2016 Predictions: Financing

In many ways, we find it quite remarkable that volume has been as robust as it has over the last few years considering that credit markets have been so tight.  Since the 2008 downturn, in fact, there has been little to no loosening of lending standards, shutting out many would-be owners from the party.  It’s not surprising, therefore, that over half of all purchases over the last several years have been made with all cash.  The city never ceases to amaze us in terms of its sheer amount of wealth and cash available.  We often hear buyers exclaim: “where does all this money come from?” (Confession:  we often ask ourselves the same question.)

We believe that, on the financing front, 2016 will bring much of the same, with perhaps only a tinge of loosening, as banks look to make up potentially lost volume driven by higher interest rates.  This will benefit savers who have been diligent about stocking away towards a typical 20% down-payment.  This tightness will also serve to decrease the chances of another real estate bubble forming from loose lending standards allowing those who can’t afford it to buy a home.  That said, tight credit markets will continue to represent a decent barrier of entry to first-time home buyers seeking a slice of the Apple.  Therefore, it will continue to be very important to diligently create a stellar buyer narrative in order to best compete with non-contingent or all-cash offers.

Closely linked to financing is the interest rate picture. On the heels of the Fed’s December rate hike, many are wondering how many more are on the horizon in 2016.  Experts seem to oscillate between predicting two to four increases over the course of the year, reaching a final rate of 0.75% to 1.25%.  Wherever we land, our prediction is that it will not impact overall demand in NYC, how much apartment one can buy for a said budget.

2016 Predictions: The High End

We believe that 2016 will see an overall softening of the high-end market, driven by an increasingly cautious global macro-economic picture.  Between China’s hard landing, European migrant and economic woes, and increased stock market volatility, it’s going to be a bumpy ride.  That said, the US is always a safe haven for those looking to park their cash and protect it from greater threats.  This will only increase against this global picture.  Further fueling investor inflows into NY is the recently renewed EB5 program that provides a path to a greencard if you invest $500k+ in US real estate.  We believe that the safe haven trend and EB5 program will buttress the high-end real estate market for some time to come, even though it won’t be able to stem the net softening we’re already seeing.

How will this softening manifest in the market? In the same ways we’ve been seeing to date: price decreases at the highest priced segments (and trickling downstream), larger footprints being split up into smaller ones, increased developer concessions, and a longer time on market for these properties.   Again, keep in mind that this ultra high end of the market is decoupled from the averages and medians that drive a vast majority of real estate activity.  In other words: no, we don’t believe that a decrease in asking price from $80MM to $65MM is going to mean much to our readers nor the overall landscape.

2016 Predictions: Rentals

For the renters among our readers, we’re sorry to predict that the picture ain’t getting prettier.  We expect that the rental market will continue exhibiting strength in 2016, going into 2017.  We simply see no catalysts for rents to soften.  With vacancy rates in the low single digits and the overall quality of rental inventory increasing, we expect more record-breaking statistics across the boroughs, especially in Manhattan & Brooklyn.   Further, despite more inventory coming online from new rental developments, it is insufficient for the growing demand of rental properties coming from both the perpetual renter and sideline-buyer demographics.  Therefore, if you have a decent lease and you have an opportunity to renew it for two years, we’d recommend doing so, postponing a rental reckoning for another two years.

2016 Predictions: Neighborhoods

We expect several Manhattan neighborhoods to experience significant transformations and generate quite some buzz in 2016.  First, as Hudson Yards comes online, we expect lots of related infrastructure following suit, like restaurants and shopping.   Similarly, the southern tip of West End Avenue is seeing quite a bit of new development, invigorating the area.   Other areas we expect to increase in popularity include the East End Avenue corridor, the Lower East Side and 34th Street.   Basically, think of pockets that were previously deemed “forgotten” or merely underwhelming in terms of demand – those are likely the areas that will see an influx of activity and demand in 2016 and beyond.   Lastly, we would be remiss to not mention the impact that the 2nd Avenue subway is going to have on the entire east side.  Yes, it’s been long in the works, but people are finally seeing the light at the end of the tunnel (pun intended) and everyone from residents to developers to shop owners are beginning to act accordingly.

2016 Predictions: Volume

We expect the 3 to 4 bedroom market to slow down in the 2016 year.  Based on our observations, this slow-down will be felt on both a price and volume level, following the trend that we already see unfolding., both from a buyer and developer perspective.  We’ve seen demand already slow for properties with larger footprints, and fall more in line with historical demand trends in the city that focus primarily on the studio and 1-bedroom segments.  Note that, traditionally, apartments boasting 3 or more bedrooms have represented but a tiny fraction of overall demand, often falling in the single-digit percentage range – we think we will be reverting to this historical trend.  In other words, the universe of buyers for 3 to 4 bedroom properties is tightening.

Conversely, we believe that demand for smaller units, especially studios and 1-bedrooms, will increase.  This is at least partially driven by the lower overall cost of purchasing smaller units.  We’ve also seen developers break up larger properties into smaller units, to meet these evolving buyer needs.   We expect this trend to only gain momentum in 2016, both from a primary-residence and investor-owned standpoint.   In the first owner category, those buyers previously priced out of the market may see this flattish market as an opportunity to at least grab a piece of the Big Apple with starter properties, to at least take advantage of low interest rates while they last.  If they have a good broker representing them, they will quickly note that their cost of ownership is far more significantly impacted by higher interest rates than higher prices; therefore, even if prices remain flat for some time, purchasing now still makes sense in a rising interest rate environment.  In the second owner category, we anticipate that investors will look downstream in their efforts of putting their money to work in order to generate some cash-flow and diversification.

 

2016 Predictions: Prices

We expect overall prices to see low-single digit growth on average in the 2016 year.  This means that mid-market, (under $5MM properties in prime areas or under $2MM properties in desirable emerging markets), may see mid- to high-single digit appreciation.  This will be balanced out by the highest priced properties experiencing single digit declines and offering concessions to incentivize buyers to bite.  Offerings like 220 Central Park South will be a grand slam, falling in the first category, but we expect that other properties in the ultra-luxury segment won’t be turning over as quickly.

We also believe that 2016’s story will be told at the property size level.  In other words, averages will tell very little of the story; in fact, averages may seem rather boring by falsely conveying that the market is largely standing still.  It’s underneath this top layer of data that most of the exciting action and movement will occur.  Once you start slicing and dicing the market by the size of the apartments (a.k.a. studios, 1-bedrooms, 2-bedrooms) and the overall price-point (a.k.a. low-, mid-, upper-range of the market), we expect quite some fodder for meaty and meaningful analysis.

Therefore, while we expect the pricing picture topline to look rather steady, we predict some pricing changes will unfold under the surface.

2016 Predictions: Inventory

Inventory, or the general lack thereof, has monopolized the headlines for some time now.  “Historically low levels,” everyone has noted.  And indeed, this is true.  That said, we believe that these levels now define the new status quo in the city.  We see no material catalysts on the horizon that will dramatically change the existing picture.   Owner-occupied properties won’t hit the market in masse, are largely priced out of any potential upgrades.

Therefore, we believe the bulk of the inventory hitting the market will come from investor-owned units whose owners are seeing prices stabilize in the low-single-digits range.  Based on this price stabilization and the expectation of flat-ish returns for the near future, we believe investors will look to cash out given the favorable economic outlook in NYC.