brooklyn townhouse market

Coincidentally this was published a day after I started this thread: http://www.brownstoner.com/real-estate-market/brooklyn-real-estate-townhouse-sales-2016/

One thing which has happened historically over many cycles is that the longer the boom phase becomes, the smaller discount you see for non-prime locations. For example in the late 1980's you saw East Village apartments going for only a small discount over Prime Village (and the East Village was a much more "iffy" area back then). OTOH when the market corrected you saw a much steeper drop. Whichever locations had the steepest recent run-ups will probably suffer the worst dips in the next market down-turn.

As 30 years said, fringe submarkets tend to drop the furthest the fastest during down cycles. It is kind of the residential equivalent to the flight to quality phenomenon you see in commercial markets. As prices go down across all markets during a down cycle, a more desirable neighborhood that may have once been out of reach for a buyer may now be more accessible – your Bed Stuy buyer may now be able to afford Clinton Hill; your Crown Heights buyer may be able to afford Prospect Heights, Morningside Heights/Upper West Side, etc. Accordingly, demand for those fringe neighborhoods falls first, but remains relatively stable in the more established/desirable neighborhoods. If your primary goal is equity protection during a down cycle, I agree with your suggestion that it is smarter to purchase on the UWS/UES than a Bed Stuy townhouse, as those markets are historically more stable and will no doubt perform significantly better. But if your targeted holding period is long-term – at least to the extent that you will not need to sell during the next down cycle (whenever that may come) – where you buy matters less from an equity protection perspective, and you can focus more on where you actually want to live.

Dan Gotlieb
Digs Realty Group
https://digsrealtynyc.com/

If you're weighing a Brooklyn property vs. a Manhattan property, what are the comparative monthlies like? I think at the same ppsf, Brooklyn is all-in "cheaper" than Manhattan because a) you're not paying for labor, at least not where you can see it, when you buy a townhouse and b) IMHO Brooklyn is crazily undertaxed compared to Manhattan -- though, as the long rise in Brooklyn values continues, that factor should change.

That said, I don't think that the market is going to run out of the buyers driving those two markets anytime soon. It feels like we're due for a correction simply because there's been an eight-year bull run, and I think we're going to get a Trump recession, but if your time horizon is ten years I agree with Dan, live where you want.

Thank you for all the solid advice. It's great to have a place to talk through this massive decision.

I'm not focused on equity protection percentage given my expected holding period. The question for me is, is the value proposition for UWS co-ops greater than the value proposition for Blkn houses? While carrying costs in UWS are higher, you do get services for those costs. Price per square foot seems to be approaching near parity for some properties and co-ops do not include the dead space of houses. Fit & finish are not consistent across geographies so doesn't warrant inclusion.

I'm fairly ambivalent about location as long as it is close to a park and has great schools which makes UWS & parts of Blkn comparable in my view. Is a smart buyer, who cannot wait for a dip, getting more bang for his / her buck in UWS?

Nothing like owning your own brownstone in NYC both emotionally and financially. I am surprised to hear that you are having such a hard time in that price range. We just closed on a nice home in Windsor Terrace for under $2M. I agree that Bedstuy is still iffy, however I think that Fort Greene, Clinton Hill, Crown Heights, Prospect Heights and Windsor Terrace are here to stay; not fringe outliers that will get crushed in the next down cycle. Ironically many Brooklyn nabes fared better after the 2008 crisis than is Manhattan counter part. I had many Brooklyn buyers at the time that were frustrated pricing didn't crater so they could pick up their dream home on the cheap.

Keith Burkhardt
The Burkhardt Group
www.theburkhardtgroup.com

I think those neighborhood didn't crater hard because they had not run up nearly as much, so there wasn't as low a bar to settle back into. OTOH, I think that a lot of them HAVE run up since that time so there is further to fall now.

As far as the Brooklyn townhouse being cheaper to operate, you really have to watch out for the capital maintenance projects:. In a Coop you're going to buy into a place with a reserve fund of some sort to handle those, in a private home there is none. And when the roof/boiler/facade, etc. need to be redone, they are all yours and the costs can be astronomical (and you will never see them listed in a setup for a townhouse). In a townhouse you could easily spend $2000,000 over a ten year period on these projects, but no one ever includes that extra $20,000 a year towards what it costs to live in your own brownstone.

Biggest benefit is single family brownstones is low taxes which can only increase by 20 percent in any five years. This means that as Manhattan taxes have nearly doubled in last 10 years from a moderate base, bk townhouses have only gone up 30-40 percent from a very low base. Maintenance is cheaper as you are not paying a super, doorman and managing agent. That still begs a question why the boom in the last 5 years. I think that has to do with the gentrification in these areas.

I lived in a family owned townhouse in Chelsea for many years. Definitely lots of ongoing projects and if you have an original home (plumbing, electric) a lot of hunting to source these antique fittings etc. The good news is it's really not that much different than owning a large house in the burbs. Basic roof and mechanicals etc. as far as big potential repairs go.

Keith Burkhardt
TBG

There definitely are lifestyle questions involved here. I live on the UWS in an apartment. I miss having a house (which in my case was a beach house, not a city townhouse) because I miss having a deck and a grill.

But OTOH if I never have to talk to another general landscaper/tree doctor guy/sidewalk guy/roofer/sewer specialist plumber/heating specialist plumber I'd probably be okay with that too.

300_mercer,
Not following your logic unless you mean 1-3 family vs Coop/Condo as opposed to Brooklyn vs Manhattan. Class I all have the 20% cap whether in Brooklyn or Manhattan. Many years ago the Coop/Condo Lobby made a big mistake asking that Coops/Condos be in a separate tax class and assessed like comparable rental properties. It worked at the time because rental buildings were largely populated by Rent Stabilized or Controlled tenants so using the income/expense method were valued fairly low. But once vacancy decontrol kicked in the rents and thus the values of those buildings has skyrocketed, and the valuations on comparable Coop/Condo buildings followed.

As far as gentrification being behind the boom in prices in Brooklyn brownstones (especially in areas which were previously seen as "bad neighborhoods") I don't see any other reasonable explanation, but I think it also puts them "on the bubble" in the event of a market downturn.

If you want a good example of the effect of the 20% cap on townhouses in Manhattan, take a look at 145 West 11th St (New Construction) with RET of $179K per year vs. 14 East 11th St (old construction) with RET of $92K per year, even thought they are comparable in terms of space, etc.

>but if your time horizon is ten years I agree with Dan, live where you want.

It is absolutely horrible advice to tell someone they can buy stupid because they have a long time frame. Long time frames should only be considered as the offset to high transaction costs in real estate.

30, I am indeed comparing coops condos in Manhattan to townhouses in bk as in 2-4mm range you can not get a townhouse in Manhattan. Sorry for not being clearer.

Oh Fieldschester, do weigh in. Which is stupid, the UES /UWS co-op? Or the Brooklyn Brownstone?

It's not about location. It's about price.

Timing is always more important than getting a "good deal". If you stole some seller blind in 1987, you were still screwed in 1992. If you over payed by 20% in 2007, you are still golden now.

30 years, your point is well taken. I bought my first apt in 1986 and sold for a slight loss ten years later.

However, notwithstanding the post financial crisis run-up in 2009 and later, I have a creeping sense of deja vu as some of the places I look at now have asking prices that are not meaningfully higher than where they traded at in the 2007 - 2009 period.

Admittedly, this is very anecdotal on my part, and perhaps more confirmation bias than anything else, as my personal view is that we are in the early parts of a softening of the Manhattan RE market. I am hard pressed to see how many buyers of $2mm plus apartments there are relative to the current inventory, and as new construction and expiring tax abatements from the last boom start impacting the market in the next couple of years, I see more downside risk (esp as I think the NYC market is affected by the stock market, and we've had a nice long bull market and may be due for a correction) to jumping in now than taking a wait and see approach.

Well, if we are still talking about Brooklyn Houses I think you would be hard pressed to find a single one that has not had a very significant price run-up since 2007.

No, not Brooklyn. Lived there for ten years but before it became cool to live in Brooklyn.

I was referring to Manhattan, and I should have been clearer I was being off-topic.

I would not buy a co-op as opposed to a Brooklyn townhouse. As far as downturns go, the worst one for NYC happened in 1991. The co-op that I bought in 1987 in Lincoln Towers for $349K was worth about $160K in 1991. The co-op board refused to accommodate anyone as far as renting their apartments out, and I am certain most co-ops had the same policy. That downturn was far worse for NYC than the financial crisis of 2008. Prices did not start to turn around until 2000 and very slowly. I would see pictures in the NY Post of people who were evicted from their Sutton Place co-ops and were living in their cars. Sutton Place apartments went down a lot and that was the Gold Coast. Even if you buy a condo, I believe condos buildings are subject to going under far easier than co-ops. I would go for the brownstone in Brooklyn, but buy one with original details, and I do believe long term it will appreciate considerably.

P.S. In the 1990's the Nasdaq market was increasing dramatically. Alan Greenspan spoke of "irrational exuberance" and after the Nasdaq market crashed in late 1999 real estate prices started to turn around.

Lincoln Towers was one of the late conversions of MJ Raynes who had acquired the Bing & Bing and MacArther portfolios in some of the largest real estate transactions NYC had ever seen. A lot of those late conversions suffered worse in the downturn which followed the 1987 market crash and Lincoln Towers was no different. Same for just about all of the Coops in Tudor City. But you can probably draw a parallel with the brownstones in Brooklyn where prices has run up enormously in just the past few years in terms of a "last one in, first one out" modality, where in most real Estate downturns the properties which crash the hardest are the latest one's to see biggest price spikes.

When Buildings converted to cooperative ownership in the eighties, there were very good buys to be had. There was a big spread between the insider and outsider price and since there were a large amount of units in each of the buildings in Lincoln Towers, buyers got great deals from insiders. I would have to disagree with your premise 30yrs. The real estate market prior to the 1987 crash was on fire. The apartment I bought was a gut renovated flexible 3 with direct river views. One can't compare Tudor City to Lincoln Towers, not that I'm saying you are, but the location of Lincoln Towers is far superior.

30y,
I think you are generally correct about "last to rise, first to fall". However, one needs to differentiate between areas which have gotten gentrified (significant reduction in crime, good restaurants, coffee shops and gyms are the indicators I use) vs others.

streetsmart, How do you factor in increase desirability of NYC vs suburbs? It is easy to look at the history and say that it will repeat itself. What if the real estate has another 25% to run up if there is no recession for another 5 years and will go down 20% from that level? I am not expressing a view on the timing of the next recession, just asking how do you predict when the next recession or big decline in NYC real estate will take place?

I wasn't comparing Lincoln Towers to Tudor City in terms of location or buildings, but in terms of both being in the same situation - late conversion and sponsors who were bankrupt - which is what caused their declines to be steeper than the overall market. One of the reasons Lincoln Towers Board was strict on subletting is that they already had an owner occupancy issue ( which was a big issue with lenders at the time) and having large numbers of shareholders sublet their units was perceived as causing a situation where almost no one would be able to sell even if they cut their price to meet the market.

Gentrification will be a stop which will safety net prices from falling to what they were before prices skyrocketed, but many of the areas in Brooklyn which have seen enormous gains still are not really good neighborhoods. So while prices won't go back to what they once were, there are locations where prices could fall 35% and still be double what they were before things took off a decade ago.

I'm with you .. parts of BedStuy and now further east you could buy entire buildings for $300k several years ago. Now it's minimum $1 million for a building you still have to renovate. Then you have to keep costs crazy low and renovate for $120k then try to flip it for $1.2 to $1.5mm.

And yes, a lot of these neighborhoods aren't exactly gentrified yet. Long way to go. Predict there will be some ways on the way down.

As a smart seller I'd be unloading like crazy. Keep transaction costs low (Hauseit flat fee listing etc.) and go to cash or re-deploy into the supposed 3BR glut in Tribeca. On buy side same thing, get a rebate of the buyer commission via Hauseit etc. and cover your closing costs discreetly. That's what I would do to rebalance.