What is the current state of the investor market?

I think Manhattan condo cap rates have always been low. So currently say 1 percent below 10y. Wonder what it was in 2010 when most people would agree that condos were fair value if not good value. I picked 2010 instead of 2009 as the market was severely dislocated in 2009.

I don't know about 2010 but I looked at these returns no more than 2-3 years ago and it seemed they were closer to 3-3.5%. I get the obvious math - prices increased while rents decreased - but if there are many people buying purely for investment purposes, what are they thinking? Was 3-3.5% too high or is 2-2.5% too low? Where should the market be? Will this trend drive more buyers - especially foreign buyers - further away from the market?

https://streeteasy.com/blog/condo-investment-returns-nyc/

https://streeteasy.com/blog/condo-investment-returns-nyc/

Thanks 300. Interesting article that seems to substantiate where the market was 1-2 years ago. But it looks like returns are even lower today. At a 2% gross return, net cash on cash returns after financing costs, vacancy/collection loss, repairs and maintenance, and income taxes seem clearly to be at or below 0%.

Such ridiculously low returns can only be economically justified by expected capital appreciation but how can one justify such expected price appreciation in the current market which is clearly less optimistic than just a few years ago?

Something appears to be driving these low near 0% expected returns and its not capital appreciation. Could it be capital preservation driven by foreign investors just looking to park money in the US with no expectations of a reasonable return?

People want to live where jobs are. It is not an investor driven market ex ultra high end at $3k plus sq ft which have continued to soften in price and still have a lot of room to go. However, try to get something nicely finished at under $1500 per sq ft to live with your family in a good area of Manhattan and your options get limited to mostly coops. There is no new development in this segment. Most families do not like to rent as you will be at the mercy of the landlord.

300, you are adequately explaining why prices in Manhattan are high but how does this explain why investors are willing to settle for near 0% going-in returns on residential property with little expectation of capital appreciation?

Ximon, it could also be justified by expected increases in rental rates. I don't see that happening in the short term, but it is a long term strategy.

While I can not say what percentage of condo investors are just looking to park money in what they perceive as a safe asset, it is clearly a factor for Manhattan. More than the condos, I wonder what the hell multi-family investors are doing investing their money at 2.5/3 percent cap rate in Manhattan with financing rates close to 4 percent for 10y maturity.

Possible explanations for such low returns in investor condos::

- too much foreign money pouring into the US in search of safe havens
- money laundering
- private equity firms specializing in residential homes
- investors with airbnb-like strategies to compete with hotels
- inexperienced investors who don't know what else to invest in
- demographic changes that favor renting over buying
- ability to highly leverage such investments
- strategy to rent it out then occupy at a later date

If these demand motivators decline e.g. the inbound movement of foreign capital to safe harbors comes to an end, the investment market could collapse and take the whole resi market with it if investment apartments are as big a % of the market as I suspect.

I think as interest rates rise it will be harder for investors to justify investing in condos at 0% return. Also, as landlord inducements rise it will be harder to keep tenants turnover will rise, and costs due to vacancy and re-renting may bring the returns even lower.
As 300 pointed out, anyone investing at a zero cash on cash return is doing so based on assumed capital appreciation. So prices don't have to go down much (merely stop appreciating) for investors to stop trying to ride that wave.

https://streeteasy.com/blog/buying-a-home-to-rent-it-out-condos-rental-market/

Fantastic article by Grant Long.

Thanks 300. Indeed an excellent article. Wish we knew more about the profile of these investors and whether the pace of such investor activity is declining or not. But if as many as 30-40% of condo sales in NYC are sold to investors and demand for such units were to, or are now, taking a nosedive, think about the possible implications for the overall resi market. In other words, what do you think would happen if overall demand for condos fell by 30%, 20% or even 10%?

Sorry, article only says 30-40 percent for a specific building. Not for all NYC.

Overall, if you look at the chart, it is 10% which is much higher than it has been in the past.

Yes but footnote 1 to that chart says “Condo unit sales number reflect all sales in New York City, as reported to the NYC Department of Finance. Rental numbers refer only to units listed for rent on StreetEasy.” Not all-let’s to apples and seems to understate the % of investor units that have sold especially in prime areas such as Manhattan. The other chart, however, lists 15 newly constructed projects in Manhattan, Queens and Brooklyn ranging from 30-40% investor units. That seems more representative and more relevant.

Sorry meant “not apples to apples”.

Well you can choose to look at the numbers the way it augments your fear. Streeteasy has majority of the rental listings for new condo rentals. So 10 percent may be 12 percent. Numbers do not lie.

I think the chart showing 10% may be skewed. And it does not appear to include only new condo sales. Whatever is the case however, any decline in investor activity will hurt the overall market even if only 10%. And if % investor units declines to average historical figures, that could be a bad sign. That is my only point. No positives here.

When you look at certain areas (like Flushing) the majority of condo rentals do not make it to Streeteasy. In addition for a lot of investors (especially foreign investors) the buying is heavily skewed towards new construction, so looking at specifically going on in New construction gives a better indication of the investor submarket.

30, What is the % number of rentals post 6 months of closing for only new construction in Manhattan?

It's worth pointing out here that not all buildings are marketed the same way. The Oosten, for example, was a project developed by Xinyuan Real Estate, which is a Beijing based-company, and it was marketed on Soufun, a Chinese real-estate portal. So, while there were also a couple of posters advertising it in the NYC Subways, the fact that that the building attracted the international buyers THAT IT WAS MARKETED TO, and that many of those people decided to sublet rather than move 7,000 miles to live in the building, shouldn't be taken as representative of the NYC condo market as a whole.

Also, the buildings with tax abatement likely attract more investors. I do not have empirical proof but it would seem logical for an investor.

BTW, in terms of general market, I am already seeing a significant correction in condo apartments needing gut reno (discount is definitely minimum $500 per sq ft if not $600 per sq ft vs finished in the same building which seems rationale - $300-$400 per sq ft hard cost and $150 for carry, time consumed in reno, distraction, and stress) as why would any one want to buy a post-war condo and gut renovate it when they can have their choice of finished apartments without hassle.

Front porch, for The Oosten, do you know if units were marketed for both sale and rental as a package deal? Some of the condo h0tels were marketed that way for a few years after the crisis some even guaranteeing a minimum return for a few years.

@ximon, I don't know how the Oosten was specifically marketed to overseas investors because those kinds of ads would probably have been in Mandarin, which I don't know, but I can ask my Mandarin-fluent landlord if anything came on his radar.

ali

"Also, the buildings with tax abatement likely attract more investors. I do not have empirical proof but it would seem logical for an investor."
And which building is with those be?

Ali
How has that strategy worked out for 1 Manhattan Sq so far? Is that an indication of the change in the market for investors / in general since the Oosten did it ?4? years ago?

Well, 30, different price point (~$2,000/sf vs. ~$1,200-$1,300/sf.). I'm not sure how 1 Manhattan Sq. is doing -- I see a lot of actives in the system, but I also don't think we've seen first closings yet, and sometimes buildings get a sales bump once that finally happens.

Was sending a comment when my WiFi signal went out....

Thanks Ali. I would be very interested in Xinyuan’s strategy. Since they are based in Beijng, I assume they would use their sales network and exhibit at the many Overseas Property Shows in major Chinese cities. Soufun had a retail strategy for the US so maybe they were putting renters together for Xinyuan sales. Not sure how Soufun is doing as they took some hits in China. I also wonder if Xinyuan remains active in US projects. The Osteen was a gift from heaven for them as they bought not just the land but the plans as well. Still took them 2 years to break ground. I think some of these Chinese developers are licking their wounds which is expected until they become more knowledgeable of the US markets. Here is a recent TRD article offering quite a lot of insight in the sales strategy:

https://therealdeal.com/2018/06/20/inside-a-new-dev-contract-what-halstead-was-paid-at-the-oosten/

Was sending a comment when my WiFi signal went out....

Thanks Ali. I would be very interested in Xinyuan’s strategy. Since they are based in Beijng, I assume they would use their sales network and exhibit at the many Overseas Property Shows in major Chinese cities. Soufun had a retail strategy for the US so maybe they were putting renters together for Xinyuan sales. Not sure how Soufun is doing as they took some hits in China. I also wonder if Xinyuan remains active in US projects. The Osteen was a gift from heaven for them as they bought not just the land but the plans as well. Still took them 2 years to break ground. I think some of these Chinese developers are licking their wounds which is expected until they become more knowledgeable of the US markets. Here is a recent TRD article offering quite a lot of insight in the sales strategy:

https://therealdeal.com/2018/06/20/inside-a-new-dev-contract-what-halstead-was-paid-at-the-oosten/

As far as 1 Manhattan Square goes, AS FAR AS I KNOW:
They started marketing exclusively in Asia in Spring 2016. They opened their New York sales office in November of 2016 and shortly thereafter sent out a press release announcing they had 80 units in contract. In March of 2017 they announced they had 100 units in contract. The last I heard was that in December of 2017 they had 150 units in contract. I am not aware of any subsequent announcements, and based on past behavior I don't think it's unreasonable to think that they would announce the next benchmark. If anyone has any different information I would love to hear it. However, from the information that I have listed above it seems like they are selling 10 or less units a month and with 800 units that would give them an 80 month / 6 and 2/3s years sellout period (as opposed to the two-year sell out period usually considered "healthy").

Ximon,
One thing I will note that's not in that article is that in general not paying the broker is a sign of financial problems with a project - it's sort of the go to move when developers run out of money. I'll also note that most developers make their money on the last 20% of sales, which even though the project has been on the market for 4 years, they still have that many units left on the table. they are trying to put a positive spin on it, but from what they are saying what they have left is also the segment of the market that is being the hardest hit - the top end. So while I'm pretty sure that we will never see a full accounting of the numbers, based on the original developer ditching the project, people apparently being let go from the internal team, the broker and not getting paid and subsequent switching to a new brokerage firm, etc. This may be a project that at first glance appears to be "wildly successful" but at the end of the day doesn't really make that much money.
I saw similar things happening in the 90s when people were buying pools of defaulted and mortgages - they would get 60 to 70% through with the pool and think they were doing great, but not realizing that the last 30 to 40% were the "problem deals" and the returns they got on the easy ones we're not even close to mirrored on the bad ones.

30, I have no personal experience with nyc real estate in the late 80s and early 90s when prices doubled in 5 years from 85-89 as per this chart. Are you basing your strong decline expectations based on what happened from 1989-94? How much do you think the prices have increased in the last five years? Do you expect prices to go below 2009-10 prices? https://furmancenter.org/files/Trends_in_NYC_Housing_Price_Appreciation.pdf

I think the last correction was stiffled by the $780 bailout and as a result I think the next market correction will make up for that.

So equities fell ~65% in 2008-2009 from the peak. You think next market correction will be 90% if there is no bailout?

https://www.bloombergquint.com/onweb/2018/07/03/manhattan-homebuyers-spoiled-for-choice-drive-bolder-bargains

700 ish square foot renovated for $835k. Hardly a deal for coop for that far up. Just fair price. No central park view if anyone is wondering.
https://streeteasy.com/sale/1314219

30, interesting analysis. I can verify that Xinyuan indeed has trouble holding onto senior executives. Probably because they give them little in the way of both responsibility and compensation. Most Chinese real estate companies are very closely held and run from the top down. Also, contracts are often ignored or renegotiated. I noticed that 80 units at The Oosten had their 421a benefits suspended apparently due to Xinyuan missing a deadline. It sure who is to blame or whether the benefits can be easily reinstated but make some wonder how many Chinese buyers bothered to hire a US attorney to represent them.

I double checked and Xinyuan bought the site in Williamsburg in 2012, broke ground in 2014 and started closing units in 2016. There have been lawsuits from unhappy buyers due to delays. Wonder if this 421a problem will result in litigation as well.

Checking sales history there are a lot of multiple unit sales, EB-5 related sales and odd price sales for individual units which makes you wonder if some buyers were paying some owner expenses or commissions.

Xinyuan does have current projects in Flushing and Hell’s Kitchen. I have a feeling we will hear more about their US business ventures in the not-too-distant future.

https://therealdeal.com/2017/12/13/xinyuan-pioneering-chinese-developer-in-nyc-dismantles-local-team/

I'm with 300 on the CPW property ... always happy to see a happy buyer, but if the last one-bedroom that traded in that building was at $824K four years ago, and we think the peak was a year or two after that, and then prices have been floating down again, $835K hardly seems like a steal.

ali r.

@300_mercer, to refer to the CPW building as "that far up" I believe doesn't factor into the equation as far as price goes. The Ardsley is two blocks from the Eldorado, and it is walking distance to the express subway stop. That's important to a lot of people. Therefore 92nd street turns out to be more desirable than 86th street for many people. And I was in the neighborhood last week and I noticed that the 96th st. subway has been upgraded and looks great. And also Whole Foods (which opened I believe only about 3 years ago) is on 95th and Columbus.

@300_mercer, to refer to the CPW building as "that far up" I believe doesn't factor into the equation as far as price goes. The Ardsley is two blocks from the Eldorado, and it is walking distance to the express subway stop. That's important to a lot of people. Therefore 92nd street turns out to be more desirable than 86th street for many people. And I was in the neighborhood last week and I noticed that the 96th st. subway has been upgraded and looks great. And also Whole Foods (which opened I believe only about 3 years ago) is on 95th and Columbus.

I agree that neighborhood had improved but it is still at a significant discount to say 60s or 70s, Museum proximity on Central park west. However, $1200 per sq ft for a coop, low floor, good clean basic reno, no particular view is fair.

As you can see, this one trades at least at a 25% discount to comps lower on CPW.
https://streeteasy.com/building/360-central-park-west-new_york

Don't forget our new TJ's, StreetSmart!

Those one-bedrooms are also somewhat price-limited by their layout -- I sell a lot of pre-war one-bedrooms, and not everyone wants an ensuite bathroom.

I am a bit of a novice in analyzing StreetEasy data but I came up with the following "statistics" on investor units using SE listings for sales and rentals:

Currently there are 849 new (however defined by SE) condo units for sale in Manhattan and 98 new condo units for rent which is a ratio of 12% overall rentals to overall sales.

However, looking at all condo units for sale and all condo units for rent in Manhattan there are currently 2,376 for rent and 17,618 for sale which equates to 31%. (The same ratio for all of NYC is 21%).

Obviously there is an inconsistency especially if we expected new condos to be more frequently purchased for investment.

Can anyone explain the inconsistency? Obviously SE does not list new unsold condos that have not been released for sale by the developer and 849 new condo units currently for sale in Manhattan is crazy low knowing what is in the development pipeline. Also, condos cannot be offered for rent until they are first sold so perhaps there is a delay factor not accounted for in these stats?

For those with a lower basis, renting their condo may still result in a "reasonable" return. But for those thinking that buying a condo today, especially in new construction, it might not be the best investment decision unless you are biding your time to eventually move into the unit such as a foreign buyer planning to immigrate.

It would be interesting to know the current motivations of new investment unit buyers. Is it possible this market has already dried up significantly but we don't have the data? Any developers or agents out there know?

One of the metric for investor owned condos

(All condos for rent less new condos for rent) x time taken to rent a condo (say 3 months) x average rental length (say 2-3 years) / total stock of condos units less new condos

Sorry
(All condos for rent less new condos for rent) / time taken to rent a condo (say 0.25y) x average rental length (say 2-3 years) / total stock of condos units less new condos

From Page 3.
Denominator is condo (95000)+ say 50% of Condoop as not all are really condos (22000*.5) + 2-10 family condos (4000) = Approximately 110,000 condo units.

https://www1.nyc.gov/assets/finance/downloads/pdf/reports/reports-property-tax/nyc_property_fy18.pdf

So one estimate using the formula above will be 2376/.25*2.5 = 23760 / 110000 = 21.6% for all condos. Would love to hear from others about other methods of estimation and results. Also, what the numbers were historically.

I think that the percent of new condos actually on the market but not listed on streeteasy is falling. As projects stay on the market longer Developers have taking longer to release units, even though they're actually on the market. And you have entire buildings which are on the market with no units on streeteasy - 220 CPS, 217 West 57th Street, The XI, etc.

Ximon,
When you talk about people who have a better return due to low basis, don't such people have to consider the opportunity cost of investing the money elsewhere (obviously after deducting sales costs and capital gains taxes)?

300,
I don't think you can take the number of "Condop" units into account because Condop is somewhat of a meaningless term these days. Brokers like to imply that it means "Coop with condo rules", but it clearly does not. "Condop" has zero to do with be able to use a unit as an investor property.

Yes 30. That's why I put reasonable in quotes.

It does seem like it might be a near perfect time to sell an investor unit if owned for a few years (some appreciation, lower capital gains, expectations of higher vacancy and lower rents) although I guess the new tax law could encourage some to either hold onto their units or even convert to rental as some have suggested although I don't know if this is actually what is happening.

I also am not clear on the new tax law as it applies to rental property. Is it still advisable to hold the pr0perty in a pass-through entity such as an LLC? There is also a new loss limitation rule that I am not well versed.

30, 60 east 8th street is a condop but has many rental units. Clearly the number of condops available as rentals is not zero but not 100% either. Some may not allow rentals which is why I am taking 50% haircut. Main point of my post is to suggest a methodology which gives provides numerical assumptions an individual can adjust rather than shooting in the dark with anecdotes and fear-mongering.

Another condop with rentals.
https://streeteasy.com/building/the-grand-sutton#tab_building_detail=3

https://streeteasy.com/building/420-east-64-street-new_york

Having rentals has nothing to do with being "investor-friendly."

300, lots of ways to do a calculation, none very reliable I fear but if your 20% is a reasonable estimate of the investor apartment market (it seems in the ballpark although not for newly constructed units), AND the investor market is getting squeezed, which seems pretty clear, this does not bode well for the resi market. So, it seems reasonable to say that the problems in the current market are not just on the supply side but also on the demand side. How that affects prices is an unknown to me but it doesn't look positive.