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02/24/2014
How High Can Luxury Real Estate Prices Go?
FROM LEFT: Property Markets Group founder Kevin Maloney, DDG’s Joseph McMillan, and AllianceBernstein’s Brahm Cramer.
FROM LEFT: Property Markets Group founder Kevin Maloney, DDG’s Joseph McMillan, and AllianceBernstein’s Brahm Cramer.

Manhattan real estate broke numerous records last year, as prices for trophy listings soared into the stratosphere, several beyond that once-unthinkable marker of not so rational exuberance—$100 million. But can this hot market stay hot? Will Manhattan trump London as the haven for the world’s super rich? To get a better read on how the top end of the residential market will play out this year, Gotham and investment management company AllianceBernstein held a roundtable discussion with five luxury property pros: developers Peter Armstrong, Kenneth Horn, Kevin Maloney, and Joseph McMillan, and Douglas Elliman’s Susan de França. Brahm Cramer, co-head and co-chief investment officer of the real estate investment group at AllianceBernstein, moderated the panel.

Brahm Cramer: Looking around this table, there are probably 15 luxury projects represented from the last three years and a lot of announced projects coming online. Is supply finally keeping up with demand? Have we hit a point where anybody has any concerns?
Kevin Maloney: In the neighborhoods we’re building in, there’s quite a bit of competition. We’re not seeing any push back in the velocity or the price point of sales.
Kenneth Horn: Nobody is doing a 500-unit project—you’re putting 50 units, 100 units on the market.
Peter Armstrong: I’m building nine units on 12th Street.
Joseph McMillan: If you look in particular neighborhoods, there’s still not a lot of supply relative to demand.
Susan de França: We see more inventory coming online in 2014, but demand still exceeds the supply. We had a very robust fall selling season; as a result, there’s a shortage of new inventory in the marketplace.

BC: Does anyone see a ceiling on prices?
PA: The market streamed up very quickly the first half, or maybe the first three quarters, of 2013. I think it has leveled. There are two markets in the super-luxury end: The trophy towers in Midtown, which very much appeal to foreign buyers, as well as some locals. And then you have the downtown market, which I see as 90 to 95 percent local buyers. I think there’s a fair way to run within this market. I don’t see it suddenly hitting a wall for any reason.

BC: As you hit higher prices, how much more demanding are buyers? And how much do developers have to change the product given new price points?
SDF: There is a high demand for real quality—a very experienced developer that drives the price points tremendously. I would say the luxury buyer has been spoiled. In Walker Tower, for sure. I’ve never seen a developer finish a product to that level of design.
KM: Well, Walker Tower didn’t start that way. In 2010, when we bought, there hadn’t been anything built [in Chelsea] for three years. We had projected a $1,700-a-foot, typical Chelsea market. Walker started as a much different product and then morphed into a very high-end luxury project as we saw where the market was.
KH: We had the same experience, because we bought around the same time. No one in their right mind would underwrite a deal at $2,500 a foot in 2010. You couldn’t get it financed.

BC: Could you comment on Peter’s contention about foreign buyers and the broad base of buyers?
KH: We thought the 77th Street project [Isis, 303 East 77th Street] would be 100 percent New York buyers, but we’ve got Brazil, Turkey, China, Japan, New Zealand, Australia, Las Vegas, Tennessee, California. And of the 33 sold [out of 55] on 15th Street [35XV, 35 West 15th Street], 15 are non–New Yorkers.

BC: How much of that is your marketing or sales programs?
KH: On 77th Street we had no international advertising. No one in my firm thought that east of Lexington would attract foreign buyers, but we have been.
JM: We attracted foreign buyers in the Meatpacking District, but found the downtown market, depending on the neighborhood—Chelsea, Tribeca, West Village—would be more inclined to be families. In the case of the Meatpacking District and Soho, you see a mix.
SDF: I would add that in the super-luxury Midtown market, Russians, Chinese, Indians, and Canadians are the categories. But Russians and Chinese are definitely our predominant market share.

BC: Is some of this just flight capital as opposed to having a pied-à-terre?
SDF: Some of it is, but more and more people are buying to enjoy the lifestyle. New York is a cultural destination, too.
PA: One of the reasons London real estate is so expensive is because of flight capital from Russia and the Middle East. London had some very attractive tax advantages for foreigners to buy apartments. Those tax advantages have been eliminated, so I think you are going to see more Russians and Middle Easterners coming to New York. And you’ll see the French as well, because it’s not very easy living in France today with the political climate, and the taxation there is a complete nightmare.
JM: New York by any measure is one of the safest places to invest in. Regardless of where you sit around the world, New York is viewed very favorably, and I think we’re all benefiting from that.
PA: Whether you sell to locals or foreigners, at the end of the day it doesn’t matter. But it’s safer to rely upon locals buying than it is somebody from Russia or China, because if things go wrong [in their home countries], they can’t get the money out.
KH: At the Woolworth Building, I imagine we will attract New Yorkers and people from outside the United States. We have only 35 units.

GOTHAM: Could what’s happening in London—the city becoming unaffordable, even for those considered upper middle class—happen here?
PA: Even if you’re wealthy, you can’t afford to live in parts of London now. The foreign people who have been buying haven’t been buying for returns; it’s to get capital out, to have an asset—and it’s appreciating. There’s more and more coming in, so prices are going up. In parts of London, purchased homes are not lived in—it’s a ghost town. Is that going to happen in New York? I don’t think so. It’s a different world. There’s a breadth of housing stock here, between rentals, co-ops, as well as condominiums. But say people from China, the Middle East, or Russia buy a two-bedroom condominium at 432 Park. It’s parking money, but it’s also having the convenience of being able to come here and stay. I think the bigger issue is that some of the high-profile projects in Midtown are 4,000, 5,000, 6,000, 7,000 square feet. I’m not sure those are going to be bought as pieds-à-terre because they’re rather large.
KH: The concept of a pied-à-terre has changed enormously. It used to be studios and one-bedrooms and now they’re—
PA: 2,500 square feet! 6,000 square feet!

GOTHAM: Is $50 million the new luxury threshold?
SDF: I’m not sure it’s the new threshold, but we have achieved those numbers.
KH: We just got approval to do the top of the Woolworth Tower. It’s going to be about 8,000 square feet spread across five stories. I don’t know what we’re going to price it at, but I imagine it will be priced at a very high level. It’s a one-of-a-kind asset, like the Walker Tower penthouse, and you’re 800 feet up in the air.

BC: When you get to those price points, how do you differentiate yourself from the 432s and the One57s? There is a fair amount of product out there for the $5,000-per-square-foot buyer.
JM: I think it’s the amenities package for the building, the finishes in your flooring or your marble or other stones. Whether it’s radiant heat and you put in a swimming pool, or you put in the outdoor shower. The views are obviously critically important. Potential buyers want something special. If you don’t check the boxes, I don’t think you’re going to get that price point.
SDF: It has to do with design, with the layouts, how much of a particular product is in a building. There’s a named architect as well as a renowned interior designer for almost every new development today. It’s a pretty powerful combination.
KH: At Woolworth we made a decision that we were not going to try to be what we are not. We are not going to modernize this building because a lot of modern, glass towers are going up. We decided to go with architectural integrity, be true to the building’s character. Obviously [the building] has modern components, but in terms of the finishes, we are trying to keep it in the nature of the original architecture.
PA: But you are creating something that is unique, and that is what people will pay for.
SDF: We did the same things with the Kushners, who we’re working with at the Puck Building. We embraced the architectural elements, the high-vaulted ceilings. That is what people are looking for in these iconic properties, not for a sleek, modern white box.
KM: I’m sure there will be an amazing price achieved on that Woolworth penthouse unit. But whatever it is, modern or historic, if it’s one-of-akind, people are paying $50, $70, $90 million.
PA: There are certain bragging rights a purchaser wants to have.
KH: Recently, somebody bought an apartment for $60 or $70 million, but he actually had a piece of art in the apartment that was $150 million!
SDF: Which is why Douglas Elliman Development Marketing sponsored Art Basel in Miami Beach this year—we know that’s our audience. Our buyers are avid art collectors, particularly in the penthouses. So we targeted that market, and as a result we’ve made good sales.
KH: There’s also an issue, when you design these buildings, to have enough wall space.
PA: And you need to put blocking behind the walls so they can hang the pictures!

BC: Given what’s happened in pricing, all tides have risen, so the price of admission for every project is higher. What actually gives you pause? What keeps you up at night when you think about the next project?
KH: I’m sure we all feel this—everything keeps you up at night.
JM: I’m starting to think most of us have “overpaid” for land.
KM: Yeah, you always “overpay,” and then six months later you’re a genius.
JM: Until five other people pay more than you.
PA: I think there’s nothing wrong with overpaying for a piece of property if you sense where you are within the cycle.

BC: So in your view, where are we in the cycle? If it were a nine-inning game—
PA: I think we’re probably in the second inning.
KM: I hope that’s true.
PA: In my view, it really all broke out at the beginning of last year. That’s only 12 months or so ago. 150 Charles [editor’s note: considered Manhattan’s most successful building in 2013] was among the first coming out. Two years before, the One Madisons had failed.
KM: The problem is what we are supplying is at the very peak of the price point. When we look at sites, my concern is land prices. Land has gone from 200 in FAR [floor area ratio, which is a building’s total square footage divided by the square footage of the building’s lot] to over 800 in FAR in certain locations. Construction costs, because of everything that’s going on in the city, have gone up—for us, 30 percent since early 2010. In Miami, they’ve gone up 100 percent.
PA: Thank god these buildings are small-number units, otherwise we’d be in the eighth inning.

GOTHAM: How will the de Blasio administration impact real estate development?
JM: I think the mayor has a very robust agenda for the creation of housing for moderate and lower-income families who have not been served to the extent he feels appropriate over the past years. We actually view it as a potential opportunity because there is so much real estate that will have to be built in order to accommodate the goals of the administration. It’s going to bring construction jobs, development opportunities, lending opportunities. We think there’s an opening here over the next four years to do something.
KM: Everyone is kind of sitting around waiting to see what his policy is. He’s a former HUD commissioner, so he allegedly has a great housing background. The jury’s out right now.

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