The city has released some new figures on the New York City residential condominium market, while analysts at the private firm Portfolio and Property Research (via WSJ and Crain’s) have released some projections for the metro-area office-building market. Taken together, the new numbers likely mean more bad news for the city budget.
The salient points:
- Since 2003, the average residential-condo price increased by more than 150 percent, while the price of single-family to three-family homes increased just(!) 73 percent.
- In 2003, condos were 17 percent of all city (not just Manhattan!) residential real-estate deals. In the first half of 2008, they represented nearly 30 percent of all such deals.
- Filings to build new condos or convert old apartments into condos, in recent years, began to outpace, and then to far outpace, sales (see chart below).
- The commercial-office vacancy rate could reach 17.6 percent in the NYC metro area (including six suburban counties), up from 12 percent today.
The possible implications of this data? First, there is a near certainty that New York will be faced with a continued glut of condos on the market in the coming years. Some developers may continue to try to turn their units into legal rentals or not-so-legal hotels in the coming months. But such options are more difficult as the rental and the not-so-legal-hotel markets dry up, as well.
A condo glut means inevitable foreclosures, both of buildings and speculatively purchased units, and falling prices. Further, falling prices likely will extend to the co-op market. Despite tighter regulations for co-op purchases (i.e. high downpayments), prices for apartment-sized units over the past few years have been set at the margin, by the condos. And, those big downpayments required by coops were made up of play money provided by unsustainable Wall Street bonuses, anyway.
Further, prices could fall precipitously, not gradually. Over the past five years, it’s fair to say that buyers purchased condos and co-ops across all price levels not for their intrinsic value or long-term appreciation but for expected double-digit percentage gains every single year. Those expected gains now must be “priced out,” just as we’ve seen future gains priced rather unceremoniously out of the stock market in the past year.
On the office-tower side, there is a near-certainty of, well, much the same thing: more foreclosures and sharply lower valuations.
As for the argument that New York’s office market won’t suffer as badly this time around, compared to the early 90s, because it didn’t see the same level of speculative office-building? First, New York saw something just as dangerous this time around: speculative valuation of towers, and lending against those valuations, based on outlandish projections of future office rents. Second, as Wall Street continues to shed jobs, recent construction, including that of the Bank of America tower on Sixth Avenue and the Goldman Sachs building downtown, may look speculative in retrospect. A half-empty building is a half-empty building, no matter how it got that way.
In one way, falling condo prices and office rents are a good thing for New York. A re-pricing of homes across the board will open more of the city up to middle-class and upper-middle-class residents previously priced out, while a re-pricing of office space will do much the same thing for non-financial businesses seeking to come to New York City.
But in the short term, it means bad news for the city budget. Between fiscal years 2000 and 2008, class 2 condos (the vast majority of condos) and office buildings, representing nearly 30 percent of the city’s billable property-tax values, had increased in terms of those billable values by a whopping 63 percent. These sharply higher valuations pushed overall property-tax collections up by 67 percent over the same period.
The city expects property-tax collections to be up another 19 percent, cumulatively, over the next three years.
It’s hard to see how those increases will happen, since reassessments are inevitable in the face of sharply lower valuations.
Even stagnant property taxes would add another $2.6 billion annually to the city’s already substantive ($5 billion-plus) expected future-year budget deficits.