Another Condo Bubble Bites the Dust

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Luxury condo boom in Lower Manhattan turns to glut, prices sag

In Lower Manhattan, 31 towers with over 5,000 apartments are sprouting up. They’re not exactly in the “affordable” category. The median price for condos – half sell for more, half sell for less – has soared 77% since 2013, to $2.43 million, while the median price in the overall Manhattan condo market has shot up “only” 54% to $1.84 million.

These are stunning numbers, even for those of us who’ve become inured to stunning numbers by being exposed on a daily basis to the craziness in San Francisco.

“Lower Manhattan is getting a facelift” — that’s how Frances Katzen, of Douglas Elliman Real Estate, explained the phenomenon to the Financial Times. The FT adds some color:

At 30 Park Place, an 82-story tower a few blocks from Calatrava’s new station, a new duplex apartment with more than 6,000 sq ft of living space is listed at $32.5 million through Corcoran Group Real Estate. A few doors down, Soho Properties is developing 45 Park Place, a 70-story condo project, with the cheapest apartments expected to sell for $9 million.

Don’t even ask about the association fees.

With condos, price isn’t the only expense. Association fees, which cover building maintenance, staff, indoor swimming pools, and other common amenities and charges in a luxury building, can cost a bundle. The FT found that “for example, the monthly charges for an $11 million two-bedroom midtown condo are listed at $5,600 a month.”

Soaring condo prices induce developers to build more, and they gravitate toward the top end. Why? Because that’s where the money is. Cheap credit funds their ambitions. It takes years to take a condo tower from planning to completion. Once the process is far enough advanced, it’s difficult and costly to stop it. And these towers keep growing and adding new supply, long after demand has started sagging. That’s why condo gluts are so terrible – particularly for lenders.

And demand in that space is now sagging: The number of condos sold at over $4 million plunged to their “lowest level since 2012.” To get things moving, the prices of a third of the 261 penthouses on the market in April – 261 penthouses on the market! – was cut by an average of 10%. And some prices were slashed a lot more. The FT:

In Chelsea, the asking price for a 5,995 sq ft penthouse in Walker Tower, a refurbished art deco project, fell from $70 million to $55 million in the 10 months to March, according to StreetEasy. In SoHo, a 5,912 sq ft penthouse with a private rooftop deck has been on sale for almost nine months and the price has been reduced from $26.5 million to $22.5 million.

In this elegant manner, the glorious high-end condo bubble in Manhattan has turned into a terrific glut:

Suddenly, Manhattan is awash with lavish penthouses, each with so-called “spectacular views” and “one-of-a-kind amenities.” According to Trulia, the property listings site, more than 700 apartments priced in excess of $10 million are on the market in the borough. The reality is that sellers have been forced to discount and deal on the most expensive units.

And where are the Americans?

So who exactly are these huddled masses to buy these kinds of abodes in such large numbers? And why are there suddenly fewer of them? The FT:

Ultra-high-net-worth individuals are feeling the impact of the roller-coaster stock market, low oil prices and a rising dollar, says Pamela Liebman, president of Corcoran. For high-end condo buyers, “there is no sense of urgency” to purchase, she says. Investors from China and the Middle East are still active, but there has been a drop-off from other regions, she says. “It’s the Russian and South Americans that have gone away.”

And Americans? There are still some among the buyers, apparently. Wall Street is still extracting fees and paying bonuses. Only about 15% of the buyers in Lower Manhattan are from overseas, while in Midtown, about 50% of the buyers are from overseas. And both sub-markets are competing with each other for this money:

In particular, Lower Manhattan faces stiff competition from new super-tall, super-high-end, residential towers in Midtown. In 2014, on a stretch commonly referred to as “Billionaires’ Row,” a few blocks from Central Park, the penthouse at One57, a 90-story glass tower, sold for $100.5 million. A few blocks away, the 96-story 432 Park Avenue, the tallest residential building in the world, was completed in December.

Supply, supply, supply, and more supply of very pricey condos.

But optimism is obligatory.

Despite the glut and the beginnings of a squeeze at the top end of the condo market, optimism still reigns about the rest of the Manhattan market. “Most indicators are still showing it’s a sellers’ market,” insisted Gregory Heym, chief economist at consultancy Terra Holdings. “Smaller apartments have been a hot commodity.”

Alas, housing busts tend to start at the top when the “smart money” suddenly gets smart and dries up. Manhattan isn’t the only place where the Fed’s “wealth effect” and hot foreign money triggered a construction boom and a glut that is now curdling.

We’ve already documented some of them. In Miami, the condo glut has fully matured, and real estate agents see a “looming” price correction. Home sales in Naples, FL, are plunging, as are sales of vacation homes across the country. The epic San Francisco condo bubble has turned into a phenomenal condo glut that will only get worse for years.

And in the Hamptons, where Wall Street’s “Smart Money” goes to hobnob over the summer, home prices at the top end are already getting crushed. Read… Super-Luxury Homes Hit by Reversing “Wealth Effect”

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  25 comments for “Another Condo Bubble Bites the Dust

  1. NotSoSure
    May 8, 2016 at 11:31 am

    “Every dollar counts”.

    Something has definitely changed. I think by this time next year, lots of people will swim naked.

  2. Petunia
    May 8, 2016 at 12:18 pm

    For $5600 a month I could find a multitude of 2 bedroom apts to rent in Manhattan, and still keep my $11M in the “bank”. Maybe this is the problem, it doesn’t pay to buy. You could say the same about Miami, where the prices are a lot lower.

    • Nicko
      May 8, 2016 at 1:29 pm

      The idea isn’t to make a return on investment, but to stash the money in safe assets.

      • Petunia
        May 8, 2016 at 4:10 pm

        Overpriced assets are not safe assets. They will deflate eventually and the cash used to buy them will not have been well “stashed”.

        • John Doyle
          May 8, 2016 at 5:59 pm

          I heard Chinese buyers are prepared for that eventuality. It’s a “cost” for having money offshore.

        • Nicko
          May 9, 2016 at 3:48 am

          The base cost of the asset is inconsequential, if one has laundered $20 million to purchase a property that later sells for $10 million less, taking the loss doesn’t really matter, the money is now cleaned, that is the name of the game. More likely the owners will just sit on the properties for a decade and sell when the market recovers.

        • Mother Theresa
          May 9, 2016 at 11:09 am

          Yeah, for some people even 75% for sale sign is luxury buy.

    • Bigfoot
      May 8, 2016 at 9:06 pm

      The $5,600 is not part of a mortgage note, it’s just the monthly association fees for all the wonderful amenities, maintenance, etc. I had to read it twice. Maybe if this fee includes a maid, cook, & chauffeur it wouldn’t be too bad. Only 66K a year so the help will have to be freshly imported ‘refugees’.

      • Gadi
        May 10, 2016 at 8:33 am

        $5,600, doesn’t include property taxes. Its just for the doorman, pool, elevators etc.

  3. polecat
    May 8, 2016 at 12:46 pm

    …..Couldn’t happen to a nicer den…oops, i meant ‘community’ of thieves, oops, I meant really nice folks…….!!

  4. May 8, 2016 at 1:24 pm

    We’re not exactly luxury and high-end in DC as compared to NY standards, but we are definitely seeing a swing here. Our first-time buyers all want condos as cheap as they can get them, and our move-up buyers and the first-time buyers who are coupled up/married, etc are already attempting to buy their “forever” home, so they’re going for the single family. They want to just lock in the low rate and also not have to worry about moving again in the future. They are also condo-fee averse.

    I realize NYC is doesn’t have many single family homes because they can build up up and up, unlike here in DC with strict zoning regulations. But condos with high condo fees are difficult to sell. I had a listing in a high end Georgetown building on the water and the $5000K/month condo fees absolutely impacted the value.

    Even at the exorbitant prices, you would be surprised to find that these are rarely cash purchases. In fact, the wealthiest typically finance the most from what I’ve seen over the years. Money is cheap to borrow and they can leverage the rest into other investments. But in the end, it’s all about a monthly payment for people, and if that monthly payment includes a hefty condo fee, the perceived value drops in the buyer’s mind.

    • Petunia
      May 8, 2016 at 4:23 pm

      In hot markets, where there are few condo foreclosures, condo owners don’t have the same financial exposure, that they do in not so hot markets. In Florida, many condo boards dealt with foreclosures by buying them and renting them out. Guess where the money came from? It came from huge assessments imposed on the rest of the owners. The boards did it to keep all the other condos from losing value, at the cost of rising expenses. I know of owners who were barely holding on who were pushed into foreclosure by the huge assessments.

  5. Colorado Kid
    May 8, 2016 at 1:31 pm

    Not much to add except people are crazy.

  6. May 8, 2016 at 2:07 pm

    It is apparent that in the main humans, and the regulators are humans, never learn. How many times and in how many places must these “bubbles” occur before a system is implemented to prevent these from inflating?

    Enormous amounts of capital and effort are allocated to these “bubbles” [which are not limited to real estate] rather than into productive/socially beneficial activities generating long-term employment and governmental revenue.

    Two possible things that could have been done to control this example are limiting the issuance of building permits using the rationale of “the greater public good,” and the banking regulators requiring much higher loan loss reserves for the construction loans, based on past experience. Indeed, it appears the FRB, Comptroller of the Currency, and FDIC have the power to set minimum interest rates by category, which they do not use. High minimum interest rates for loans into bubble activity could help divert/allocate capital into more useful activities.

    • TeeJay
      May 8, 2016 at 9:36 pm

      “How many times and in how many places must these “bubbles” occur before a system is implemented to prevent these from inflating?”

      We don’t need a “system” to prevent these bubbles – most are created simply by the ridiculous easy money policies of the Fed.

      • May 8, 2016 at 11:08 pm

        Bubble is all there is, everything else you’ve heard about = myth.

    • d'Cynic
      May 9, 2016 at 3:47 pm

      Good thinking. However, each consecutive bubble was created to save the American economy and public from the crash of the previous bubble. The famous Greenspan put was applied to any and all assets. Central to the problem is the refusal to view all manner of rising prices as inflation, and focus inflation measurement and fighting to a narrow scope of basic necessities.

      The most recent bubble still in memory was the tech bubble. It can be viewed as gross inflation in a narrow class of equities. Yet, this inflation was dismissed with a wave of hand as “irrational exuberance”.
      The mainly US centered property bubble was caused by low interest rates and lack of regulation to prop up the economy after a tech crash, and we know how it ended.
      So forward to the present, we now live in an interest rate environment which is unprecedented in history, and as a result have bubbles in all asset classes: equities, bonds, and real estate. The latter, you can experience immediately, the former two will become noticed when people start collecting their pensions.

  7. chris hauser
    May 8, 2016 at 2:10 pm

    the scenery only changes for the lead dog.

    a little late, these deliveries.

  8. Shawntay
    May 8, 2016 at 8:41 pm

    I’ve often commented to my husband why many of the ‘below market rate’ condos here in San Fran are a joke. So the city requires the newer condo buildings to delegate a certain percentage of their condos to lower income families. Never mind that lower income families have to finance and come up with a down-payment for condos in the $300k and above range, but they are also responsible for paying their own HOAs. I noticed one new developments that had HOAs in excess of $700/month. What low-mid income family can afford this? I’m not originally from here and I may not have all the facts but this seems really counter intuitive to me.

    • Petunia
      May 9, 2016 at 8:34 am

      You need to look at how the city defines low income. In SF low income could be as high as $100K per year. Poverty is relative.

  9. Sam
    May 8, 2016 at 8:55 pm

    Know a friend who is swimming in debt, with a modest salary who qualified for ultra high end property.

    So what’s going on with lending standards, that’s the question that needs to be answered.

    There are NO shortage of Americans who would not give their left arm for the chance at one of those 5000 condos should they be financed. As we all know, real estate prices only go up so there’s no risk.

    Are lending standards declining as prices rise?

  10. Michael Francis
    May 9, 2016 at 12:16 am

    I believe many appartments are pre- sold to investors off the plan at bubble prices long before construction starts to protect developers and banks from the fallout of a bursting property bubble.

    • May 9, 2016 at 1:06 am

      I don’t know about Manhattan. But here in San Francisco, some units in these new towers have been pre-sold. But many units are coming on the market as they’be being completed. Since they’re not part of the MLS data, it’s hard to get a good grip on how many of these units are available. It’s all purposefully obscure. The developer of a new tower with 150 unsold units will not put them all on the market at the same time. They’ll market a few of them. And the rest are off the list.

  11. Petunia
    May 9, 2016 at 8:25 am


    Having worked in banking and finance, I have seen money laundering and the haircut does matter. Crooks like to hold on to their money as much as anybody else. Not one of them would take a 50% haircut to move money. But neither banking nor finance compares to what I saw living in Staten Island, NY, ground zero for the mob in New York City. There are innumerable ways to clean money using fake businesses, real estate, rackets etc. Any foreigner that would take a massive haircut to move money is just stupid.

  12. unit472
    May 9, 2016 at 1:33 pm

    If you’ve got $100 million and want a penthouse the cupola ( 49th to 58th floors) of the Woolworth building is available. No glass rectangle this is a real architectural gem and, from 1913 until 1930 , the tallest building in the world.

    Here is the ‘lobby’:

    And the ‘cupola’:

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