CEO Letter
The following is excerpted from a television interview on Channel 57 with Sivan Achor about important trends underlying the Manhattan Real Estate Market. Because it was done over two years ago, it is even more timely for its vision of the Manhattan market at a time when nearly universal opinion was that the market would crash at any moment.
What would you say to New Yorkers that might give them confidence to invest in the New York real estate market?
I would say that we are in a very long term and very powerful bull market in real estate in New York City and that all strong bull markets have their “corrections” just as they do in the stock market. For instance, in 1996 the stock market experienced the Asian Crisis which sent the stock market reeling. In 1998 we had the Russian ruble crisis and Long Term Capital. In 2000 we had a devaluation of the Brazilian Real. All these events caused “corrections” in the on-going bull market in stocks.
Similarly, today New York City real estate is in a bull market fueled by fundamentals that I will explain in more detail later. Those fundamentals are much stronger than events that might cause a correction (like a terrorist attack or the current over-building that is going on at the upper end) and the fundamentals will reassert themselves just as they did the past.
The current market
We are currently seeing a pause in the market, particularly at the upper end. This is due to the large amount of new offerings that have been coming to market since August of 2005. That trend will continue for the duration of 2006 and probably into 2007. It will put a lid on prices going forward although we still see a small increase in prices for 2006, on the order of 2% to 4%. The re-sale market has about 35% more inventory than a year ago, but that inventory would have to be up 100% just to get us to normal inventory ratios in New York. So we are very, very far from having a glut of re-sales. Instead, buyers now have a much greater selection of apartments from which to choose and with interest rates still very low by historical standards, it makes this a great time to go shopping.
The bubble
Many people are concerned that, for a number of reasons, we may be on a bubble and therefore on the verge of a significant drop in property values. Given all of the circumstances that affect the market, including a lack of inventory, a jobless economic revival, political issues and the interest environment, do you believe that we are, in fact, on a bubble or not, and if not, please give us your reasons for believing as you do?
I have said for six years publicly that there is no bubble and there never was one is not one now. This is a great bull market.
There are many reasons that this is a bull market driven by fundamentals. By understanding the fundamentals, you understand the forces driving the market. Let me name a few.
First, the “bubble” argument people think that the market is primarily driven by low interest rates and we don’t deny that is a powerful factor in creating the frothiness that people are mistaking for a “bubble.” When rates rise, as I expect they will later this year, that frothiness will end. People will then worry about the market and think it is going to nosedive. Why? Because they only see the market driven by the low interest rate environment and not the underlying fundamentals. But the market has much more depth than just interest rates. Those who understand the fundamentals will be buyers.
But there is something just wrong about the interest rate argument. The fact is that Manhattan is one of the least interest rate sensitive markets in the world. Recently my company did a study and found that about half the buyers in the market today were either paying cash or making offers without financing contingencies. And everyone knows that many coops allow only 50% and usually no more than 75% financing and many are all cash buildings. So interest rates affect Manhattan less than almost any other market in America.
The second and most important long term driver of the market is supply and demand. The bottom line is that we are just not building enough housing to meet demand in NYC and THAT is what is driving the market. Several years ago a study was done that showed we had demand for 40,000 housing units to be built every year in Manhattan just to meet demand. Guess how many we have been building? About 6,000 a year on average. So we have missed the demand by 34,000 housing units a year for almost a decade. And what has been built has been for the very high end market.
At the high end of the market, we do now have a glut, but that is in the top 10% of the market. If you are planning on spending more than $3M, we have a lot to offer and there is likely to be price weakness there over the next 12-18 months. But if you are looking under $1M, well, if you are, then you know, there just isn’t a lot out there and if you find what you like, buy it.
Our overall situation today is the exact opposite of the situation we had in 1990. Back then a national recession turned into a NYC real estate depression because we had so OVERBUILT in the 80’s. Back then we had tax incentives and developers were putting up buildings for tax reasons rather than because of demand. The result? We had a tremendous OVER SUPPLY during those years and when the recession hit, WHAM, we got hit badly and it took us until 1995 to work off that excess supply. Then the fundamentals re-asserted themselves and the market took off. Since 1995 we have built 15% of what the demand is. That is the primary fuel for this bull market and it has not only not changed, but the situation is growing worse every year. Demand keeps increasing and supply is very limited except at the upper end of the new housing market. Again, the upper end is definitely in an over-supply phase now, but the overall market is not.
Third, immigration is fueling the market. We are experiencing the largest wave of immigration in our nation’s history. And a Fannie Mae study about 5 years ago showed something very interesting: the average immigrant saves more money than the average American. They have a greater desire to buy a home than an average American. They have a larger amount of money for a down payment and they are financially more qualified. Now those people are working hard, saving their money and they want to buy a home and they are doing just that and will continue to do so for decades to come. That may not seem important to the high priced Manhattan market, but it is. Experts know that the market is unlocked at the bottom entry level. If there are no buyers for that lowest rung of the market, then the sellers of those apartments cannot sell their properties and move up. Today the entry level is very liquid. Sellers can sell and move up the real estate buying chain. The people they buy from at the next level can sell and move up, and so it goes all the way up the chain. So we have a huge supply of buyers at the entry level to keep the market unlocked and that is not going to change any time soon.
Fourth, New York City is experiencing an unprecedented reversal of fortune. For years NYC experienced an exodus of people to the suburbs. From WWII to 1990, that occurred, and then something remarkable happened. The exodus stopped and people started moving back to the city. The 1990 and 2000 census showed NET POPULATION Growth in Manhattan for the first time in 60 years and can you believe it? Two of the fastest growing counties in New York State are… guess where? New York City! So demographics have changed dramatically. 60 years of leaving has stopped. People are moving in and there is no supply.
Fifth, some of the Baby Boomers may be moving to S. Carolina and Florida to retire, but a large segment of them are saying, no, I want to be in the city instead. They like the lifestyle of the city, and the food and the entertainment and the fact that you don’t have to mow the lawn or fix a roof or shovel the snow. This group has two sectors: the second home sector and the retirement sector. The retirement sector will grow tremendously over the next 20 years as more and boomers find their way back to the city from the suburbs. The Urban Lifestyle is back in vogue and the Boomers will be moving back to the city for the next 20 years and that is a very powerful trend. The second home or “pied-a-terre” sector is similarly made up of Baby Boomers who keep a house in the suburbs or elsewhere but want an apartment in the city. For instance the 2000 Census indicated that the number of apartments in Manhattan used as second homes increased 141 percent to 21,640 over the previous decade, and the Census Bureau’s 2004 American Community Survey showed the number of second homes in Manhattan continuing to climb to 30,780. Over the next 20 years we will see that number soar even higher.
Finally, you have the Dollar. The dollar fell about 35% against the Euro before it recovered a bit. The dollar is likely to fall farther over the next few years as we incur massive deficit spending. That means that New York City is TODAY cheaper for a European than it was only 18 months ago. Imagine that? New York City is on sale for Europeans! On top of that New York City is one of the least expensive international cities in the world. Only rarely does it even make it into the Top Ten of the most expensive. It is cheap compared to London or Paris or Tokyo or Moscow. So you have a situation of a cheap market by international standards made even cheaper now because of the fall of the dollar. That means that any drop in domestic demand due to rising interest rates or unemployment or a recession is likely to be well covered by internationals buying in New York.
MOTS questions ( Man on the Street)
In light of the crazy prices of New York Real Estate and the overall economy, do you think this is a good time to buy or do you expect values to drop? Should I wait to buy an apartment or act now?
There are two answers to that question. If you are an investor who is making an investment, I would wait 6-10 months because I think the market will level out and there will be a greater selection of properties to buy. Similarly, if you are looking to buy at the upper end of the market which currently is experiencing a large increase in inventory, then you have a tremendous variety to choose from and you can negotiate prices.
But there is another answer to that question that is more important. Thinking of a home as an investment is like someone who needs a refrigerator asking whether it is a good time to buy or will refrigerator prices decline? The answer is if you need a refrigerator, buy a refrigerator and live your life and don’t worry about prices going up or down. The same is true of an apartment. If you need an apartment and can afford it in this environment, then buy an apartment. Over the next 3-5 years, you will do just fine. Don’t try to be cute and time the market. If you find what you like, can afford it, then buy it.
A home is a lifestyle question first and an investment question second. Keep the right order and the right priorities and it will all work out.
The future of NY RE
Having been in the New York real estate market and played a very active and prominent role in it, I’m sure you have many memories of how the market has changed. At this point I’d like you to put on your futurist hat and give us your sense of how you believe the NY market will evolve over the coming years and what changes and challenges you see in the years ahead for our city.
Now that we have reviewed the fundamentals that are driving the market, the answer to this question is easy. New York City will keep growing. Every area of Manhattan will be prime real estate. We are seeing that right now as Harlem townhomes are selling for $2M and Washington Heights gets flooded with buyers and Hell’s Kitchen is becoming a chic address. There will be no such thing as a secondary Manhattan neighborhood, only different neighborhoods with different styles. ALL Manhattan is prime real estate.
I don’t see us keeping up with demand as there are just so few developable parcels and the costs to develop are high, so we see prices holding very steady and rising over time.
We see all the outer Boroughs experiencing huge growth. Staten Island is booming and will continue. The Bronx is being totally revitalized and it is only a quarter of the way through its renaissance. Brooklyn Heights and Park Slope and Prospect Park are already very expensive chic neighborhoods. Williamsburg has gone crazy over the past few years. Astoria, Long Island City, Flatbush are all experiencing tremendous growth. It will continue and if New York City gets the Olympics in 2012, my God, make sure you have bought by then because all those outer Boroughs will have millions of visitors and eyes upon them and in subsequent years, you will see huge growth.
Manhattan will become even richer than it already is. But the wealth will spread around much more than in the past. You already can see that with the wealthy center having moved beyond Park Avenue and Fifth Avenue and Central Park West to Downtown where lofts sell for $2M routinely and to 12th Street on the Hudson River where Calvin Klein and Martha Stewart bought. Imagine, there is now a Ritz Carlton in Battery Park City across from what was built as middle income housing! Brooklyn Heights is a minimum of $1M market now. And the Boomers wealth will spread all over the city.
The City will experience growth from aging Boomers but it will also feel growth from young people. A survey done by Princeton just last week showed that more kids want to attend NYU than Harvard, Yale or Princeton. Kids want to enjoy the urban lifestyle of the world’s greatest city and that is fueling the boom over the next few decades. It all means that 20 years from now NYC will be more vibrant, more diverse, and even more exciting than it is today. It is a great time to be part of that overall growth.
