From A Perfect Storm To Hitting Its Stride: What 2022’s Buyers Can Expect In New York City’s Real Estate Market

This past year was remarkable for its deal volume, but below the surface, several trends emerged which may be instructional heading into the new year. From a growing divide of luxury coops and condos, to townhouses finding a bid, to New York City investment metrics, the prodigious deal volume in 2021 backlit these trends with data, helping them appear more visible than they otherwise may have been.

Coop vs. Condos: Prime Location Versus Rich Amenities 

Coops, where apartment dwellers own shares in the underlying corporation which owns the building, make up approximately 75% of the Manhattan apartment sales market. The remaining portion is filled in by condominiums, where the unit itself is directly owned. Because condos are real property, and not shares, they are easier to buy and sell, and the overwhelming majority of newly-built apartment buildings are set up as condos from the beginning. 

As more developers build condos, the market share of coops is slowly, but steadily, shrinking. Moreover, because most newly built condos in Manhattan sell for luxury prices, the share of condos in the luxury market is growing faster than average. In fact, with the rise in the number and dollar value of luxury transactions in 2021, the ratio of resale condo sales to coop sales over $4 million rose to the highest since 2008. Additionally, in most new condo buildings, attractions like pools, sports courts, and screening rooms are built from the ground up and are seamlessly integrated into the fabric of the building. These are features most coops cannot match, as they simply do not have the physical capacity to create new amenities, or even expand on existing ones. 

Still, coops do have one strategic advantage: prime locations. 

For buyers interested in addresses along Central Park, Riverside Drive, or Park Avenue, the vast majority of choices are coops. However, the history of coops themselves suggests that, over time, amenities may trump location. Case in point, the now-famous Upper West Side coop building The Dakota — located on Central Park West and West 72nd Street, and opened in 1884 — was literally considered in “the Dakotas” because it was so far from the then-prime areas in Manhattan. However, like High Line condos today, The Dakota became a fashionable destination, and the neighborhood, despite its northerly location, grew into today’s desirable Upper West Side. 

With that in mind, and with developers almost exclusively building condos these days, the ratio of condos to cooperative units, especially at luxury price points, will continue to rise. Also, because most coops simply cannot compete with the amenities offered by newer condo buildings, the price differential will continue to rise in a showdown of must-have amenities versus must-be locations. Coop owners and potential buyers would do well to understand how this dynamic may affect their decisions, especially if they are planning on holding on to their properties for the long term.


Townhouse Sales Likely To Continue To Rise In 2022 

As noted, the continuous construction of condos is taking aim at the current market dominance by coops. But luxury condos also have townhouses in their crosshairs. 

Roughly speaking, until the early 2000s, buyers seeking square footage above the normal limits were forced to shop for townhouses, where five or six connected floors could offer over 5,000 square feet of living space. Savvy condo developers noticed this and started building ever-larger, full-floor units, offering just as much space. Moreover, these super-sized condos came with amenities that would be difficult to shoehorn into the footprint of a townhouse, such as swimming pools, spas, and garage parking. 

Indeed, as the chart below shows, the number of townhouse sales appears to be on a downtrend from mid-2012 to early 2020 (the spike in 2019 represented a flurry of buying activity before a higher New York State ‘mansion tax’ went into effect). 

However, the COVID-19 pandemic appears to have ushered in a new golden age for townhouses. Buyers perhaps sought not just more space, but privacy as well, in a bid to minimize their personal city living density. Of note, the monthly sales volume jumped from a 2008 to 2018 average of 27 to 40, an increase of 48%. Prices, so far, have remained below peak 2015-level highs, but the last few months have seen far lower variance, suggesting a base may have formed with new highs forthcoming. Underscoring the luxury nature of townhouses, three of 2021’s top ten most expensive closed sales in Manhattan were for townhouses. 

Townhouse owners and potential buyers should understand that townhouse sales will likely continue to rise in the new year, and prices, especially in downtown neighborhoods, could break out to the upside as the scarce nature of townhouses becomes more of a sought-after premium, especially in in-demand downtown neighborhoods such as Greenwich Village, Chelsea, Soho, and Tribeca.

The Spread Between Renovated and Unrenovated Units to Narrow

In a normal market, there is always room for a deal on a fixer-upper, and the math is straightforward: Subtract the cost of a renovation from the move-in ready price. Thus, the discounted price of unrenovated units typically follows the market as it rises. 

In the new post-pandemic market, that may no longer be the case. As market activity increased, more and more buyers ignored units in need of work and opted for units where all they needed was a toothbrush. In 2021, the normally correlated spread between renovated and unrenovated units widened as buyers reassessed the costs and benefits of tackling large, complex renovations. In a perfect storm for so-called estate condition units, global supply chain issues raised prices for materials, building-level logistical issues crimped schedules, labor shortages extended timelines, all while COVID variants lurked in the background. 

As the market hit its stride in early 2021, buyers voted with their wallets that less work is more. As 2022 rolls around, however, the spread between renovated and unrenovated units could finally narrow. The growing imbalance between supply and demand may prompt reluctant buyers to search for value in fixer-uppers, which is reflected in the current spread. For buyers interested in finding a deal, due diligence at every level will be key to understanding what sort of costs and timeline to expect. For sellers of unrenovated units, understanding price versus competition in a hyper-local market will be key.

The Return of New York City Properties as a Store of Value?

From an investment perspective, despite a barnstorming year for volume, price action in Manhattan and Brooklyn condos has lagged the S&P 500 for the last several years. The general uptrend in both Manhattan and Brooklyn appears to have broken in 2017, with both markets essentially going sideways from that point. 

As 2021 draws to a close, it is notable that the frothy activity observed in the New York City real estate market since the post-lockdown reopening has yet to translate into anything approaching the gains seen on the broader equity index. That being said, over the long term, New York City condos have certainly proved to be a store of value, especially for some non-US-based investors who also benefited from a weaker dollar. 

As 2022 comes into focus, condos could finally see meaningful appreciation as the most recent wave of purchases, with a large luxury component, hit the tape. New York City condo investors should consider what effect proposed interest rate hikes in 2022 might have on putting an upper bound on prices, especially in the more sensitive luxury and new development sectors.

Is New York City a Good Bet for Foreign Buyers in 2022?

From a foreign purchaser perspective, a look at Manhattan and Brooklyn condos through the lens of major currencies shows that while returns for USD-based owners were generally lackluster over the last decade or so, a general weakening of the USD boosted returns for non-U.S. based owners, particularly those denominated in British pounds, Canadian dollars, and Euros. 

However, recent strength in the U.S. dollar has drawn down some of those gains. As 2022 dawns, a strengthening dollar on the back of interest rate hikes in 2022 could dissuade new foreign buyers, reduce paper gains for previous investors, and induce foreign owners to liquidate their current holdings, suggesting that 2022 could be the year of the foreign seller. 

Foreign owners in New York City condos should understand that while Manhattan and Brooklyn condos have certainly proved to be a store of wealth over the years, there may be headwinds going forward. For current foreign owners, a rising dollar could not only cut into unrealized gains, but make monthly carrying costs significantly higher. Potential foreign buyers should weigh currency risks and possibly higher carrying costs against their anticipated long-term price appreciation.

New Dynamics to Take Hold in 2022 

The forces that shaped 2021 will undoubtedly remain in play well into 2022. And while the new year may not see the same frenzied intensity as the old year, today’s buyers and sellers will set the stage for tomorrow’s buyers and sellers in a feedback loop. And because activity builds on activity, knowing what trends are in play today helps both buyers and sellers understand what trends will likely be in play tomorrow. 

With that in mind, the broad upswell of activity, which began in late 2020 and exploded in 2021, jumpstarted several trends. The future buyers and sellers of 2022 would do well to understand the changes 2021 brought to the market and how their property fits into the new dynamics.

The Tycoon Herald