By Nav Athwal
New York City’s real estate market has reached blistering temperatures, with record sale prices reported at the end of 2015. In the fourth quarter alone, the average sale price for a Manhattan apartment hit a lofty $1.95 million, representing a 12% jump year-over-year, according to the latest Elliman Report.
Over the same period, the median sale price topped $1.15 million while the price per square foot climbed to a jaw-dropping $1,645. In the rental market, Manhattan rental prices have increased by 3.9% over the last year, with the average rental price hitting $4,071 as of November 2015.
Demand from global buyers who are looking to escape the fallout from the market slowdown in China is what’s leading the push in the condo market, where new construction sale prices are averaging just shy of $3.3 million. Newly developed properties represented an 18.6% share of the overall sales market through the fourth quarter.
On the co-op side, pricing is still moving up but it’s been slower to peak, with the average sale price hovering around $1.28 million. The number of active listings declined by 6.2% from the fourth quarter of 2014, while sales are down 4% over the same time frame. Despite these dips, 2015 was still a record-setting year and the big question is, what’s next for the New York real estate market?
China’s slide will help to maintain the momentum
From an investor standpoint, real estate remains a hot ticket for 2016 and New York is set to remain on solid ground, despite foreign market upsets. China’s shaky economic outlook has triggered a fight-or-flight response among foreign investors and the result is a substantial shift in assets to less volatile U.S. holdings, including real estate.
According to Collier’s 2016 Global Investor Outlook, New York continues to be a prime destination for wealthy investors in need of a safe haven. Manhattan took the lead in terms of global capital in the third quarter of 2015, raking in more than $4 billion. That trend looks set to continue, with 24% of overseas investors planning to invest in New York real estate over the next 12 months.
The luxury market may be more vulnerable
While an infusion of foreign dollars is fueling the boom in New York and other cities, certain segments of the market may be more susceptible to upsets in connection with the turmoil in China. For 2016, Knight Frank is forecasting a 5% increase in pricing for luxury real estate in the Big Apple but although supply is expected to rise significantly, demand will remain relatively moderate.
The median sales prices for a luxury property in Manhattan registered at $6 million during the fourth quarter, according to Elliman. That’s an increase of 25% over Q4 of 2014 but in light of what may lie ahead for China, prices may begin to increase at a much slower pace.
Worldwide, Knight Frank anticipates that average annual price growth for luxury properties in the world’s top markets, including New York, will drop to 1.7%, a decline of nearly half over 2015 figures. If the Chinese economy continues to flounder, the ripple effects could spread to the larger luxury market, resulting in lower prices for buyers and fewer returns for investors.
Where will rising interest rates fit in?
The Fed’s recent rate hike shouldn’t have come as a surprise to investors and in many ways, it was something of a relief when the trigger was finally pulled. As far as how an increase in the short-term rate will affect New York real estate and real estate investors in general, it ultimately depends on which side of the market they’re buying on and where the economy is at.
For example, in a strong economy where incomes are going up, residential buyers may be willing to take on a higher cost of mortgage when property values are also increasing. While rental prices in Manhattan haven’t increased as quickly as sale prices, rents are still on the rise while inventory is creeping up at a snail’s pace. Those two factors may push more buyers into the market, despite higher rates.
In the commercial real estate arena, an increase in the short-term interest rate is likely to be felt most deeply in markets where cap rates have become compressed. In recent years, Manhattan’s average cap rate has hovered around 5%, with certain properties dipping below that figure. A hike in the short-term rate could result in higher cap rates and correspondingly lower property values, which increases the risk to the investor.
New innovative real estate investment models such as Real estate crowdfunding can also be an effective way for investors to escape the potential threat posed by rising rates. At RealtyShares (where I’m CEO) for example, we haven’t seen a significant increase in the interest rates associated with commercial loans for small-balance commercial real estate projects. Rates have also remained stable for residential borrowers seeking fix-and-flip loans.
The bottom line
China’s real estate market has been on a steady decline, with sinking prices driving investors into stocks. Falling stock prices and a weakening currency are at the center of the economic storm. Accordingly, atleast for now, Chinese investors are pinning their hopes on U.S. properties.
The stage in New York is set for continued growth, particularly in Manhattan where, despite a projected cool-off in sales, prices are expected to keep rising at a fast clip. City-wide, renters are going to be spending even more on housing, with Brooklyn renters shelling out the highest percentage of income. For now, the New York real estate market looks poised to continue its reign as a hotbed of opportunity for investors.