Manhattan’s iconic “Billionaires’ Row” is known for establishing new benchmarks in both the luxury and price of real estate. Now, the toniest residential area in New York City—with its ultra-exclusive condominium towers offering breathtaking views of Central Park—is experiencing its first-ever foreclosures.
Two recent lender suits against defaulting owners at luxury high-rise One57 (157 West 57th Street) have stirred concerns about the outlook for the Big Apple’s luxury residential real estate market. Are these foreclosures early warning signs of a bubble, perhaps global in scope, that could soon burst?
Donna Olshan, president of high-end Manhattan brokerage Olshan Realty, doesn’t think so. She says the recent foreclosures at One57 are isolated incidents involving borrowers who got into trouble, not indications of a coming market meltdown.
Instead, Olshan says current soft prices are partly the result of excess inventory caused by the overbuilding of expensive condos. “At $10 million and above, inventory is growing. We had too much building on the uber-luxury end of the market. Things under $1 million fly and things over $10 million are sitting,” she says.
Overpricing by sellers of luxury properties is largely responsible for stalling transactions at the top of the market, says Olshan, a 37-year veteran of the New York real estate market. “Real estate is an efficient market. If it’s not priced correctly, it won’t sell. People either remove their property from the market or they lower the price and sell it.”
Olshan refers to the boom that happened about five years after the 2008 financial crisis as “the golden years of luxury real estate building in New York City.” From 2013 to 2015, construction projects that faltered after the crisis were restarted and a lot of new development began. “During that period of time, the market really escalated,” she says.
Prices of newly developed super-luxury condominiums in New York City have already corrected by 15% to 35% since their peak in 2014, according to Jonathan Miller, president and chief executive officer of New York-based Miller Samuel, a residential real estate appraisal and consulting firm. “When you have values dropping in short order that much and asking prices don’t adjust, you have few sales,” he says. “It always takes sellers—especially at the high end—a couple of years to get back in sync with the market.”
Miller covers 22 housing markets and authors the Elliman Report for Douglas Elliman Real Estate.
With no significant increase in demand expected at current prices, Miller says sellers will need to come down another 10% to 15% to clear the inventory overhang. The construction of about 10,000 luxury condos above current levels of demand has resulted in at least three to four years of excess supply in New York City, Miller says.
Overall, he says, prices for both existing and new luxury properties are softening. “Like the national market, New York is roughly 85% resale, 15% new development. The market is softer at the top and tighter as you move lower in price.”
As sellers reduce prices in many areas of the country, sales of luxury homes are picking up. “What you’re seeing now with sales in a lot of markets is much larger listing discounts and longer marketing times because sellers have to travel farther to meet buyers. Buyers aren’t coming up. As sellers capitulate to the new market, sales occur,” says Miller.
Defining Luxury
The Institute for Luxury Home Marketing designates the top 10% of the total U.S. home market based on sales price as “luxury,” the top 5% as “ultra-luxury” and the top 1% as “uber-luxury,” according to Diane Hartley, president of the Dallas-based organization.
The dollar values associated with the institute’s luxury tiers vary dramatically from market to market. “Luxury real estate is hyper-local. Because the stakes are so high, you want a local agent that knows the market literally down to the street,” says Hartley.
For example, in Chicago a $1.4 million single-family home qualified for the top 1% in the first half of 2017, whereas in Palm Beach, Fla., the 1% threshold price was $4.3 million, according to San Diego-based REAL Marketing, a strategic marketing company that provides local statistical analytics for the North American real estate market.
The range of luxury selling prices also varies significantly across markets. The highest-priced condo/townhome sold in Park City, Utah, during the first six months of 2017 went for about $5.9 million, while the highest price for one in Los Angeles went for $20 million, according to REAL Marketing’s data.
In a few U.S. markets, like Manhattan, home prices approach the surreal. A penthouse comprising the top two floors of One57 sold for just over $100 million in 2015, a record for the most expensive unit ever purchased in New York at the time. Several condos at 220 Central Park South were combined to create a mansion that’s under contract (as of press time) for close to $250 million.
“The New York market is nearly always viewed through the optics of the $100 million or $250 million apartment. Those are outliers,” says Miller.
Global Insights
Ultra-prime residential real estate is indeed rarified. As of mid-2017, about 1,500 homes over $20 million were listed for sale globally. Yet only 34 were available for over $100 million, according to Christie’s International Real Estate’s 2017 report “Luxury Defined: An Insight Into The Luxury Residential Property Market.”
By country, the definition of “luxury” real estate differs significantly, says Christie’s report, which gathered data from over 100 luxury residential markets worldwide. For example, an entry-level luxury home can be purchased for less than $1 million in Costa Rica, while one would start at over $10 million in Monaco.
In 2016, the global trophy residential real estate market was characterized by significantly slowing sales, considerably more days on the market and slightly upward-trending prices. Luxury home sales over $1 million grew by only 1% annually in 2016. By contrast, sales of $1 million-plus properties grew 8% year over year in 2015 and 16% year over year in 2014. The average time on the market for homes over $1 million increased from 195 days in 2015 to 220 days in 2016, a 13% rise, Christie’s research shows.
High-end home sale prices ticked up about 2% globally in 2016 from 2015, and the trend continued in the first half of 2017. The percentage of the asking price that sellers are actually realizing, known as the list-to-sale-price ratio, has fallen year over year worldwide, “signaling a buyers’ market,” Christie’s report found. This is particularly true at the highest end of the market. For homes listed at $30 million or more, the actual selling price averaged 75% of the listing price in 2016, down from 82% in 2015. Homes listed for between $1 million and $3 million sold at 94% of the asking price in both 2015 and 2016, says Christie’s.
New Reality
The last time sales of very expensive homes faltered was in 2007 and 2008. After the global financial crisis, many properties languished on the market for years until sellers dropped asking prices considerably.
Since then, rising incomes among the rich, coupled with tighter mortgage-lending standards for middle-class borrowers, led developers to shift their efforts toward the affluent market.
And the wealthy responded. Some purchased properties simply as trophy residences. Others bought for investment purposes, as low interest rates and equity volatility made real estate attractive by comparison.
Some wealthy foreigners bought in the U.S. to avoid taxes in their home countries or to store wealth in areas where it seemed less likely to be seized by governments or other creditors. Foreign buyers closed on a record number of U.S. homes between April 2016 and March 2017, a 49% increase over the same period from 2015 to 2016, according to the National Association of Realtors.
But home sales to rich foreigners are slowing. Declining commodity prices, such as those for oil, have affected buyers from the Middle East, and elsewhere. Moreover, to combat money laundering, the U.S. Department of the Treasury began last year to track purchases of multimillion-dollar properties by overseas buyers, especially those bought with cash through shell companies.
Recent capital controls in China have also curtailed wealthy buyers, thwarting their ability to move funds out of the country. “The crackdown by the government on extracting funds keeps getting tighter and that has had some impact on demand from China,” says Miller.
One key distinction between the slowdown in high-end real estate and the 2007-2008 crash is the virtual absence today of bubble-causing speculation. Luxury properties are simply too expensive for speculators. “No one is flipping $5 million condos,” says Miller.
Another difference is more cash sales. “With a bubble, I think of a market raging out of control faster than logic can support—with a lot of leverage. One thing we don’t have now is leverage,” says Miller, noting that, over the last few years, 80% of sales above $5 million in New York City were cash transactions.
Market Psychology
Understanding the needs and wants of discerning buyers, and getting top dollar for demanding sellers, requires a high level of service from real estate professionals. Buyers and sellers in the general market have “an expectation of a transaction being completed,” says Hartley. By contrast, at the highest end of the market they have “an expectation of expertise” because these deals tend to be complex, she says. Multiple parties may be involved, including the individuals or families the agent represents, as well as attorneys, accountants, investment advisors, estate managers and family office representatives.
“Family, friends, business managers. All kinds of people often chime in,” says Kofi Nartey, who frequently represents celebrities as the director of the Sports & Entertainment division with the Beverly Hills, Calif., office of Compass real estate brokerage (he’s also the author of the recently published book Sellebrity: How To Build A Successful Sports & Entertainment Based Business).
“The best approach is to try to get to the underlying motivations of each player in the deal,” says Nartey. “That will help dictate the information that’s useful to them and how you can work with them as opposed to against them.”
After consulting with a client’s business manager on a recent transaction, Nartey and the manager agreed that a home purchase was not appropriate. “The client makes millions and millions of dollars a year, but it was the best decision for them to shore up some other investments and do some financial planning prior to buying another property. Sometimes, it’s hard to tell clients ‘no.’ It’s their money. They want to spend it,” he says.
Nevertheless, the client accepted the advice and the business manager appreciated Nartey’s assistance. “That’s part of working with the different role players and understanding what each person’s motivation is,” he says.
Good luxury real estate professionals also understand the unique factors that influence prices at the highest end of the market, including location, rarity, provenance, privacy, security, architectural design and material quality. At the top 1% of the market, there are no “comps” or “comparables,” says Hartley. For these ultra-exclusive homes, there are only “relevant properties” that experienced agents can use as general guides to establish justifiable list prices and encourage sellers not to set extraordinary, or “aspirational,” prices. Unrealistic list prices cause potential buyers, even the uber-rich, to close their wallets, which in turn results in otherwise-desirable homes languishing on the market.
Nartey spends considerable time educating sellers about market conditions. As an example of “aspirational pricing as a marketing tool,” he cites the Playboy Mansion, the first residential property to sell for nine figures in Los Angeles.
Originally listed for $200 million, the iconic estate eventually sold for $100 million—a 50% price reduction.
Besides inflated prices, questionable décor can add to time on the market. “Over-the-top decorating, gold gilt and aqua kitchens” are most definitely “out,” says Olshan. “Nothing will kill a residential property sale quicker than really bad taste. And by the way, just because you hired a decorator doesn’t mean their taste is good either,” she says.
Even with the current softening in the luxury market, Olshan remains confident about the long-term prospects for residential real estate. “If you buy and hold, you’re usually going to make money,” she says.
“Since the start of my career in 1980, the market has been many more years up than down. When you hit a down cycle, you can’t lock into a loss. You just have to hang in there. It will return.”