Is now a good time to invest in Manhattan, New York residential property?
Posted by Wei Min Tan on March 4, 2021
The Manhattan, New York residential property market has been weak since mid 2017. This is despite a strong economy (both U.S. and New York City) and record low unemployment rates. In Q1’2020 it first appeared that we were starting the recovery as evidenced by an increase in sales volume (before March 15, 2020). Then after March 15, 2020 New York City was hit by COVID 19 at unprecedented levels and the property market came to a standstill.
As of today, New York City’s restaurants have reopened to 25 percent capacity, but offices still have work-from-home policies until mid or late 2021. The sale market has picked up a lot as buyers want to lock in low mortgage rates and don’t want to miss out on the pandemic’s deals. The rental market is recovering but still weak as a lot of people didn’t renew leases and moved out of Manhattan. With work-from-home policies at companies, New Yorkers have a once-in-a-lifetime opportunity to work from anywhere they want while saving on Manhattan rents. For renters, now is the best time to get a deal.
Given the uncertainty, clients often ask whether now is a good time to invest in Manhattan property.
Why was the Manhattan market soft from 2017 to 2019?
Manhattan property has been experiencing a slowdown since mid 2017, typical with property cycles. Looking at property price data going back to 1999, Manhattan condominium prices were going up from 1999 to 2008, had a dip in 2009 and remained flat in 2010, and then went back up from 2011 to 2017.
The 7-year up cycle ran its course and we went to a down cycle. If 2009/2010 can be a gauge, it previously was down one year and remained flat another year. Manhattan experienced a dip between 2017 and 2019, and due to COVID 19, 2020 saw the dip extending as the market and entire U.S. economy came to a standstill. The original 2017 to 2019 slowdown started with the market’s reaction to the decreased tax deductibility on primary residence property. And then it was driven by (i) increased mansion tax and oversupply in the $5m+ high end segment, (ii) increased inventory, (iii) the typical down cycle after an up cycle (2011-2017).
Impact of COVID 19 and Q4’2020
The three key points from Q4’2020 data are:
(i) Sales volume was up 39 percent compared to Q3, showing recovery, but still lower than pre-Covid levels.
(ii) Listing inventory was down 11 percent vs Q3, but still higher than pre-Covid.
(iii) Months of supply at 13 months was a marked improvement from the 20 months of supply in Q3
The U.S. housing market as a whole is doing very well due to limited supply and record low mortgage rates. Even the suburbs close to New York City, in New Jersey and Long Island, are experiencing a very hot market. Properties are sold in 2 days! Only Manhattan and other large urban areas are suffering as people move out of the city.
Deal example: Client’s condo at 111 Murray, opposite Goldman Sachs HQ (the green building). Booked at pre-construction, prices up about 20 percent.
Weimin’s article, Investing in Tribeca property.
How much Manhattan residential condos cost now
Back in 1999, price per sqft was $480. The peak was in 2017 at $2,149. The below are key data points on a Manhattan condominium in Q4, 2020.
Average price $2.69m (+2.1% vs prior year)
Price per square foot $1,898 (-8.2%)
Transactions 902 (-11.5%)
Months of supply 13.5 months (+29%)
Sales volume in Q4’2020 increased 47 percent compared to Q3 and overall metrics improved compared to Q3. But compared to pre-Covid 2019, the current market is still weak. Price per square foot was $1,898, down 8.2 percent from a year ago. When compared to the peak of 2017, price per square foot in Q4, 2020 was down 12 percent.
These declines are significant in a non-speculative market like Manhattan. Property prices go up because of inflation, so it’ll never go to the levels of year 2000 or even year 2009. The same reason the cost of a burger now will not go down to their price in year 2009.
This is because central banks continually print more currency every year hence making each dollar worth less than, say, 10 years ago. Naturally, more dollars are required to buy the same goods (or Manhattan property) now vs 10 years ago because of the concept of inflation.
In 2009, prices came down by about 15 percent. And in Q4’2020, condo prices were down by about 12 percent compared to 2017. While prices are still at historical highs, it has to be viewed in the context of cycles and dips, driven by inflation.
Deal example: Client bought and then sold this prewar condo that is one block from the World Trade Center, New York’s largest development.
Why investors globally track Manhattan property prices
Manhattan and London are deemed the world’s top two cities for asset diversification and price stability. These are the only two Alpha++ cities.
Key reasons high net worth individuals globally invest in Manhattan are:
(1) Asset diversification
(2) Stable price increases
(3) Low credit risk
(4) Tax breaks such as depreciation
How long will this slowdown last?
The property slowdown has been on for about 4 years, from mid 2017 until now. The last downturn in 2009 was about 2 years. In the beginning of 2020, we were seeing more transaction volume but COVID 19 changed everything.
The U.S. housing market is currently very robust, despite COVID 19. This is because of low supply and record low mortgage rates. Only Manhattan and the big cities are suffering. In Manhattan, work from home policies and people wanting to avoid big city density resulted in people moving out. Rental vacancy rate was at a high of 6.14 percent in Nov’2020 and has since decreased to 5%. The historical rental vacancy in Manhattan is around 1.5 percent. In the sale market, listing discount hit a peak of 10 percent in Q3’2020 but has since decreased to 7.6 percent in Q4’2020.
Q4’2020 metrics overall have improved compared to Q3 but still not at pre-Covid levels. While supply is high, number of deals signed have been increasing since the bottom of May – July 2020.
Since mid 2017, the smart new development projects have been pricing according to the market and offering concessions, which never used to happen in a normal market. For example, the developer covers part of the transfer taxes that is otherwise paid by buyer.
New developments that were selling well before COVID hit are still doing fine. But that is not the case for the less popular developments. Ultimately it boils down to having a good product in a good location. This will sell, although buyers will want more concessions. The overpriced projects are facing challenging times especially in the wake of the pandemic.
Read about How to buy new launch property in Manhattan
Deal example: Represented multiple buyers at 130 William, FiDi’s new development with very low carrying costs and full amenities. Proximity to the Fulton Street subway station and high quality finishes such as marble bathroom, solid wood doors make this a good buy.
When do we return to normal
Now is a good time to be a buyer. Buyers benefit from the slow market which leads to more negotiability. Currently, new developments are offering concessions and even price discount, something that never happened in a normal market. For resales, higher price point properties, $3m and above, have greater negotiability than the mass market $1m to $2m properties.
Normalcy will come when people return to the office. Working from home is not productive and quite distractive. When the whole family is working or attending school from home, it is hard to focus. Human beings are social animals. We need to interact with others as a basic need. Looking at zoom video conferences cannot fulfill that need.
One year from now, people will be back at work, that is when things are back to normal. Manhattan needs office people in shirts and suits walking around. And of course, the tourists, who have started coming back.
Weimin’s article, What does a luxury apartment in Manhattan mean?
Weekly sales trend from March’2020 COVID lockdown until present
The charts below, courtesy of data analysis firm Urbandigs, show Manhattan market trends on a weekly basis from the March 2020 COVID lockdown until now. Supply hit a peak in Oct/Nov’2020 and has steadily been absorbed. Number of deals have been increasing, with the lowest point being in June/July’2020 which we can deduce to be the bottom of the market.
Supply has been decreasing because number of contracts signed exceed new listings coming into the market. We are now in a negative net inventory situation as depicted in the last graph. Buyers don’t want to miss out on the pandemic’s deals and are taking advantage of low mortgage rates. The biggest challenge now is not enough supply.
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
Notes: This article was updated March 4, 2021