Bidding wars in the suburbs (Part 5)

One last note: I remember when people referred to Jackson Hole as "the poor man's Aspen." Jackson Hole is pretty spectacular too, but I believe it is now out of reach of the "mass affluent." However, the "mass affluent" still have all the resorts that are within an hour of SLC, and for those who love skiing, they should be able to find happiness there based on the terrain and snowfall that are not replicated elsewhere in this country in that price range for the foreseeable future. However, if they want to keep up with the Jones', Alta is probably not for them. It is Wasatch Canyon's version of Turtle Bay; definitively not "cool" because there is no "scene."

If all you wanna do is ski, buying a home 2000mi away -- in hostile terrain that demands constant maintenance -- makes no sense. Ownership in a place like Aspen implies a desire to use "summer" as a verb, and to drag big-city cultural amenities along for the ride: celebrity chefs, music festivals, art galleries, Prada shopping, etc.

To support those industries, you need rich neighbors. The mass affluent won't buy plane tickets to see the NRO (unless their kid is in the violin section). So unaffordability is a feature, not a bug.

Distance from Denver is also a feature of the places on the Western Slope. I don't know Aspen any better than Steamboat, Telluride, Crested Butte, or any other resort beyond a Denver weekender's driving ability, but in general in these resort communities, affordable housing is some combination of:

- Company dorms
- A cheaper nearby city (like Avon for Vail... I remember when Lionshead was the el-cheapo part.)
- Deed-restricted homes like HDFC but with residency and employment requirements to eliminate trust fund babies
- Very tight building codes, such that the 'cost' of an approval is building employee housing
- Encouragement of mother-in-law apartments and legalization of bandit units even in single family zoning
- Government run housing
- Restrictions on conversion of resi units to any other use
- Short term rental restrictions or taxes

George>> Because the wealthy don't pay taxes. Income is taxed, wealth is not (except real estate). These mass affluent people are where the money is if you don't want to tax the middle class.

Except you are wrong. Go look at the link I sent you. In 2016, NYC collected $9.3B in income tax. The salt-of-the-earth class (97.5% of households) paid $5.3B. The criminal class (0.3% of households) accounted for $3B. The whiner class (2.2% of households) accounted for only $2B. That’s why they’re called the whiner class. I think the salt-of-the-earth class would be willing to take on an additional increase of $0.5B / 10% in taxes and the criminal class the remaining increase of $1.5B / 50% if it meant all of the whiner class were banned from the city, simply so we wouldn’t have to hear the incessant whining. I’d even be willing to let individual members stay, so long as they paid their tax and signed a no-whining pledge.

>> I am in Inonada's camp, but I admit that George has deftly left me in the position of needing a few more years before I can render a verdict.

I think George & I are in the same camp. He thinks the whiners should leave, I want the whiners to leave. Having rents drop 25% sounds great to me. If that means some $300K-earning family who wants to be here can get the $2M apt renting at $8K for $6K instead, I’m all for them having that extra $24K per year in their pockets and doing something interesting with it. Go to Alta, I guess. It’s not like any amount of incremental income or angst will get Kenny G’s $200M pad be built for them at $3M instead.

Will the streets become needle-infested hell-holes because the whiners left? Probably not, but meh, there are worse things. Then again, I happily lived in a loft for many years where the neighboring lot sometimes became home to a few addicts. They were good peeps, kept quiet and even had a massive hazmat bin (hospital-size, like a big trash can). Mostly felt sad about the juxtaposition of their social empathy (don’t throw needles around) and their shitty predicament.

>> After becoming a partner, opening their own practice, or becoming EVP of Whatever, many will gross 1m each.

Sure, I get it, at $300K you have to make some choices. But if you can’t make it work in NYC on $2M and feel blessed for the privilege, then you have deep issues. That’s OK too, suburban therapists could use the business.

I think it's time for me to point out that during "lockdown" we had predictions that as soon as "the re-opening" occured buyers would come rushing back, there wouldn't be enough supply, and prices would soar. Of course what actually happened is supply came rushing back but not nearly anywhere near enough demand to meet it. So we got the fallback position of "it's the Summer, wait until after Labor Day. Then we will see it."

Well this is Labor Day Weekend. How long will it take before we start to get "we really meant next Spring because....." from the usual suspects? And when are all the new construction Condo units which were actually available a year ago at this point going to make real moves to do something because I think the clock is ticking on a number of them (did y'all notice the CEO of Extell is jumping ship?)

inonada,
My concern is that the type of $300k earners that I would like to stick around (for example entrepreneurs with unique small businesses that really contribute to the fabric of NYC) who might be persuaded to do so because that 25% drop might get them an apartment which would tip the scale might also be the same profile who finds their income drop by more than 25% (at least short term).

Sales right now are in a weird place because sellers really wanted a huge August selling season but buyers didn't get the memo. Also, I think that the reopening leading to the market returning meant the return from WFH and being able to go to restaurants. In person showings are important to selling, but none of the other Covid issues can be addressed.

I am enjoying this conversation because my wife and I make just over $300k combined and are thinking of Manhattan if we can sell our Queens 2 BR for a good price. Currently on the market, wish us luck.

That Gold Street apartment looks attractive, I think that the comparison to the Cliff St. rental is the tale as old as time of the market under-pricing the benefit of low maintenance. I wouldn't want to own in high-maintenance Battery Park City right now (although I do otherwise like that it's a quieter area).

Paul, good luck on selling the place! Are the lower rents in Manhattan making a difference in your calculus?

30yrs, I’m not too worried about the small business entrepreneurs leaving. They are not the whiners, which I think tend to be professionals. Income will suck bad over the next year (worse than 25%), but then it (like normal NY life) will be back. Arguably, with a better baseline as retail rents will drop to a point where many of these businesses you like can actually become viable again!.

Most importantly, it’s not like said entrepreneurs have any shot of doing the same type of thing in Nowhere, which just doesn’t have the density to support unique businesses. If you need 10K customers for a business that interests 0.1% of the population, it’s not happening w/o density.

The reason the professionals are more prone to being whiners is because: (a) a good fraction of them got into it because of the money rather than for a love of the profession, meaning the profession carries a higher percentage of people who are money-obsessed; and (b) all day long, they see people who have more money and think this is somehow normal.

inonada, the lower rents matter little. Our plan is to sell and rent for a year while we bargain hunt a purchase. Landlords are clearly looking to fill the apartments now and not offer the two free months upon renewal, so that is only a short term solution.

What we are more excited about is if the chance to own 900-1000 sq ft at $800-900 psf (with reasonable monthlys) and having a place that is ours forever.

Our Queens apartment was a great value for us cheapskates, but our son is approaching two years old and the schools here just aren’t good enough to stay forever.

Got it.

As a person whose life goal is to never own a piece of RE, I think leasing a condo from an individual tends to be a better route than leasing from a rental building for many reasons. Amongst other reasons, free months tend not to be a thing but rather just a lower price.

However, our life goals may just be different: you want a place forever, I just need a roof over my head until I’m dead.

Do you have kids? Don’t want to move with a child every few years to chase lower rent.

Also, I don’t love this stock market and I am too liquid. We were thinking of retiring our 3% mortgage if we were staying in our current place.

I am envious of both RichardBerg and WoodsidePaul being buyers in this market. I hope you guys will each keep us posted on where you end up.

@Inonada - Excellent stats regarding which tiers pay what percentage of income taxes. Again, I do love it when you focus, and find your argument the more persuasive as to whether NY will collapse if the whiner class departs.

In addition, I am confident that not everybody in that income range is a whiner to begin with such that it is not likely the entire group earning that income range will ever leave. I suspect there are many in that income range who don't whine and are giddy to be raising their families in NY, attendant with the limitations in other aspects of life that entails (no fancy vacations or dinners on the town). If they did not grow up with these things, the only thing they see is life getting better as they get older and progress in their careers.

And, as I said before, as for the whiners, I believe they have always left at a certain point so I don't see anything new there. I have been hearing the "hollowing out" argument for decades, and the stats you provided show that not only has it not come to fruition, but rather the middle has bulked up. Is there something different/new/more dire occurring now? Time will tell, but again, I am in your camp. I remain with you and Seinfeld: Yes, NY is in for a bumpy ride in the short term, but NY will be back stronger than ever within a matter of time, and I hope to be there when that time arrives.

@RichardBerg - Agree on not owning a ski house if all you want to do is ski. Honestly, RedRoof Inn is all you need!

Welcome back Paul. Seems we have a similar outlook. Prime location + low maintenance isn't super common, but I'm confident patience will yield value.

Follow Noah ("UrbanDigs" on YouTube). As a non realtor, it calls for lots of fast-forwarding -- we don't care about lead generation or closing volume etc, only price -- but there are solid insights hidden in the broker fluff. The recent one with Nikki Field was ?

^^ the :fire-emoji: looked good in my comment window but does not render, alas

Forgetting about your 300K to 2m earners for a minute, there are plenty of people living in rentals throughout the NYC either with or without kids getting on just fine. I was one of them for many years, chasing cheap rents in places like Greenpoint, Inwood and before all the craziness a multitude of apartments in Chelsea and the West Village. For me it was a lifestyle choice, a lot of surf/ski travel and playing music.

There are a lot of regular/ normal people that love living in NYC, and live a very humble experience in their rent stabilized long-term apartment or newcomers that venture out into neighborhoods like sunset Park, Inwood, Washington heights, greenwood, Sunnyside, canarsie Flatbush or midwood.

Paul, I don’t have kids. However, I’ve never had an issue with being forced to move over price or anything else for that matter. I was in my last place for 4 years before deciding to leave, and I am now in year 6 at my current place. Rent I pay today (struck pre-Covid) is flat to 6 years ago, reset from a higher point as of 3 years ago. Part of it may be because of top end segment dynamics, but I think more of it is because it’s an individually owned condo whose owner / property manager has better things to do with their lives than play squeeze-the-rental-yield on an iffy rental-yield proposition. Over many years of training, I’ve learned to sniff out such owners.

I hear where you are coming from on what to do with cash & the state of stocks. I was a big bull on the stock market 11 years and 5200 post ago on this board, as a far superior use of capital than NY RE. You don’t hear that out of me anymore. Given the price-to-rents in my corner of the market relative to other investment options I have (in my even-more specific corner), buying still isn’t that attractive to me. However, I can see it being a reasonable financial option to others elsewhere, in ways I didn’t consider reasonable a decade ago.

New Yorkers fleeing to the suburbs are discovering that neighbors have leaf blowers and lawn mowers. Hilarity ensues.

https://www.nytimes.com/2020/09/05/realestate/noise-suburbs-leaf-blower-.html

The leaf blower wars are indeed hilarious and out of control across the country. We are between two sets of neighbors in DC who don’t speak any longer over the issue. I don’t feel strongly about either side of that issue, which shocks both sets of neighbors, in much the same way I am shocked that issues that trigger me have no emotional impact on others I know. Democracy is fun!

I made good money raking leaves as a kid every fall. We need to bring back suburban child labor.

My mother-in-law in Chicago was just complaining about this, lol. The comments are classic...Maybe the noise from that crosstown bus on 9th Street isn't so bad after all?

I know more about leaf blower wars than anybody should based on a friend's pro-bono case from the early 90's. This wasn't the case, but the issue is never-endingly fascinating for those who study politics: https://www.nytimes.com/1994/09/27/nyregion/our-towns-fighting-for-the-right-to-bear-leaf-blowers.html?searchResultPosition=8

As a kid we didn't have leaf blowers, didn't seem to have a leaf problem either.

The more you destroy nature, the more leaf blowers you need.

https://mcmansionhell.com/post/152516732716/mcmansions-101-landscaping

For the Francophiles:

https://www.theatlantic.com/ideas/archive/2020/09/paris-not-dead/616099/

"I feel lucky to live in a place where both politicians and the citizens holding them to account are using the devastating pandemic to make the radical changes necessary to survive the upheavals to come."

The article makes clear that the changes were in the works long before covid and are just being accelerated now. I suppose it also helps that the mayor of Paris and the governor of Ile-de-France (or whatever their equivalent of a state is) aren't fighting every day over the most trivial of matters.

If NYC wanted to expand it's subway by "200 kilometers of new tracks for automated trains running every two to three minutes between 68 architect-designed stations" it would probably cost over half a trillion dollars.

A very long list of CEOs is concerned about Blas's incompetence in handling the present crisis.

https://pfnyc.org/news/letter-to-mayor-bill-de-blasio-from-nyc-business-leaders/

Not just me.

Deterioration of rents continues. On my bell weather building & entry-level apt, another 10 days, another 5%. Now 21.5% below last year’s rent on the lowest-priced studio.

https://streeteasy.com/building/prism-at-park-ave-south/8a

June 2015: $3520
June 2018: $3335
June 2019: $3450

June 1 2020: $3260
July 1 2020: $3125
Aug 27 2020: $2865
Sept 5 2020: $2710

I've previously said that I like following Sam Zell's buildings since they are transparent and have the computer algorithm setting prices. However, there are two caveats:

(1) The algorithm completely messed-up during covid. It appears that they kept prices far too high until about a month ago and then took some major reductions when everyone moved out in July and August. This unit at Parc East, for example, is down about 25% from its peak, but they left the price quite high from March all the way till August: https://streeteasy.com/building/parc-east/5h . I'd have to believe that if the computer had recognized what was going on and reduced prices in June and July, they wouldn't be left with 15-20% vacancies today. They might be playing catch-up and overshooting to the other extreme. Summit, for example, which is arguably a competitor of Prism, hasn't had such dramatic reductions, though Summit is only a year after lease-up.

(2) They don't list the concessions on StreetEasy. If you go to EQR's website, they are offering "up to 3 months rent free on select apartments", but it's not at all clear which apartments have which concessions. So the reduction could be even more dramatic. But there may have also been concessions back in 2018 and 2019 since landlords love playing that game even in good times.

(3) Equity buildings appeal to young people. Parc East is basically a frat house. If you compare this to more established rental buldings, it appears that EQR has been worse hit. It's an extreme comparison, but compare EQR's buildings to something like Spitzer's 985 Fifth Ave. Much less vacancy and turnover this year, rents apparently holding up better. https://streeteasy.com/building/985-5-avenue-new_york/5a

I'm pretty sure I mentioned recently that a lot of landlords are still based on a model of high turnover rather than stability. I think this year that will backfire on them (it's certainly hurting a number that I'm seeing). I wonder how long it will take them to adapt to the new reality because it seems most are in denial that the market has changed and think if they just wait it out things will go back to the way they were soon enough. Time will tell but so far things continue to get worse and these guys are losing some pretty good money.

Looking at that Parc East unit, it's not just that they took too long to lower it, but that they actually raised the price 4 times along the way. And they aren't the only one's who have done this - other places have also raised prices multiple times in that time period, even though vacancies have been consistently rising the entire time. It kind of seems a lot of them are using similar algorithms, and it's kind of been a disaster which they keep doubling down on.

George, one of the reasons I like the EQR buildings as bell weathers is that they seem transparent. I.e., every single one of them across every neighborhoods / styles / conditions is showing the similar degrees of vacancies. Prism is very typical at 15+% vacancies, with units on the market for months. Pricing also follows some degree of semblance to reality. Should they have lowered prices earlier? Maybe, but there is some connection with reality.

I looked up the Summit building you referenced:

https://streeteasy.com/building/summit-222-east-44th-street-new_york

They are “showing” 2.5% of units available. Every unit, save one, has only “been on the market” for a couple of weeks with an asking price that now exceeds last year’s. The one exception to the couple-of-weeks rule is the penthouse, which is sporting an asking price that exceeds where it what they had dropped it to pre-Covid.

I don’t do rental buildings, so maybe I got it all wrong, but I don’t buy it. Mainly, it seems like they are doing BS to blow smoke up their existing tenant’s asses.

One explanation could be that new rental buildings always list only a small fraction of units available. They possibly never fully rented from initial launch and are still acting in "new building mode." But you also have older buildings now which are acticting this

way - as you say putting on a show for existing tenants, acting like they don't have vacancies.

We got the school class list today. It's a competitive independent school with an application process that has never had a problem with enrollment, doing full and proper in-person instruction. The class has gone from 20 kids to 7. Three dropped out in the most recent week because the families aren't returning, at least not yet.

The tuition is fully payable in May and most families have no trouble writing the check, so presumably the school will be OK financially, at least for this year. But next year could be quite difficult if families stay away.

The public school and private schools in Nowhere have resumed in person but straining under an unprecedented increase in enrollment.

When brokers are leaving it means even they don't buy their own lines about the prognosis for the market.
https://therealdeal.com/2020/09/14/following-the-money-ny-brokers-seek-licenses-in-other-states/

My daughter's nursery school downtown still has a waitlist.

Putting this out there:

The 2 year old new rental (rent regulated) next to mine that was 100% full and offering 0 months free pre-covid is now offering 2 months free on a 12 month lease (14 months occupancy). It has 70 empty apartments of 500 total.

When the building was brand new and they were trying to fill it they were offering 2 months free.

Which implies the landlord was willing to go close to back where he started.

He probably needs to go lower though if he wants to fill his 70 empty apartments... I'm seeing 3-4 months free in a few months.

The months free on luxury rent stabilized apartments is going to create a weird environment where a bad tenant could move in, put down $1000 deposit, get 3-4 free months and then move out and only lose his deposit.

NY, It is highly unlikely that you get all the free months upfront and get in without 1 month security deposit and first month rent.

30 - our agent in Nowhere is a recovering New Yorker. She got out a year ago while the gettin' was still good. There have been more closed resi sales over $10 million this year in Nowhere than in all of NYC, and Nowhere has about 1/80th the number of agents, so the ones that are here are having their best year since 2007.

I have been saying for years that there are way too many agents in NYC. We need broker season to thin the herd.

Hmmm, are the Georges in Aspen? I came across this article when I was researching my Aspen question earlier in this thread: https://www.aspentimes.com/news/aspen-housing-market-sets-blistering-pace-with-8-home-sales-of-10m-or-more-already-this-month/

Rental inventory continues to pile up. August added another 2K, which is about the 5th month of that pace. Now over 15K, from a base of 4.5K in March. That’s about double the worst of it in 2009.

https://www.millersamuel.com/files/2020/08/Aug20MHTrent-invNmos-scaled.jpg

How many homes do you think closed for over $10M in NYC so far this year, George?

And you think based on that chart rental prices will be up 10% from where they are now in a year?

As far as sales over $10 million my guess around 100.

It's very clear George is talking about the Hamptons.

It’s 110 sales over $10M this year by my count. Just wonder if George has the count right compare to Nowhere.

On rents next year, my dates of interest are really winter 2020 vs winter 2021. I think there’ll be some more downward movement between now & winter (10%?). A year beyond that, I think 30% probability it’ll be up 10% or more, 50% probability it’ll be within +/- 10%, 10% probability it’ll be down more than 10%. So a bit of a skew upwards. On sales price, I skew downwards.

Where would you put the probabilities?

I can't find data on any city that has more than 110 sales over $10 million; not even Aspen. However, that article that I linked suggests that many deals are being inked right now such that count won't be updated until those close. But even then, I have a hard time believing the count will be above 110, and to the extent it is, is that really a place one wants to be buying into at this moment?

I do love Aspen (as I recall it some 30 years ago - I have not been there since 1991), but were I one of the "super rich" (see https://www.portfolioaspen.com/blog/pitkin-county-real-estate-sales-set-record/), I would check out The Yellowstone Club. I recall a few years back a number of the libertarian silicon valley crowd touting that as the place to be. However, I have noted that a few in that crew have taken it to the next level, building their own independent self-sustaining doomsday compounds in remote locations like Hawaii and New Zealand. For them, Aspen is now for the "mass affluent," which by their definition is anyone with less than mid-9 figures to their name.

Oops, additional reading suggests that for these folks "mass affluent" is anyone with less than 10 figures to their name. Hard to keep up with the magnitude of the wealth gap. With that said, enough procrastination for today, but I remain curious as to where "Nowhere" is on the map.

Sorry I was unclear. I meant contracts post start of covid which I compiled from the Olshan Report. I'll pull the numbers this evening.

inonada,
I'm much less interested in how much any dead cat bounce off the bottom is than how much we fall before that. Right now we have already passed through the (historical) busy season and over the next 2 months headed towards the time of year (mid-November through mid-January) which is (again, historically) the doldrums and extremely difficult to get anything rented. And to beat this dead horse again, this is with a moratorium on evictions thru the end of the year (at least - who knows what happens when that deadline approaches with an estimated half million evictions hitting the courts). And even before this "going into slow season plus evictions, etc" we are having the record skyrocketing of inventory which you pointed out. So I guess only falling another 10% is possible (which BTW wouldn't leave prices down 10% from today, but even, if we were get that 10% bounce from winter 2021 to 2022).

I'm getting convoluted now, so I guess I'll try to wrap it up saying there are a lot of scenarios I can see forthcoming, but one where the rental market goes down another 10% between now and this Winter and then goes up 10% the following year is very low on that list.

Evictions are a good point, but I figure they are not a meaningful component of the top end. Hence, my blind spot in that regard.

Looking at recent activity at the top end, I’m already seeing the panic start. For example, there is some unit that sold for $9.5M in 2013. Probably $10M at the peak. Rented in 2016 with a last ask of $38K.

Came back in 2019 at $38K, no takers, so removed & instead listed for $9.5M in 2019 ($10K monthlies). No takers. Dropped to $8.5M pre-COVID 2020. No takers. Listed for rent again in June at $32K. No takers. Removed sale listing in Sept, dropped rent to $22K.

So current ask is 42% less than 2016 last ask. I’m guessing they’d be just as negotiable today as in 2016. Maybe that gets to $19K if it sits another couple of months, maybe you can get it for $15K. Just not sure how much further it’ll go beyond that by the end of 2021.

A) I think that example points out why I think rents could fall by more than another 10%, and

B) Even if the owner only financed 65% do you see how far under water they are rental wise, and potentially as prices in the high end fall might be inclined to walk away and let the lender have it? That's what ended up causing the real crash in the low end (studios) in the early 1990s where in some cases sales prices were down >70%

As far as evictions in the top end goes, I am fairly certain that there is a certain percentage who are using the evictions moratorium to not pay rent even though they easily could, and being aware of the softness/availability only encourages them to do so. And eventually rather than paying up they will leave and add to the stock of vacancies. I think a lot of these units - in the absence if this crime of opportunity situation - would have simply paid their rent, renewed their leases, etc. But these are not normal times and the notion that the market is rational/efficient is being tested.

30yrs, always good to hear your insights. I am in total agreement that sales prices are heading down beyond the 35% off-peak we are broadly seeing now. On that front, I’m not waking up (i.e., even considering buying, much less pull the trigger) unless we see another 25% from here (so 50% off-peak broadly). I definitely can see that happening in the next few years, more slowly than rental deterioration, and continuing even after rents start climbing back up.

On bottoming of top-end rents, I have a line of reasoning that I’ll run by you later, see what you think on it.

I was just thinking about the degree of silence from “other side”. Basically, it’s just you & me arguing over how doomsday will play out. Last time around, a decade ago, there would be 2 comments for every one of ours saying how it’s a great time to buy, how this is the last chance chance, and how a decade out they will have minted money. Now, it’s crickets.

Not really, I just think 300_mercer and Keith got tuckered out

Nada, To be clear, for ultra-luxury, there were no bulls on this board as far as I can remember. In fact, back in the day 2009 ultra-luxury barely existed.

I was calling 40 percent down for ultra luxury 3 years back.
https://streeteasy.com/talk/discussion/43143-price-prediction-for-ultra-luxury

I'm very curious to see what happens with a few neighbors and acquaintances who decamped to weekend or rental homes in the NYC suburbs and enrolled their children in school there. None of them have yet to list their places in the city. Presumably they're waiting to see how things go with the fall semester and the NYC market, but it's hard for me to imagine they'll get to Spring 2021 without a decision either way.

Cheap money makes it easier to ride this out for longer, but eventually you get to the point of throwing good money after bad...

Perhaps some of them have spoken with brokers who gave them realistic numbers for what they could sell (or rent) for and decided to wait until the market rebounds. I'm not so sure they are going to like the results of that strategy.

inonada,
I'll add that we are around 5 years into this slow/down-ish market, which is a time period perma-bulls usually use to be "guaranteed" a profit. Well anyone holding for the last 5 years, even if they appear to be close to breaking even lost a nice chunk of change on transaction costs. I think there are plenty of people who could still be in this category but are in denial and are going to end up substantially worse off than if they took what they could get today.

Yes, 5 years of a slowdown that was absolutely turning around in the beginning of this year. Let's not forget this was a global pandemic, not organically occurring, traditional market conditions that cratered this market and other markets around the world. Nobody predicted this.

Markets have a funny way of doing the unexpected. Was anyone counting on the s&p 500 being where it is currently after it's recent lows (down more than 30%)?

" Nobody predicted this."

Someone predicted this right here in this forum.

A global pandemic that upended the entire worldwide economy?

Re: strength of the rental market in 2021, from Jonathan Miller:
“In the context of the pandemic, there is a lot of uncertainty. We don’t know when that ends, when there’s a vaccine,” he said. “I think there will be continued weakness well into 2021, simply because the pandemic isn’t going anywhere.”
https://qns.com/2020/09/402999/?fbclid=IwAR2zb4oWTKS7eeA2-FAXcJqzE3WIpYPSxoz4m6Zpj6gSJn2LI3mO3ovs_b8

Keith, I don’t think anybody predicted the pandemic 5 or 10 years ago. But 30yrs & I were had been calling this crappy outlook 5 & 10 years ago, alongside many others. Don’t make me bring w67th back here. As far as things having turned the corner at the beginning of the year, let’s just agree to disagree: at that point, it was just looking like the continuing of the slow bleed.

From my POV, when the fundamentals are crap, the outlook will be fundamentally crappy. Might be long and drawn out, might be quick, might have a trigger, might not. But when net rental yields exceed mortgage rates, you fundamentally are dealing with crap.

Preceding paragraph from the article 30yrs posted:

>> While some in the real estate industry suggested that the rental market in Queens may begin to normalize come fall, Miller is less hopeful.

Uhh, fall starts Monday. Did someone forget to explain seasons to some in the real estate industry?

inonada,
Since the search function here sucks and I don't feel like spending hours looking for it I can't point you at the exact post I made here back in mid-February, but you can get an idea from this post elsewhere (where I retell the same story and specifically point out that I had already posted it here) what I'm talking about:
https://www.urbandigs.com/forum/index.php?threads/how-will-coronavirus-affect-the-market.17/

Here is someone who not only does not want to buy into a market in that is experiencing bidding wars, but is trying to capitalize on them after carrying a property for at least a few year longer than he planned to (note earlier attempted sale price): https://www.bloomberg.com/news/articles/2020-09-16/goldman-ceo-shops-his-sprawling-aspen-estate-as-rich-flee-cities

30yrs, haterz will be haterz. You had it exactly right. If & when a trigger arrived, the poor fundamentals propped up by a booming economy flush with cheap money were poised to blow up.

Or as Carville once said: It’s the yield, stupid.

MCR, here’s some general advice. You want to avoid taking the other side of a trade with Goldman unless you really know what you are doing. Not from the trading desk, and probably not in Nowhere.

@Inonada - Exactly. That is why I am a dollar-cost-averaging index fund investor.

30yrs, here’s a reason why the rental bottom (in terms of price) may be closer rather than farther.

Let’s take the $25M-peak apt I posted on the “crappy rental yields” thread. Back in the day, it would fetch (say) $50K/mo. Blowing $600K/yr is something few can or would do, not least because those who can have probably already bought something. Let’s say in good times there were ~100 such people and ~120 such apts, and there was some sort of happy balance between supply & demand.

Over the past few years, the number of such apts has increased significantly. Let’s say supply became 200. Meanwhile, COVID has evaporated demand to 80. And you have owners trying to get ahead of that. E.g., the $25M-peak apt now seems rentable at half price, say $25K/mo. At $300K/yr, it is now within reach of the top end of the “mass affluent” with $1M (a stretch) to $2M (not so much) of income. There used to be a supply of (say) 1000 such people, which COVID has thinned down to (say) 800. What do these people do?

Let’s say half of them stay in the $10M-peak apt rental market, paying (say) $17K/mo and pocketing the difference. But that still leaves 400 to soak up the supply of $25M-peak apts, available & forthcoming.

This whole mechanism works it’s way down. When the $10M apt starts renting for what $5M apts used to rent, then $5M apts start renting for what $3M apts used to rent. Let’s call that number $10K/mo. At that sort of number, the number of renters is much larger: let’s say 10K. Maybe only 8K of them remain, and maybe only 4K of them would rather keep paying $10K/mo for a better $5M-peak apt than go to $8K/mo in their existing $3M-peak apt. That sort of demand should be able to soak up the $5M-peak supply.

My general point is this. Demand has been cut by a relatively fixed amount at all levels. But the rent cuts we’re seeing are putting the relatively few expensive apartment within reach of exponentially more hands. If we reach cuts upwards of 50% this winter, how much further can it go?

Wait, does that mean I have to be the bull now? I'm wary since nada schooled me that being bullish in 2009 didn't turn out to be that great a stance (although frankly I have enjoyed living in the co-op I bought then).

Okay, so here's my attempt: I think it's too early to call the low end (what is the "low end" to you guys? Under $2 million?). From my limited perspective, it was fairly active mid-summer, driven by extraordinarily low interest rates, and now it's dead. Why is it dead? well, school uncertainty,as flarf pointed out, is huge. So I'm not really sure that 30's comparison

NYC public schools are supposed to start in-person on Monday... will the teachers institute a job action, or will they come? And once schools start, will the testing infrastructure support them? As of now, it's not where it should be... can it be ramped up?

I think the answers to those questions will be clearer in about two months, and then we'll begin to see market signals, although it may not be possible to really "call it" until March. But I can absolutely see a world in which people who have stayed away from NYC begin to deal with the realities of the suburbs in the winter, and yearn to come back to their offices and a world that doesn't involve driving in the snow and battling the raccoons for the homestead.

The top end? always harder for me to call. I do imagine a world in which the politics get settled, and the certainty, one way or the other, brings confidence in the city back. And certainly if things swing one way ... we got bailed out in 2008; we could get bailed out again.

Don't get me wrong, I think property taxes will go up in the short-term, and I warn all my buyers of that. But I'm not ready to sign up for the apocalypse.

As far as rents, currently, I am in the processing of renewing my tenant's lease at 3% off last lease term's rent. So yeah, I guess I'll take the "rents down 10% and then back up again" bet.

ali r.
{upstairs realty}

Aaaannndd... in-person public school kicked down the road for eight more days.

MCR,
I think that in the current (perhaps starting to same?) Gold Rush to suburbs there has probably been a lot of dumping substandard product on a reasonably uneducated (local Real Estate wise) over eager buyer pool. The reason I say this is because there is an awful lot of product which was on the market for YEARS which couldn't sell and now it has. For a non-insignificant portion of it, it was not only overpriced, but overpriced crap. A lot time ago a well known RE investor told me "If you buy crap you own crap. If you buy quality you own quality." I think a lot of crap was finally moved in the last 4 months, which means a lot of these new buyers own crap.

But then I also think a lot of crap was sold in NYC from 2012 to 2015 and a lot of people still haven't figured out they own crap.

Predicting a bear Market 10 years out, is that something? Makes me think of the broken clock analogy, being right at least once a day. I think we all accept the quantifiable reality of the cycle of markets, even a neophyte like myself. Or to paraphrase JP Morgan when asked for investing advice, " Markets go up and markets go down".

Nada I absolutely accept the fact, that you recently also pointed out, when it comes to housing you're just looking for a roof over your head until death comes knocking. And I agree, in the category that you're in, renting certainly makes more financial sense than buying, especially if you get no emotional benefit from one over the other. I think we all agree we will not escape death, just some prefer to own the place they live in rather than rent, for a variety of reasons.

Buy, rent or van life, whatever is going to make you happy on this precarious journey through life.

Keith
TBG

inonada,
I hear what you are saying and it makes sense in the high end. But in the mass market we haven't seen prices fall anywhere near that amount. But we are seeing supply skyrocket. Perhaps the owners of those high end units are quicker to react. But from where I sit right now a lot of mass market units have not come down anywhere near what I think the market is, and I think most large landlords are just in denial. As a result we have 2 fighting concepts of what "market" is for thousands of units. Is it the small amount most units have come down and a small percentage of them have been rented, or is it the larger amount it would take to actually rent most units?

If this were a luxury product like a Ferrari, they could simply limit production and sell a smaller amount at higher prices. I don't think you can do this with rental units (although as we have already discussed we are seeing landlords try by only officially listing a small part of their actual inventory. That has some chance if working when you are the only one doing it, but you can't get away with it when every newspaper is publishing the stories they are currently).

So what I'm saying is that given the employment conditions, amount of people who have left, years of overbuilding (which includes not just new buildings, but huge amounts of renovations turning $1200 walk-ups into $4500 walk-ups) in my view we haven't come close to proper price discovery for the mass market of units. Take for example Peter Cooper Village: I just saw it listed in an article about "highest vacancy buildings" yet today's pricing is less than 5% down, plus big incentives. They are refusing to lower rents or give equal incentives to renewing tenants, and as a result they are moving out in droves. I'm seeing other landlords act similarly. And until that changes I don't see us finding the real bottom. In fact I think it will exacerbate the problem.

Anecdote in the 2bed/2bath 1.4-1.8M buy / $6-7k rent North Brooklyn condo range -
My building had a Wave of listings as owners moved out/renters didn’t renew leases, etc.

Rentals
From April - July the rentals actually started getting rented out quickly.
Enough that sellers flipped their listings to also being available to rent.
Since August 1 I didn’t see any further units get rented out.
I think they are seeing stiff competition from big corporate rental buildings doing big concessions and taking out all the demand.

Sales
I suppose it goes without saying as well that none have sold, even listing at or below 2017 cost basis.
They all stopped doing open houses months ago.
In fact more units have been put up for sale.

Think of how many students there are in NYC (or more accurately aren't in NYC right now who were last year) not in University owned housing.
https://therealdeal.com/2020/09/16/quiet-dorms-and-distress-storms/

30yrs, I think “market” is where transactions occur regardless of how much inventory is behind it.

Think about Microsoft Office. How much inventory is available? Infinite, at zero marginal cost. But pricing is $100 or whatever because it maximizes profit. If they drop prices to $90, maybe they pick up another 7% in volume. But that leaves them with 3% less profit. So they don’t, and $100 becomes the market price.

I think median apts in NYC are the same, albeit with a greater degree of competition. Suppose the market (what actually moves) is 15% down right now, and at that price level 90% of inventory rents. Even if another 10% drop in price fills up those last 10% of apts, it still isn’t profitable. So you wait & hope demand returns.

At the top end, the supply/demand imbalance began more out of whack and became worse. It might be the case that only 50% of inventory is occupied. So if dropping price by 10% moved that by the same 10% increment to 60%, it’s profitable.

Supply is increasing over the next couple of years slowly, so the big question is what happens to shocks in demand, which I think have been driving the market.

How much does it cost Microsoft to carry that additional inventory? It's not really comparable. I'm not even sure you can call it inventory.

Carrying these units vacant isn't a zero cost proposition. In fact the cost is high. I'm willing to bet there are any number of buildings operating at a negative right now due to vacancy.

Also, looking at the numbers, no where close to 90% of available inventory is renting. As far as I can tell you've got 15,000 inventory (which I think is undercounted) and 5,000 new leases. And unless something is done to move product that's only going to get worse.

I'm not looking to put words in your mouth but it seems like you are convoluting available inventory with total market.

And to be clear about my point, lots of landlords have assumed that if they don't drop face rents, but offer incentives to new lessees and not to existing tenants that they can have their cake and eat it too, and as far as I can tell that strategy is backfiring in a big way.

'The Exodus has mostly been from Manhattan, Brooklyn Market is booming'
Very interesting discussion with the Matrix Man, Jonathan Miller along with Noah and John. I think there should be some interesting reaction to their discussion by some of the members of this forum.

Enjoy.

https://youtu.be/Algo91FduRc

I'll add a wrinkle we haven't spoken about yet:
There is a set of tenants whose landlords refused to negotiate rents or offer the same incentives they were giving new leases, so in return they simply stayed and took advantage of the eviction moratorium to stop paying rent. These will interestingly play out in court eventually, but at least one housing court judge has stated they won't be looking to adjudicate hundreds of thousands of cases individually and are looking to the legislature for a large scale answer:
https://brooklyneagle.com/articles/2020/08/24/housing-court-judge-pleads-with-legislature-for-help-with-looming-housing-crisis/

So far the government has been kicking the can down the road hoping the problem will go away while all it does is continue to get worse. But eventually they will have no choice but to do something. I think it is highly likely that the Real Estate industry will make the exact same mistake they did in 2019 when essentially the same group of NY legislators (who through turnover are now much more pro-tenant than prior legislatures) kicked them in the teeth because they tried to stonewall rather than compromise. I mean, they can't help it because that's their nature. But we saw the results in the Housing Stability and Tenant Protection Act of 2019.

30yrs, what do you think the vacancy rate actually is?

I threw out 10% because I figured there are 900K housing units in Manhattan, 1/3rd owner, 1/3rd free market, and 1/3rd regulated in some way. So if there’s another 15K or shadow rental inventory behind the displayed 15K, that’s 10% of free market units. Another datapoint are the EQR buildings, which show 15%. But I figure the fancy buildings are the most prone to vacancies, maybe that’s wrong. But my overall point was that it’s not 50% vacancy rate.

I have no doubt that when these buildings are renting 90% of the units at 90% of the old rents, they are only making 80% of what they used to make and are bleeding. But if they drop rents to 80% of the old rents, and this fills things up, they still are bleeding money. Microsoft & a rental building are a lot more similar in terms of marginal cost: there is minimal marginal cost incurred in leasing an otherwise-empty apartment. Imagine they drop rents to 80%, and this increases occupancy to 95%. Inventory has been moved, but now they’re bringing in even less money.

So LLs play the game of differential charging. I.e., keep their old customers at full price while moving their marginal inventory at a lower price. And eventually, that “rob Peter to pay Paul” strategy will come to roost. For the capital holders. But fundamentally, when there were 870K people wanting to live in 900K apts there used to be some balance. When you have the shock of that becoming (say) 820K people, you get giant dislocations. These dislocations can be slowed down but will eventually come to roost, which is your point I think, and I agree with that. But what happens when 50K come back?

I have not yet listened to the Miller/Digs Manhattan v. Brooklyn podcast, but very broadly, IMHO one reason to prefer living in Brooklyn is that property taxes are cheaper on roughly equivalent housing.
And IMHO one reason to prefer living in Manhattan is that the availability of services, specifically schools (I think I can say that without being discriminatory) is better. In a world where almost no one gets to go to in-person school, and taxes are as they are, those factors are in favor of Brooklyn. But I can also imagine those factors flipping in the next six months.

FYI it's not a Manhattan versus Brooklyn vlog, just one point brought up over the more than an hour conversation.

There's also some discussion on the current state of the rental market.

I watched the UrbanDigs video and commented on it but will also comment here.

I understand that Noah, John and Jonathan Miller are saying that contracts are currently being entered at 5-9% 'listing discount' and I agree with Keith that as a buyer I really don't care about this number, some asks are delusional while some are priced reasonably but can be bid slightly down. What matters is what I get for the price I agree to pay.

What wasn't really discussed is that we are approaching 9,000 active listings with 150 entering contact per week. Even if the rate of contracts double to 300 per week, most of the units on the market won't sell before the holidays. This isn't even accounting for more new listings entering the market every week. For now I think that the strategy is to low ball and wait. I don't need to own a Manhattan apartment immediately.

So what will play out:
1. Price competition/erosion to find new buyers to clear the market?
2. Declining sales prices with some motivated sellers cutting to get to the front of the line ahead of higher priced inventory?
3. Most sellers realize that they can't get their price and sit on it with units waiting on the market for years?
4. A big fall selling season with 500-1000 contracts per week through late October / early November?
5. Big inventory with no transactions which stalls then reverses post-Covid with a 'reverse exodus' which even may include some sellers deciding they didn't want to leave after-all.

I think one Brooklyn vs. Manhattan point (as a Queens resident) is that neighborhoods with mostly 2-5 story average density (the boroughs) are much more livable during Covid than living in high-rise neighborhoods, simply from an perspective of the amount of crowding on the sidewalks.

Nothing wrong with Woodside either....

We are currently on track to exceed 9,000 unit Manhattan supply early next week and surpass peak post crash supply by the end of the month. Meanwhile rather than "A big fall selling season with 500-1000 contracts per week" using Urban Digs 1 week contracts we get 178.

As I've said many times before we have not seen significant foreclosure activity (yet), but what we are seeing is a growing number of sellers who under pressure to sell have needed to take large discounts to do so. Since we are also seeing a collapse in the rental market it could lead to owners not being able to hold on by leasing units and waiting for the market to come back. If banks start to become a significant presence as sellers I think the stage is set for a significant further correction.

Nothing wrong with Woodside/Sunnyside except the schools. Everyone with young children loves the neighborhood but sending Paul Jr. to a school with a GreatSchools rating of 6/10 just isn't going to work.

Yeah we've done a handful of deals in Sunnyside, difficult if you're not dealing with a Rebny' member broker. The independents can be difficult to deal with.

@Paul, that entirely depends on the reason for the 6. Some 6s are 9s in disguise, while some are not.