Thursday, September 12, 2013

A Manhattan real estate question: What can you buy for $12,745?

As I write, $12,745--that's twelve thousand, seven hundred and forty five dollars--will buy you exactly one square foot of a three bedroom, five and a half bath condo on the upper west side.

If you want all 3,923 square feet, you'll have to come up with $50,000,000.

True, the apartment is on a very, very VERY high floor, and the views are spectacular.  You can almost see the curvature of the earth.

And the master bedroom does have its own sitting room, and there's a staff room and a breakfast room and a gallery (what you call a hall when it's seven feet wide).

But there's no terrace or balcony, or even a fireplace, let alone a pool or a tennis court or a helipad or a place to exercise polo ponies. 

Look down at the floor.  Measure one square foot of it.  Now imagine that square foot being worth $12,745.

A development in the village has just come to market with average prices per square foot of around $4,500.  That's a long way south of $12,745, but it's still a lot of money for a square foot of floor.  An apartment in another development, this one in Noho, is priced at more than $5,000 psf, again, with no outdoor space or fireplace.

Developers must be supremely confident that these will sell, and quickly, because they keep building more of them.  And this is no easy or inexpensive process.

First, they may have to pay as much as $800 to $1,000 per buildable square foot.  That's square footage that right now exists only as air, up in the sky.  (The mere idea of paying a thousand dollars for a square foot of air makes me whimper.)  Then they have to carry the financing for these projects for three to five years before they see any income.

They have to build out the spaces--not cheap when everything has to be top of the line, and this involves architects (preferably the kind known as starchitects), expediters, contractors and construction crews.  And then they have to mount expensive ad campaigns, put together expensive sales offices and expect to pay commissions.

All of this takes money.  A lot of money.  The profit margins are far from huge.  And the risk factor is significant.  What if, somewhere along the way, there's a fire or a flood?  Or another economic disaster?

But right now there are any number of these vastly expensive projects in the pipeline, each of them taller, shinier and more ambitious than the last.

Here's the weird part:

Jonathan Miller, president and CEO of the semi-eponymous and pre-eminent appraisal firm Miller Samuel, explains "absorption" as the number of months to sell all listing inventory at the annual pace of sales activity.*

That is, if there are 100 properties on the market and there have been an average of ten sales a month for the past year, then it should take about ten months to sell all those properties.  In this case, there's a ten month supply of inventory.

More than nine months of inventory is a buyers' market.  Six to nine months is a balanced market, and less than six months is a sellers' market.

As per Mr. Miller's blog Matrix (, there is currently no more than a five month supply of inventory of properties priced below $5,000,000.  In some categories below this price point, there is a supply of only two and a half months. 

Buyers are starved for property, and there's next to nothing available for less than $5,000,000.

But in the $5,000,000 to $10,000,000 range there's a seven and a half month supply of co-ops (a balanced market) and a twelve month supply of condos (definitely a buyers' market).  The picture above $10,000,000 is disastrous for sellers, with a 16.4 month inventory of co-ops and a 27.9 month--well over two years--inventory of condos.

There is something wrong with this picture.  I asked the expert to explain.

Mr. Miller kindly responded to my query as follows:  "Developers are largely forced to target the high end of the market because of the cost of land and construction. The math doesn’t work at the lower price points.

"If the high end softens then land prices slide and the math begins to work again. Rising housing prices tip more inventory in the market as people have more equity to participate although that has not happened in Manhattan yet."

I am waiting.  So are a whole lot of would-be buyers.

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