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Over my career, I’ve have observed a higher frequency of combination apartments (ie co-ops or condos) when inventory is tight. A combination apartment is simply the connecting of 2 or more adjacent apartments (to either side, above or below). It may be easier and/or less expensive to buy the apartment next door to create a larger space (even if you have to overpay for it) than to brave the tough market searching for a larger place to live.
A few years ago I started to track this during the preparation of the Elliman Report: Manhattan Sales. I looked at the actual apartment numbers and counted those that suggested they were combined. I am clearly omitting apartment nomenclature that is not so clear ie 7AB is renamed 7A, so my results are conservative. The above chart reflects the recent trend of more combinations being sold but doesn’t necessarily equate to more being created, so new combinations would only be considered a subset of this data.
I’ve always thought co-op or condo building that allow combinations (nearly all do) as providing a potential way for shareholders to realize value upside, thereby enhancing the price structure of a building ie higher values rub off on other apartments in the same building.
Some top line ideas about combinations
Some other more granular thoughts
Some layouts don’t work
- Not all combo layouts make sense or provide value upside.
- Layouts tend to work better in pre-war and new developments than post-wars.
- 1980s condos often often the least combinable layouts – ie a side by side 1 bedrooms.
- Over the last decade, developers have kept this in mind during construction to give them more flexibility during the sales process.
Higher value per square foot
- Creating larger apartments creates value upside to existing space ie “1+1=2.5″
- Sometimes large combos can be oversized for the building and there is no ppsf premium for the larger space.
- When a an owner of a large unit buyers the adjacent unit, the mere fact that the same unit owner owns both usually results in a ppsf premium before renovations are made to connect.
- The upside in value for a smaller apartment, means that a buyer can overpay for the unit as an individual sale but the addition of the smaller unit to the large unit adds value to both units on a ppsf.
- The highest value is realized when the buyer can’t tell the layout was comprised of two different units. Simply creating a door between two apartments would realize the least upside.
That second kitchen
- The biggest “tell” on a combo is the existence of a second kitchen.
- They are often converted to a laundry room or bathroom, taking advantage of the utility connections.
- Buildings might object to the removal of the second kitchen because it may impact the building Certificate of Occupancy – I defer to lawyers on this point.
What do lenders think?
- Some banks are scared of combinations and others are not.
- In my experience banks require financing on the whole apartment – if they have a loan using collateral of one of the apartments, they will require that it be replaced with a new mortgage to cover both apartments.
- Banks often get confused on the value of a combo asking the appraiser to provide a value for each of the separate apartments before they are combined. The problem with that position is that the combination is usually worth more as one apartment (even before considering improvements) – in other words, the sum of the parts is less than the whole and the bank will incorrectly assume the collateral is inadequate.
- Many agents tell me it is assumed that maintenance charges are skewed higher for combos. I can’t prove this, all other things being equal. When it occurs, it’s probably for reasons other than simply combining the units.
- A combo in a small building, ie a 4-unit brownstone co-op, raises the risk to the remaining shareholders if the combo shareholder stops paying their maintenance charges. Risk exposure to a mid to large sized building should be nominal.
- Quite often hallways are purchased and incorporated into a combo layout for a better result.
- The co-op wins by getting a cash infusion for the purchase and income in perpetuity for the additional share allocation from the common area purchase.
Our 4 comprehensive reports for Douglas Elliman on the residential sales markets for Miami, Boca Raton, Fort Lauderdale and Palm Beach this week.
Click on each report to download!
With the Miami housing market well into the third year of its recovery, rising prices have begun to pull listing inventory into the market. Median sales price increased 16.1% to $244,000, the highest point reached since 2008. Average sales price jumped 19.1% to $461,374 over last year to a 5 year high and average price per square foot exceeded $305 per square foot for the first time in 6 years. Listing inventory bottomed in the second quarter of 2013, trending higher, up 15.2% to 12,664 from the prior year quarter. Along with the rise in supply, demand continued to rise. The number of sales rose 3.9% to 5,133 from the prior year quarter, to the highest first quarter total in the 8 years this metric has been tracked. The market share of distressed sales, once the majority of the market, continued to decline. Excluding short sales and foreclosures, market share rose to 69.4%, the highest level reached in the 4 years this metric has been tracked. The number of distressed listings and distressed With the Miami housing market well into the third year of its recovery, rising prices have begun to pull listing inventory into the market. Median sales price increased 16.1% to $244,000, the highest point reached since 2008. Average sales price jumped 19.1% to $461,374 over last year to a 5 year high and average price per square foot exceeded $305 per square foot for the first time in 6 years…
CONDO Median sales price surged 16.3% to $150,000 and average sales price declined 8.8% to $229,569 respectively from the prior year quarter. Listing discount, the percent difference between the list price at time of contract and the sales price, rose to 7% from 3.8% in the prior year quarter, but fell from 7.7% in the prior quarter…
SINGLE FAMILY Median sales price jumped 19.4% to $370,000 and average sales price rose 5.3% to $528,616 respectively from the prior year quarter. Listing discount edged up to 6.9% from 6.1% in the prior year quarter, as sellers were slightly more optimistic when determining their listing price…
CONDO Median sales price jumped 19.8% to $255,000 from the same quarter last year, the highest level reached since 2008. Average sales price followed the same pattern, rising 23.9% to $379,391 over the same period also reaching a 5 year high.
SINGLE FAMILY The average time to market a property was 91 days, essentially unchanged from 90 days in the prior year quarter. Listing discount, the percentage difference between the list price at time of contract and the sales price, jumped to 8.1% from 4.5% as sellers pressed list prices higher than market trends support.
CONDO There were 68 sales during the quarter, 25.9% more than the same period last year. Listing inventory fell 16.9% to 360 over the same period. As a result the absorption rate, the number of months to sell all inventory at the current pace of sales, fell 34% to 15.9 months from the same period last year. The faster market pace pushed down days on market, the number of days from the last price change to the contract date, by 10 days to an average of 182 days.
SINGLE FAMILY Median sales price increased 10.7% to $3,100,000 from the prior year quarter to the highest first quarter reached since 2009. Average sales price jumped 56.7% to $6,450,093 over the same period. The average square footage of a sale was 5,261, up 20.9% from the prior year quarter.
My friend Nathan Pyle has penned a book: NYC Basic Tips and Etiquette that should be required reading, well at least required viewing for:
You get what I mean. This book is clearly for everyone.
He’s come a long way from making selfie-videos of his basketball dunking prowess. I’ve long been a fan of his art. Nathan combines nice Midwestern sensibilities (he’s from Ohio) with street smarts, artistic talent and a dab of humor.
In fact Nathan’s only shortcoming is his siding with the “GIF” (Graphics Interchange Format) pronunciation camp while I am squarely in the “Sounds like “Jif” as in the peanut butter AND confirmed by the inventor of the “GIF” camp who said, and I quote:
“It’s pronounced JIF, not GIF.”
Here are a few samples, I plan to revisit his artwork over the next few weeks. The book even provides instructions on where to eat pizza on a busy sidewalk!!! C’mon people, the value add for that alone is worth well above the very modest price! Here are a few samples…
There was a good article in the New York Times yesterday: In Many Cities, Rent Is Rising Out of Reach of Middle Class
Many have complained about the Federal Government’s (and our society’s) overselling of homeownership over the past decade and how the decline in homeownership will eventually lead to an emphasis on rentals in the US. Of course, like many housing market ideas, good and bad, they tend to be presented in a vacuum, without real context.
I believe much of this discourse is in reaction to tight credit combined with a weak economy rather than some sort of fundamental cultural and economic shift. During the bubble we got the opposite discourse – that there was a fundamental cultural and economic shift towards homeownership.
Currently there is a much smaller subset of Americans that have access to financing. According to the Federal Reserve Senior Loan Officer Survey, lending has actually tightened in 2014 over 2013 (related to QM). Many homeowners are unable to sell because they can no longer buy and many renters no longer qualify for financing so the idea of of homeownership as a goal fades.
Case in point has been the recent public discourse on the issue of home affordability, whether it be sales or rentals. Zillow presented an analysis for the New York Times that illustrates how much rents have risen in the past 13 years (since 2000) in cities across the US.
Here’s the scenario:
The economy is weak – we are seeing tepid growth in employment, stagnant incomes and historically tight residential mortgage lending.
The organic flow out of the rental market into the sales market is slowed and a log jam is created of too many renters and not enough buyers.
Rising rents against stagnant incomes creates an affordability crisis. The sales and rental markets are connected. They are not mutually exclusive.
Rising rents are a product of tight credit, which is a residual byproduct of the financial crisis. Fix the economy and credit eases, then lending normalizes (no, not circa ’06) and the pressure on rental housing is eased.
I’m not entirely confident with the reliability of the historical rental data being presented to the New York Times by Zillow – but I still agree that affordability is being pressured:
- Zillow was launched circa 2006 and rents are not public record so the early data has to be super thin.
- The comparison was made between a first quarter (low) and a third quarter (high) in a highly seasonal market.
- I am not sure if “New York” means Manhattan or New York City. If it is Manhattan, then our median rent figure in 1Q 2000 was $2,600 in nominal terms, and $4,276 in real terms. In nominal (unadjusted for inflation) terms, rents have risen 23.1% through 3Q 2013 while real median rent has fallen 27.3%. The Zillow median rent as share of median income nearly doubled, rising from 23.7% to 39.5%. Either incomes have collapsed in NYC or the 2000 rental figure being punched into their model is flawed, ie way low, no?
Other inights on any of this would be appreciated.
Daniel Geiger of Crains New York Business interviews well know developer Steve Witkoff on his plans for the Park Lane Hotel, formerly owned by Leona and Harry Helmsley. Steve talks about shadow effect and how he plans to let Vornado discover how deep the top of the market is via their nearby development site on Central Park South.
There has been a lot of discussion about “Billionaires Row” which these developments would be part of.
We released 3 reports for Douglas Elliman on the sales markets for Brooklyn, Queens and Westchester/Putnam this week. Click on the reports to download!
BROOKLYN The Brooklyn housing market was characterized by more modest price growth and chronic lack of inventory, holding back sales growth. Median sales price expanded 1% to $520,000 from the same period last year and the highest first quarter result in 6 years. Average sales price grew 7.3% to $681,182 over the same period. Co-ops posted the largest year-over-year gain in median sales price, rising 12.2% to $340,000 but lost 2.1% of the market share. Condos remained essentially unchanged over the year with a $625,000 median sales price and market share edged 1.6% higher. The 1-3 family median sales price increased 5.1% to $588,733 and market share increased a nominal 0.5%…
QUEENS The first quarter Queens housing market was a period of rising prices after an extended period of stability, declining inventory, and rising sales. The bottom of the multi-year decline of listing inventory may have been reached in the fourth quarter of 2013. Although the first quarter listing inventory increased 7% from the prior quarter bottom to 5,617, it was the second lowest level recorded in this report series since 2005 and 13.5% below prior year levels. The number of sales jumped 32.8% to 3,156 from the prior year quarter, the highest first quarter total in 6 years. The combination of declining inventory and rising sales led to a faster market pace. The absorption rate, the number of months to sell all listing inventory at the current pace of sales, fell to 5.3 months, less than half the 11.2 month average over the past 5 years…
WESTCHESTER The Westchester housing market saw the most first quarter sales in 7 years, the highest median sales price in 6 years and initial signs that the trend of declining inventory may be ending. There were 1,525 sales in the first quarter, up 13.1% from the prior year quarter and the most first quarter sales since the same period 7 years ago. Listing inventory fell 3.7% to 5,378 from the same period last year and for the 8th consecutive quarter. With the rise in the number of sales and the decline in listing inventory, the pace of the market was faster. The monthly absorption rate, defined as the number of months to sell all inventory at the current pace of sales, fell by 1.8 months to 10.6 months from the prior year quarter…
PUTNAM After bottoming out two years ago, housing prices have generally trended higher as the number of sales expanded and inventory contracted. All price indicators posted gains from prior year levels. Median sales price increased 12.7% to $302,500 while average sales price rose 15.9% to $379,217 over the same period…
All price segments of the market are generally showing a faster market pace than the same month in the prior year. The top 1% ($10M+) had slower absorption rates for co-ops and condos, but not by much. Inventory began to “bottom” in recent quarters so we may not see much more compression in the market pace in the coming months.
Side by side Manhattan regional comparison:
I started this analysis in August 2009 so I am able to show side-by side year-over-year comparisons. The blue line showing the 10-year quarterly average travels up and down because of the change in scale caused by some of the significant volatility seen at the upper end of the market. The pink line represents the overall average rate of the most recently completed month for that market area.
Absorption defined for the purposes of this chart is: Number of months to sell all listing inventory at the annual pace of sales activity. (The definition of absorption in our market report series reflects the quarterly pace – nearly the same)
Manhattan Market Absorption Charts [Miller Samuel]
Rob Ferdman over at Quartz writes a great breakdown of the narrowing rental spread between Manhattan and Brooklyn using the data I crunch for The Elliman Report: Manhattan & Brooklyn Rentals. Here’s my version of the chart.
After I designated last week’s Bloomberg story headline “Brooklyn’s Hipster Economy Challenges Manhattan Supremacy” as my favorite new phrase, specifically:
Brooklyn’s Hipster Economy
Quartz has given me a new favorite phrase (see under original chart):
Coolness doesn’t come free