Crowded At The Top——Manhattan Apartment Bubble Goes Manic

By ELIOT BROWN And JOSH BARBANEL at The Wall Street Journal

It’s getting crowded at the top of Manhattan’s apartment market.

As condo developers chase billion-dollar paydays through the construction of luxury dwellings, the cranes dotting the city are sparking fears of a supply glut.

Builders are plowing ahead with scores of condominiums priced above $20 million in skinny glass towers throughout Manhattan.

One building, the 66-story tower at 220 Central Park South, is listing more than 60 apartments above $20 million, according to filings made with the New York attorney general’s office. By comparison, in 2008, just 29 new condos sold for $20 million or more across all of Manhattan, according to appraisal firm Miller Samuel.

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“There are a finite number of people that will buy these,” said Jonathan Miller, president of Miller Samuel. As for the developers kicking off projects now, “You are going to have haves and have-nots.”

The boom in the upper echelons of residential real estate is touching a handful of cities around the world, including London, Singapore and Dubai, where the global elite are pouring money into top-quality homes. But the demand is particularly acute in New York, reshaping its skyline to an extent few would have predicted during the real-estate bust.

The epicenter is the area surrounding Central Park’s southern tip, where big bets under way include a 1,050-foot tower next to the Museum of Modern Art financed largely by investors from Singapore, the Chetrit Group’s conversion of the upper floors of the former Sony Building on Madison Avenue, and a pencil-thin limestone tower being built by Zeckendorf Development that calls its units “mansions in the sky.”

The buildings, aimed at the world’s wealthiest buyers, are going up even as overall apartment construction lags behind historical norms.

That is skewing Manhattan’s traditional real-estate barometers. The average price of newly developed condos is expected to pass $7.2 million in 2017, up from $4.8 million in 2014 and $1.9 million in 2008, according to New York property-tracking firm CityRealty.

Land, meanwhile, has gotten so pricey that developers buying many new sites must expect to sell units at more than $3,500 a square foot to make a profit, real-estate experts say—three times the break-even level of a few years ago.

There are signs demand for this rarefied product might be nearing its limits. The 1,004-foot green glass tower One57 remained about 25% unsold for much of last year. Its builder, Extell Development Co., lowered its expected total revenue from the building by about 4%, or $100 million, in part because of the slowdown, according to filings made with the Tel Aviv Stock Exchange in Israel, where Extell has issued $300 million in debt.

With the market hot, pricey condominiums are filling the New York skies. Above, a rendering of a planned building on West 57th Street. ENLARGE
With the market hot, pricey condominiums are filling the New York skies. Above, a rendering of a planned building on West 57th Street.
But for now, times are good for developers. Last week, Vornado Realty Trust Chief Executive Steven Roth told investors his project at 220 Central Park South secured $1.1 billion in sales commitments in just six weeks on the market. With just one-third of the building committed, then, it has already paid for itself, according to calculations based on securities filings.

“We are doing beyond well,” Mr. Roth said.

At One57, Extell founder Gary Barnett said sales have picked up substantially in the past couple months. He declined to discuss specifics but said he hoped to fully sell out the tower by the end of the year.

Already, One57 is one for the record books. The building’s penthouse fetched $100 million in January, the most expensive sale for a single unit ever in New York City. The nearly 11,000-square-foot duplex on the 89th and 90th floors boasts 24-foot-high walls of glass on three sides and sweeping views of Central Park, New Jersey, Long Island and the Atlantic Ocean. It features six bedrooms, six baths, a curved staircase, two powder rooms and access to a pool at a Hyatt hotel in the building, according to offering documents.

All told, Extell expects the 1,004-foot building just south of Central Park to deliver a profit of about $1 billion to Extell and its partners from Abu Dhabi, according to filings.

Mr. Barnett plans an even larger tower just west on 57th Street, termed “billionaires row” given the rash of development. Anchored by a Nordstrom department store at its base, the building is projected to generate $4.4 billion in total sales proceeds, versus estimated construction costs of $2 billion, according to Extell’s filings.

While those costs could easily change, construction of the foundation is under way, and Mr. Barnett said he expects to secure financing in the coming months. The well of buyers is deep, he believes, at least for the best towers.

“Although supply is increasing, demand is increasing, too,” Mr. Barnett said of New York’s luxury market, adding he didn’t expect all projects to do well. “There is sufficient demand for projects that have everything going for them.”

But the precise factors driving demand for superluxury properties aren’t always clear. Developers and brokers attribute the soaring prices to a range of factors including the growing ranks of the superrich, a turn by the globally wealthy toward residential real estate, and low interest rates that have made investors look for higher returns than they can get from bonds. Many apartments go unoccupied, used only as investments.

Details on buyers are scant, since wealthy purchasers typically shield their names. That makes the fundamentals of the market more difficult to understand than the typical drivers of housing demand, like local income or population growth. Specifics on condo pricing also aren’t always easily accessible, making it difficult for developers to gauge their competition. Real-estate markets that lack transparency are prone to overbuilding, because developers don’t know the depth of the pool of buyers or when they will stop buying.

“There’s a problem when no one knows what housing demand really is,” said Charles Nathanson, a finance professor at Northwestern University who has studied real-estate pricing. “Very little information is actually getting into the market—everyone’s just copying each other,” he said. A frequent result: “You get an overshooting” as companies build more than the market can bear.

Even brokers who generally are bullish predict many units are likely to sit vacant despite an economy that could stay strong, given the flood of supply and the finite number of superwealthy individuals.

“Wealth creation has to keep abreast of the apartment creation,” said Leonard Steinberg, president of Compass, a New York-based brokerage. “The bottom line is everyone is going to have to expect that the time to sell will take much longer.”

Source: With Manhattan Luxury Property Hitting Highs, Some Fear Air Is Getting Thin – WSJ