Residential marketing expert Adrienne Albert, founder and CEO of The Marketing Directors, explained everything builders need to know about where, when, why and what to build in Manhattan in her presentation at ABO’s November Luncheon.
Albert won members’ attention right off the bat, proclaiming, “It seems as if the market is coming back.” She based her findings on the latest research compiled by her firm, which has helped sell or lease properties worth $29 billion over the last 30 years.
Through September of 2011, Albert reported, there were 3,600 condominium closings at an average of $1,400 a square foot across Manhattan, including 1,400 studios averaging about $1,050 per square foot; 1,400 one-bedrooms at $1,100 a square foot; and 1,100 two-bedrooms averaging $1,350 per square foot.
While just 550 three, four and five-bedroom units closed, prices were higher, ranging from $1,600 per square foot for the three-beds to $1,820 for the fours. Five-bedroom units, with only 42 sold, went for almost $2,000 a square foot.
“Should we all go out and build larger homes?” posed Albert. To address the question, she presented a snapshot of current inventory.
One-bedroom units are the predominant apartment type on the market today, representing 35 percent of homes for sale. “A lot of you remember the day when the smaller homes had the higher price per square foot,” said Albert. “That is not the case today. We are playing with a whole new set of rules.”
Studios are only 12 percent of the homes for sale, at $1,100 per square foot. “This price should rise,” said Albert. Two-bedrooms have a one-third share, listed at an average $1,236 per square foot, and three-beds account for 16 percent of homes for sale, at $1,555 a square foot. Four-bedroom units, with 6 percent of the listings, average over $2,000 a square foot.
“The larger homes are really looking attractive,” noted Albert — “large dollars achieved, large dollars listed, very little product listed.” But she cautioned builders to consider the number of new units slated for construction in the next couple of years before jumping into big apartments.
Some 2,000 condo apartments larger than 1,600 square feet are in development in 27 buildings. They can expect to command more than $2,000 a square foot, said Albert. Handsome prices, if they can find buyers.
“In order to purchase one of these large expensive homes,” she said, “assuming a purchase price of $4 million, you need to earn approximately $1 million a year if you intend to mortgage. And that assumes that you can get a mortgage.”
As for the “typically-sized” homes, there are about 34 buildings with less than 2,500 apartments smaller than 1,600 square feet in the works set to be priced from $1,000 to $1,500 per square foot, depending upon the neighborhood. “To own one of these homes at today’s low interest rates, the buyers needs to earn “only” $450,000 a year, assuming an average price of $1.7 million. “And this assumes the buyer has enough cash and good enough credit to obtain a mortgage,” adds Albert.
Given that both larger and smaller homes represent about the same amount of new product coming into the marketplace, “should you build large and go for the big bucks,” posed Albert — “differentiating your offering enough to be one of the lucky buildings that attract these very few wealthy homebuyers?”
Or, “should you go smaller and cheaper and spread the risk, appealing to a broader market, but settle for a lesser yield?” She left it to the temperament and goals of the investors to decide.
Whatever the apartment mix, where should we build?
Downtown enjoys the most activity in the city, reported Albert, with 29 percent of homes sold in 2011, averaging $1,280 per square foot over 134 buildings — “the greatest volume but the lowest prices.”
Midtown West sold 23 percent of homes at an average of about $1,450 per square foot — “good volume,” noted Albert, “good average dollars. Definitely an area to consider.” Midtown East garnered 16 percent of the market at $1,300 per square foot; the Upper West Side had 17 percent of the closings at $1,450 per square foot. The Upper East Side, “a sleeper for the past few years,” observed Albert, earned a 15 percent market share with the highest prices — about $1,480 a square foot.
As for homes listed for sale today, Downtown represents 40 percent of the market, by far the biggest piece of the pie in Manhattan. Plus, added Albert, “There is a lot of new product coming to downtown, so the absorption is going to be the longest.”
“Maybe we don’t want to build downtown for the next year or two,” she advised.
Midtown East, while valued at less per square foot, has the least amount of listings — just seven month’s inventory, with a record of high absorption. “I would definitely flag that as something to look at,” said Albert.
The Upper East Side has nine months available inventory. The Upper West Side has eight months of inventory with a very high absorption rate.
Regarding new development, Midtown East and Midtown West have the least amount of for-sale product in the pipeline, making them potentially winning areas for investment. And the Upper West Side, said Albert, “where there is very little product coming online for sale in a desirable, established neighborhood,” could be the safest bet for new product.
Across all of Manhattan, noted Albert, “at the 2011 absorption rate, there is six to 10 months of inventory on the market, depending on neighborhood, and a very limited supply of new homes coming to the market in the next few years. As the existing inventory is purchased, supply diminishes.”
“If demand remains constant, prices have to go up,” concluded Albert. “Big time.”
Looking at the challenges builders face to today, Albert said the biggest is probably the difficulty of obtaining construction financing. Also, the banks remain stingy with loans for buyers of apartments, requiring that the project they are in have no more than 20 percent of its space used for commercial purposes, no more than 10 percent ofthe homes owned by an individual owner and at least 51 percent of the homes be owner-occupied.
Banks require reserve funds for capital expenses and deferred maintenance in a new condominium be equal to 10 percent of the operating budget. And the project cannot include a hotel.
To developers with the fortitude to go ahead in this climate, Albert recommend they do a reserve study, which, while expensive, can help them get an exception to the 10 percent reserve fund requirement. Builders should look into “PERS (Project Eligibility Review Service),” she added, a program that eases eligibility requirements for qualifying buildings for obtaining Fannie Mae approval. Plus they should work with multiple banks, mortgage lenders, brokers and portfolio lenders — “each can bring
different programs to the table for your purchasers. And have qualified, trained salespeople that know how to deal with financing.”
If all else fails, she said, “look into the possibility of providing sponsor financing,” adding, “I know that’s just what you do not want to hear.”
Better yet, build a rental.
“Rents are going up,” said Albert. In the first to third quarters of 2011 rents for two-bedrooms were up nine percent, seven percent for one-bedrooms and six percent for studios. One-bedrooms enjoyed the greatest level of activity and are likely to continue that way. Building one-bedroom rentals right now is a good way to go — “a no-brainer,” she said.
The most promising areas in which to build rentals are the Upper East Side, with little to no new construction planned, and the Upper West Side, a strong market with little in the pipeline.
Albert forecasts buildings coming up in the next couple of years will rent at $75 a square foot, with studios averaging about $3,500 a month, one-bedrooms $4,700 a month and two-beds around $6,600. Formidable numbers.
“Tenants for studios would need to earn $140,000 per year to qualify at the rate of 40 times earnings to rent,” said Albert. One-bedroom tenants would need to earn $190,000 a year. Two-bedrooms would require $255,000 a year to qualify.
Still, she advised, “we think the long-term safety bet — very safe — is to build rental. On the other hand, she adds, “from a yield standpoint, there is more opportunity on the horizon in condominiums — if you can get the job financed.”
“Whatever you choose to build,” advised Albert — “rental or condo — Uptown, Downtown, all around the town — there is money to be made in this market.” CLICK TO VIEW ORIGINAL ARTICLE >>>