Tom Adams: The NYC real estate bubble is about to pop
This Sunday our friend Tom Adams visited the Alt Banking group and talked to us about how the high-end NYC real estate bubble is due to burst soon, if it hasn’t already.
He introduced his topic with an analogy from oil. When credit was super easy to obtain, post-crisis and during the era of quantitative easing, there was an incredible amount of investment in fracking and drilling. Everyone wanted a piece of the action, and the secondary junk bond and CLO markets were more than happy to oblige with plentiful cash.
The result was an over-supply in an economically stagnant era of low demand. Instead of seeing the economic law of supply and demand kicking in, however, we saw the opposite, at least temporarily: companies that were in need of cash to pay their creditors regularly pumped as much oil as possible to make their payments, resulting in even more supply and the collapse of the market.
According to Tom, we’re seeing a similar dynamic in NYC luxury housing, and for a similar reason: too much easy money for developers to buy and develop luxury housing, without regard for the demand. But, whereas in the case of oil the markets are relatively transparent and move quickly, the real estate market is famously opaque and sly, with information leak managed by real estate brokers who have skin in the game. And while ultra luxury condos are a “hard asset” they aren’t really a commodity: no one “needs” a $20 million condo like they need oil or wheat. It’s really more like art, where the market is whimsical and changes when a particular collector or two die or lose interest.
Even so, it’s possible to do some basic reckoning. If you count the number of very rich people who are on the market for Manhattan apartments that cost more than $100 million, or even $10 million, you’ll soon realize they mostly already bought them. That means that hundreds of units which have come on to the market in the past couple of years, and that are due to come on to the market this year (5126, the most since 2007, of which 63% are luxury, defined here as $2400/square foot or more), are essentially going to just sit there, with no buyers in sight.
Just to give you some apples to apples comparisons, there were a total of 177 apartments sold for $10m or more in 2015, down 13.7% from prior year (205 in 2014). According to streeteasy.com, there are 520 units currently listed for sale over $10m.
How could this have happened? It’s a market failure, but according to Tom it’s not that hard to believe given the availability of cheap, overseas loans and expensive land prices. Everyone and their uncle wanted a piece of the luxury real estate market, which has been a gold mine for developers for years, to the point where they’ve been building like crazy without looking around them for indications to pause.
The dynamic of success has made land prices so high that it’s become unattractive to build affordable housing, and moreover the labor with which the luxury apartment building is built is non-union to save on costs. The developers argue that they simply cannot afford to pay their builders well.
There are already signs that the bubble is bursting. First, look at the number of recently sold new apartments that are already listed as for rent. There are 6700 of them, which is a high since 2005. Also, the count of new listings are up 9% for luxury apartments – while going down 3% for non-luxury housing – to 4,055 units, and the time on the market is also way up.
There’s another connection between oil and real estate markets. Namely, the people who buy the stuff. Lots of the luxury apartments are being bought – often through shell companies – by international elite who got rich in part through their investments in oil and other commodities. So the drop in the price of oil, although great for the average consumer who buys gas (and not great at all for the environment), means that there are fewer potential buyers looking to invest in apartment-shaped commodities. The recent problems in China aren’t helping either for the supply of billionaires.
So, what can we expect? First, a wave of developer defaults, like we recently saw in Harlem, which will slow down or stop the new construction. Second, the apartments that already exist will be rented or sold at below-luxury rates, cannibalizing the market at that level. At some point we might even see land prices going down far enough for developers to consider addressing the needs of the middle class, whatever that might mean in New York City. Fingers crossed.
Most importantly, the impending luxury housing crash should be an opportunity for community groups to demand a new conversation about what land and housing are supposed to be for, hopefully convincing city officials that they represent all New Yorkers, not just the super rich.