COVID 19 in Manhattan, current situation
Posted by Wei Min Tan on April 16, 2020
COVID-19 has impacted the Manhattan property market drastically and the past month was unreal. The coronavirus (COVID-19) hit New York City drastically around March 15 and New York City became the new global epicenter for the virus. A state of emergency was declared in New York on March 7 and lockdown started around mid March. As of April 15, there were 118,000 COVID-19 cases in New York City.
What is the current situation?
Q2 GDP shrinkage and unemployment
Goldman Sachs predicts that Q2 GDP will be down 34 percent. Unemployment rate will quadruple the February low and will hit 15 percent. In the past 4 weeks, number of unemployment claims have jumped to 22 million. This effectively wipes out the nonfarm payrolls that were added to the U.S. economy over the past decade. A bit of good news is that number of new weekly unemployment claims has fallen, indicating the peak is over.
The severe contraction in GDP growth is because of the economic lockdown, driven by both consumers and businesses. Most businesses are closed while those that are open experienced big drops in revenue. The only businesses doing well are Amazon (as everyone buys online now), grocery stores, online games and video streaming. On the consumer side, unemployment and temporary halts in employment drastically impacted consumer spending which has always been a driver of the U.S. economy.
Is a Q3 rebound possible?
The Goldman report expects Q3 GDP to surge 19 percent as the economy reopens and the $2+ trillion CARES Act stimulus package takes effect. The “V-shaped” recovery as predicted by Goldman may be possible because the current contraction and loss of jobs are due to an economic lockdown and not driven by business fundamentals of natural supply and demand. Obviously, this remains to be seen.
The $2 trillion CARES Act is the largest stimulus package in U.S. history and equates to about 10 percent of GDP. Key components include $500 billion to big corporations, $560 billion to individuals, $377 billion to small businesses and $150 billion to public health organizations. For small businesses, a key driver of the U.S. economy, there is a Small Business Administration (SBA) $349 billion Paycheck Protection Program. These loans do not need to be repaid if used for payroll and certain overhead expenses provided payroll returns to pre-pandemic levels. For individuals, there is $1,200 check if income is less than $75,000 and it goes away gradually as income increases.
Manhattan property market standstill, Q2 sales to decrease 60%+
While the real estate industry became classified as an essential business, the process of renting/selling apartments is not. The “essential” parts of real estate are activities like title searches, closings, appraisals, inspections. The sale/rental market has been a standstill since mid March. No showings are allowed (not that anyone would want to view anything now) as mandated by both New York state and by the condo buildings. Only new development sales offices are doing virtual showings but that is unlikely to gain any serious activity from buyers.
I am predicting Q2 closed sales volume to be down more than 60 percent. This is driven by the frozen market for half of March, all of April and likely all of May from the lockdown. Closed sales numbers are lagging between 30 to 60 days because they reflect deals entered into 30 to 60 days before the transaction actually closes. As of this writing, we are 2 weeks into Q2 and lockdown is in effect.
In addition, after the lockdown is lifted, people are not going to jump to look at apartments. Opportunistic investor buyers may, but most buyers are primary residence buyers and they should not be jumping in right away. The ramp-up will be slow. My forecast is that it will take at least 1-2 months after the lockdown is lifted for some form of viewing activity to resume. As such, we will only see improvement in sales metrics in Q3 and beyond. Q3 in 2020 will be a big drop compared to Q3 in 2019. But it should be better than Q2 of 2020.
Strategy for sellers and buyers
Sellers who need to sell will be in a very bad position as opportunistic buyers from all over the world will come in and many with lowball offers. Buyers with financing or all-cash ready will be in a strong position, perhaps the best ever. Listings that go back on immediately after the lockdown give a huge signal that says the seller is desperate. As such, I do not recommend sellers relist their property immediately after lockdown, maybe wait 3 months.
I am already getting inquiries from buyers globally who want to take advantage of the depressed pricing. For buyers, the 1-2 months after the lockdown is perhaps the most opportune time to hunt for property. Separately, buyers who are in the midst of a negotiation from the pre-lockdown period are in a very advantageous position. Many pre-lockdown deals are being renegotiated to the buyer’s advantage. There is no competition from new buyers as the lockdown prevents other buyers from coming into the game to view property.
Rental market down 79%
In April thus far, number of new leases signed were down 79 percent. Most tenants renewed their leases because it is impossible to view new apartments. Even if they found a new apartment, the lockdowns make it impossible to move in. Hence, most leases are being renewed.
News reports mention one third of tenants did not pay rent. Specific to the Manhattan condo tenants, the non payment rate is much lower. This is because Manhattan condo tenants tend to have higher income and financial liquidity. Nevertheless, some tenants are requesting rent reductions because building amenities are closed. In a condo building, a lot of residents, whether owner or tenant, have moved temporarily outside of Manhattan to escape. For example, to their vacation home or family home in a state that is less severely affected. My condo building in Tribeca has been about 20% occupied for about 1 month now. We can count with two hands the residents who are still in the building.
Do tenants need to pay rent? Absolutely! All leases are in effect. The law has provided a 90 day moratorium against evictions. This does not mean that landlords cannot take legal action against a non paying tenant. It’s just that the action cannot be taken during the 90 day moratorium. In addition, courts are closed as part of the lockdown anyway. After the lockdown and courts are reopened, there will be a huge backlog of cases.
While the fed funds rate is now at 0%, mortgage rates have not decreased commensurately. This is because banks are overloaded with volume that they cannot close due to the lockdown. The current 30-year mortgage rate is at 3.59 percent (vs the 52 week high of 4.34% and low of 3.52%. By historical standards, mortgage rates are close to the lowest in 50 years. But relative to the yield of the 10-year note currently at 0.611% and the fed funds rate, mortgage rates are not low enough.
Opportunistic strategy for buyers
For buyers with a source of financing, one strategy is to take a loan at cheap rates to buy property in Q2/Q3 at the cheap. We know Q2 and Q3 property prices will be depressed. Sellers who are selling are those who really need to sell. The challenge is to get the debt funding.
Refinance volume has shot up dramatically and most banks are not doing cash-out refinances. This means if one is to leverage an existing property for the debt, the debt will need to come from a source other than a U.S. cash out refinance mortgage. For example, an open line of credit from a different property or a source of funding backed by a different type of asset such as stocks/bonds.
What We Do
We focus on global investors buying Manhattan condos for portfolio diversification and long term return-on-investment.
1) Identify the right buy based on objectives
2) Manage the buy process
3) Rent out the property
4) Manage tenants
5) Market the property at the eventual sale
1) The Sutton, Turtle Bay, Midtown East. This Toll Brothers development only required 10 percent reservation deposit. Represented multiple buyers at the $2 million price point. Location, classic style windows and luxury finishes make this a good investment. Close to United Nations, Citigroup Center, Blackstone, Blackrock. Rented at premium rents from the beginning.
2) 200 Chambers Street, Tribeca. Top quality building in Tribeca. Convenient location next to Whole Foods. Building is priced at premium but rents are also at a premium. This corner unit has dual exposures, maximizing sunlight. Purchased at around $1 million and has appreciated substantially since then.
3) Parc Vendome, Midtown West. Purchased at a great price and renovated entire apartment. Buy factors were south exposure with plenty of sunlight and proximity to Central Park. The photos below are the Before/After. Rented immediately after the renovation was completed.
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