For years the condo market in New York was untouchable. Prices per square foot where at worst two times the price and at best 60% more. In addition to that, one not only had to pay maintenance, but also property tax. For those of you who are unfamiliar with the New York market condos, NYC condos allow the owner full fee simple property ownership whereas the majority of properties which are built fall under a co-op ownership.
This co-op ownership type allows the building to regulate who can purchase based on their own private guidelines , they require board approvals interviews , reserves after closing, and typically only allow owner occupants meaning a purchaser must be willing to move in an with there as their primary residence. For this reason, condos which had none of these restrictions have easier guidelines and should be the first choice for any real estate investors. Historically speaking, about 50% of the existing inventory in Manhattan coop properties. These co-op properties could not be rented, therefore the only rentals available were all condos . This drove up the price of rent and attracted investors/speculators, which further drove up the price of properties regardless of the condition.
Due to covid-19, we're now seeing a mass exodus of both renters purchasers in primary residences in what was historically one of if not the best rental market in the country. Overnight investor appetite to purchase properties has disappeared as well as the potential returns that they could reap from these rentals month over month. The causation of this occurrence could be due to the fact individuals continually pushed up prices because in NYC there is nowhere else to build because it's an one is landlocked you can only build up. Building up is only being reserved for high rise luxury buildings. In a city where everyone is reliant on public transportation and their jobs all being close by, one can demand a steeper price for a lower quality of winning and this model has worked for decades up until today.
Now due to the cyclical nature of real estate development, the approval process is time consuming, so finding a suitable piece of land anywhere from seven to ten years. What we're seeing now is that from 2010 to 2020 there's been an extreme boom of new high rise luxury buildings being built, which has left half of the city unrenovated pops. The vast majority of these luxury new developments were being built as condos, which could also command a higher purchase price. Therefore boosting the profits for the developer.
Currently, the rental market has had a slowed inventory for sales, as well as rentals. The inventories have gone through the roof, and now more than ever we're starting to see a large shift of properties for sale go from not just the co-ops, which historically were making up 90% of the inventory of the city, but now we're starting to see uneven higher proportion of condos which are being put up for sale as well.
This can be driven in the large part because renters have been fleeing the city. If one were an investor purchasing these condos on the assumption that all of the debt would always be serviced through rent, this may now be in jeopardy.
That's a very rough baseline because the cost per square foot for a New York City apartment is roughly $1000 per square foot, and for a condo historically you could expect to pay $1500 to $2000 per square foot. We're now seeing anywhere from first around 40% a 60/40 split between co-ops and condos which historically would never occur typically it would be 90/10.
Basic economics shows us that increased supply with reduced demand drop prices. That's exactly the force that we're seeing here with the condo average price coming in roughly at 1150 per square foot and co-ops coming in still at the $1000 to $1100 per square foot range. However, the smaller unrenovated properties are priced below $1000, hitting into the eight and $900 per square foot range. Now if one were to trace this back, we would see that this is starting to come in around the 2010-2011 year based on historical price alone.
Investors were flocking to these condo properties ten years ago because they knew that they were the only ones which would allow rentals, and that drove the price to double over the past decade. Similarly, New York City real estate has doubled as a whole. What we're seeing today is essentially a reset back to that time over that exact pricing scenario.
If we look back in that the 2010 interest rates were roughly 5 and 1/8% for a 30 year fixed rate purchase. Today, one purchase maybe a half a point at 2 1/2% for a 30 year fixed. Ten years ago, the financing was 30% higher to obtain the same purchase price, so that leaves one with a good assumption to purchase real estate in NYC today,
Historically one needed to put 20% down because that's how New York is with co-ops. With condos there are fewer restrictions in that you can put down less than 20% and still be allowed to purchase. Therefore if your bank will let you put down 5%, by all means put down a 5% payment and make the purchase.
Today one would need to offer a steep discount at a 50% discount, meaning if your mortgage is $2,000 on a $400,000 apartment, and you rent it for $1000 a month you'll be losing $12,000 per year. For many of you, that may be unacceptable, but you should also keep in mind that these losses are all tax deductible. Tax write offs are one of the amazing benefits of real estate. Take into account that this apartment which you just purchased you only had to put for example 10% down. This means that if it costs a total out of pocket of $78,000 for all of the expenses, due to all of the losses.
While stocks have rebounded quite nicely, NYC real estate has been down about 30%. This means that when real estate in NYC recovers the $78,000 total cost of ownership can allow for one to obtain about $150,000 in asset appreciation. That seems like a pretty good return on investment. Do you really think that restaurants will never rebound? Do you really think that you'll never go back to work in an office again? Don't you think that someone won't want to grab an amazing apartment for rent for only $1000 a month while you take the loss month over month?
This window of opportunity might not come back in quite some time, so if you have the risk appetite definitely go purchase some condos in NYC.
-Anthony Magno
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