New York City Real Estate

Is the challenging real estate market in Manhattan a buying opportunity?

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Overall
Manhattan real estate had its worst first quarter since the financial crisis, capping the longest losing streak for sales in over 30 years. Total sales fell 3 percent in the first quarter. That marked the sixth straight quarter of declines, which is the longest downturn in three decades. The drop stems from an oversupply of high-end apartments, a lack of foreign buyers and the new federal tax law that has hit real estate in high-tax states.

Condo segment
The Manhattan real estate market appears to have some challenges but, as usual, it depends on which market segment that you are looking at. For foreigners, the most important segment to follow is the condo apartment segment. Condos (or condominiums) are the most popular type of apartments for foreign buyers as these units do not have restrictions from building Boards, are easy to purchase and can be rented out easily. This is very different from coop apartments (or cooperative apartments) which almost always have restrictive Boards in place that do not allow foreigners to purchase the unit and do not allow subletting the apartments.
Median price of resale condos fell 4 percent year-over-year. Median price per square foot declined as well, falling by 4 percent annually. The median price per square food for a resale condo is now $1,395 (or $15,000 per square meter). The supply of condos has increased with 15% - there is now 12.3 months of supply of condos.

New development segment
Sales of new developments has been slowing significantly over the last year. There were 157 new development sales in the first quarter of 2019, a drop of 39.4 percent year over year to the lowest point in 4.5 years, the lowest that has ever been recorded since the first quarter of 2003. Furthermore, the supply in new development is high: the supply of newly built condos jumped 56 percent over last year, to a 19-month supply. As such, buyers who are looking to buy a brand new condo unit definitely have a lot of options to choose from. It is interesting to note however that the median price per square foot of a new development unit has increased with 7% over the last 12 months. The median price per square foot is now $2,085 (or $22,440 per square meter)

Shall you buy a condo in Manhattan now?
It is clear that the Manhattan real estate market has some challenges so should you invest in Manhattan now? Nobody can predict the future but you may consider a few factors:

1. Interest rates remain low (and may drop even further)
For sure, most local Americans are using mortgages to buy property. Being able to finance the purchase of a property in Manhattan at low interest rates is a positive thing. With a Fed that potentially will start reducing rates, it may become more interesting for local Americans to start investing even more heavily into real estate as they would be able to do so at lower interest rates. Of course, if more local Americans start buying, property prices in Manhattan will continue to increase.

2. US economy remains strong
While the media is often focused on the trade wars, the US unemployment rate is at a record low, the economy is doing well and the stock market is still strong. Overall, these are positive signs supporting a healthy real estate market. As long the economy remains strong and the jobs are there, the demand of local Americans will remain and the Manhattan market will continue to get better.

3. Large supply of new development buildings
It should be noted that there is a large supply of new condos that has been built in Manhattan. These new condo buildings are mostly luxury building and focused on upscale buyers (3mm USD and more). As such, prices have come down in this segment and it may be a good time for any cash rich investor to start looking for deals in this segment.

4. Manhattan is a diverse economy
Manhattan is a huge economy that has become very diverse – there are certainly major financial institutions but over the last 10 years, huge tech firms such as Google and Facebook have built campuses in Manhattan as well. Law firms, marketing agencies, culture and arts and tourism are major contributors to the economy as well. Lastly, there are a number of top schools located in Manhattan: Columbia University, Cornell University, New York University and several others have major campuses in the city.
Why is this important? It is crucial for job creation and it forms a major buffer if something would happen to any particular segment of the economy.

5. What happens when a recession hits the US ?
There is of course a risk that a recession will hit the US at some point. The question is how bad the recession will be and what the impact would be on the Manhattan real estate market. Assuming that the US will face a recession that is similar to the crisis in 2009 (which was the worst since the 1930s) then Manhattan real estate prices probably would drop on average 15% (which certain upscale segments dropping 35%). The drop would last 1 year and then prices would recover.
However, it is probably unlikely that a recession similar to 2009 would occur anytime soon; especially with President Trump who is eager to use any mean possible to keep the economy steaming ahead. As such, investors who are planning to invest in Manhattan real estate in 2019 probably have some downward protection by realizing that any recession would cause Manhattan prices to drop less than 15%, and the drop would not last longer than 1 year.

Nobody can predict the future but it is probably fair to say that the Big Apple will remain a formidable city in the long term.

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