Matrix Blog

Manhattan

Combinations: Creating a Larger Manhattan Co-op or Condo

April 20, 2014 | 5:58 pm |

1q14MATRIXcombos

[click to expand]

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 dubbed the phenomenon “1 + 1 = 2.5” because there is a premium for larger contiguous space.

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

  • No shares are lost and in fact, many combinations  result in the acquisition of dormant common hallway space providing additional revenue in perpetuity to the corporation and a cash infusion from the purchase price.
  • Larger units sell for more on a ppsf basis (ie my formula above) potentially influencing higher values for other units.
  • A few less apartments in the mix is a non-issue (ie risk) in a building this size, unlike, say a 4 unit brownstone.
  • I’ve always thought it wise to keep the stock certificates separate to give the buyers and co-op more flexibility, but I see this done both ways (and admittedly don’t understand any legal nuances on this point.)

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.

Maintenance fees
- 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.

Common Area
- 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.

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With Mortgage Lending Historically Tight, Renters Suffer Just As Much

April 15, 2014 | 4:19 pm | nytlogo |

nytrentafford4-14

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.

  • Approximately 38% of homeowners can’t buy their next home so they won’t list their home for sale.
  • Buyers without credit issues won’t list their homes until they can find something to buy.
  • The lack of supply presses prices higher because those who have access to credit have little inventory to choose from, driving up prices.
  • Renters looking to buy can’t find a home they want to purchase so they are kept in the rental market.
  • Renters looking to buy don’t qualify for a mortgage so they stay in the rental market.

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.

ASIDE 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.

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[Video] Steve Witkoff on future of Helmsley Park Lane Hotel

April 15, 2014 | 3:03 pm | crainslogo |

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.

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[Manhattan Absorption] March 2014 – All But Top 1% Seeing Faster Pace

April 12, 2014 | 1:23 pm |

3-2014Manhattan [click to expand]

Thoughts
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:

March 2014 v 2013
3-201403-2013 [click images to expand]

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.

Definition
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]

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Brooklyn Rentals: Coolness doesn’t come free

April 11, 2014 | 10:07 am | Public |

4-2014qzmanhattan-brooklyn-rentspread [Source: Quartz]

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

.

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[Infographic] Looking at the Manhattan and Brooklyn Rental Markets 3-2014

April 10, 2014 | 12:00 pm | delogo | Infographics |

Entering the world of infographics, here are some highlights from our just released Elliman Report: Manhattan & Brooklyn Rentals 3-2014

ManhattanBrooklyn3-14INFOGRAPHIC


Heightened Observations on the ‘Billionaires Row’ Phenomenon

April 9, 2014 | 11:05 pm |

VF6STR1261CJ70.pd
[Source: Vanity Fair, click to expand]

Paul Goldberger, the Pulitzer Prize-winning architectural critic at the New Yorker and voice of design reason, penned a comprehensive overview of the “tall towers” building phenomenon in the latest issue of Vanity Fair. It’s an engrossing piece with stunning visuals as it correctly describes the global trend that is creating it.

I believe Michael Gross, the author of the new book on 15 Central Park West, Manhattan’s truly first super luxury condominium that was wildly successful and oblivious to the global economic crisis, coined the phrase “Billionaire’s Belt” which best describes this new Manhattan submarket and new housing classification. I was pushing “57th Street Corridor” as a label but there were no takers so I’ve modified Michael’s phrase to “Billionaires’ Row” as if all these buildings are fighting to be the best.

I like Goldberger’s description of the new design trend:

…the latest way of housing the rich, is an entirely new kind of tower, pencil-thin and super-tall—so tall, in fact, that one of the new buildings now rising in Manhattan, the 96-story concrete tower at the corner of 56th Street and Park Avenue, 432 Park Avenue, will be 150 feet higher than the Empire State Building when it is finished…

And that these residences provide…

a place not for its full-time residents but for the top 1 percent of the 1 percent to touch down in when the mood strikes.

One thing missing from this piece, and perhaps rightfully so is the discussion of why these projects are being built beyond the notion that the global wealthy are demanding them. In Manhattan, new construction developers have to target the super luxury market because land prices are at record highs – we just came out of a record setting building boom last decade – and few prime sites are available. With a high cost of land, inflated labor and materials costs, the math does’t work otherwise for more mainstream projects.

Our city’s obsession with chronicling lifestyles of the Wall Street rich and dysfunctional in the previous boom with prices of $3,500 to $4,000 per square foot seem downright quaint now. Now upwards of $10,000 per square foot has emerged as the price point for all participants in this market niche to aspire to.

New York City residents don’t seem quite sure what to think about these projects and their likely full time emptiness. One thing is for sure, the world’s elite are now a lot more visible and it’s a lot easier to point fingers…doesn’t One57 kind of look like it’s flipping the city off while it looks at the park?

one57topNYO
Source: New York Observer.

But this global pattern of the wealthy searching for hard assets to invest in doesn’t appear to be ending anytime soon.

And we’ll continue to appraise it.

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[Chart] Manhattan Inventory Reached Bottom After 4 Years of Decline

April 4, 2014 | 9:00 am | Charts |

Manhattan listing inventory seems to have found a bottom after 4 years of decline…

1q14manhattan-inventorysplit
[click to expand]

Manhattan Co-op/Condo Market Charts [Miller Samuel]

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[Chart] Manhattan Co-op/Condo/Townhouse Monthly Listing Inventory Remains Woefully Low

April 3, 2014 | 9:00 am | Charts |

No meaningful rise in inventory in the last 3 months overall supply appears to be leveling off per the recently released 1Q14 Manhattan sales report we authored for Douglas Elliman.

1q14manhattan-inventorybymonth
[click to expand]

Manhattan Co-op/Condo Market Charts [Miller Samuel]

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[Chart] Separating New Development From Existing Sales Shows Sharply Higher Trend

April 2, 2014 | 9:00 am | Charts |

After separating new development data from existing sales from our 1Q14 Manhattan sales report, the high end new development product that is beginning to close now and pushing overall prices to record levels.

1q14manhattan-ASPnew-existing
[click to expand]

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