Lehman drop in prices has ended.

These market reports depict closed sales for 3Q’09 and have a lag relative to real time activity. It takes roughly 2 to 3 months to close after a price is agreed upon. Hence, prices reported are those that traded in June or July of 2009.

Since then, my real time observation is that prices have declined further and by the time the 4Q’09 report is published, I won’t be surprised if they are 3-7 percent lower than 3Q’09 numbers. But transaction volume has indeed been increasing.

Buyer’s Market

Yes, brokerage firms paint a picture of an improving market. However, there are negatives which include unemployment hitting 10 percent, expiration of the first time homebuyer credit in November and of course, the glut of new development units in Manhattan. Inventory in Manhattan is around 8,400 units, which is higher than the 10 year average of about 7,100 units.

Every week, we hear news about a developer announcing potential bankruptcy or something related to inability to repay loans.

For the buyer ready to get into the market, now presents the advantages of low interest rates and a buyer’s market because everyone seems to be running away from real estate. The current market obviously favors the buyer and here are suggestions to effectively negotiate the next deal.

Winter will be a great time to buy because it’s a dead season. This means developers will be more willing to extend better deals.

Be aggressive when negotiating. You want to be the beneficiary of the downturn, not the victim of it. Even before potential buyers ask for a better price, sellers are already offering a lower price compared to the listed price. Prudential’s 3Q’09 report shows the average price per square foot for a condo as $1101. But we’ve observed even very nice new developments selling at 10 to 20 percent lower.

Cash buyers should be even more aggressive when negotiating. If you’re a cash buyer, you’re gold because no credit is required and closing is a lot faster. We have seen buyers who offered to purchase multiple units at a substantial discount and wanted a response on the spot. Of course, the seller gave in because despite a lower price, these are units that will very likely close. Each additional signed contract increases the developer’s credibility with the bank and with the next potential buyer.

Do the numbers. Compare the price per square foot you would be paying relative to what has closed in the same building. It’s all public information. Also, look at the number of units for sale and for rent, both of which will tell you a lot about the demand for the building.

The cap rate of a Manhattan condo is about 3 to 4 percent while for a mixed use building it is around 5 percent. The cap rate is the net rental yield assuming no financing involved. Hence for investors, it
can be compared against a stock’s dividend yield, a bond’s coupon or a bank CD.

Finally, get a fixed mortgage! With the Obama stimulus plans, we will have higher inflation ahead. This is one reason why gold prices shot up recently. With inflation, prices of all things increase and this includes property value and rental income. In residential real estate, mortgages could be fixed for up to 30 years while in commercial, up to 10 years. By fixing your mortgage, you are essentially repaying the debt with weakened currency over time. If you’re renting out the property, rental income will rise with inflation while mortgage payments stay the same. This leads to a larger cashflow over time.

Inflation is the reason why buildings in Manhattan today that are worth $300 million were only $10 million thirty years ago. The successful landlords understand and practice this concept of using real estate as an inflation hedge and letting inflation do its work over time.

Wei Min Tan is a real estate entrepreneur focused on investments and brokerage. He is CEO of Castle Avenue Partners and lives in Manhattan.

No comments: