Small is Beautiful

To judge from reports in the press, New York is a city filled with foreign billionaires. They plunk down $30, $40, or $50 million to buy crash pads in which they will likely reside no more than 45 days each year. There is no denying that market does exist, but it represents a tiny fraction of the real life transactions which are consummated each year. While the mega-market has slowed, both for condominiums and co-ops, properties under $2 million remain both sought after and fought over. 4.5 and 5 room apartments are THE hot commodity of 2014!

The constituency for these two bedrooms represents people at all stages in life. The young couple with a new first baby (or second baby) sees the 4.5 room apartment as an opportunity to sleep alone again someplace other than the living room sofa, and maybe use the dining area as a nursery. For the single professional, there's a bedroom and an office. And for empty nesters, moving from a larger apartment or a house in the suburbs, they get a guest room as well as a master bedroom, usually with a separate bath. And the 5 room buyer gets a formal dining room, today often used as a den or third bedroom, as well.

The supply of properties of this size and price range remains low, while demand soars ever higher. For this size property, in today's low interest rate environment, it remains more advantageous on an after tax basis to buy than rent. This has proved particularly difficult for the younger buyer. In general, single professionals and empty nesters have stronger assets and fewer expenses than the young family. So when these listings go into multiple bid situations, as they often do, older bidders tend to have a better balance sheet, which makes a stronger financial case for them and thus wins them the apartment.

Over time this phenomenon becomes a self-fulfilling prophecy.  As these properties become more in demand, their prices increase.  As the prices increase, the balance skews even more away from first time buyers and young families towards more affluent purchasers. The Upper East Side two bedroom, two bath with a dining area which cost $1,350,000 18 months ago and $1,465,000 last winter is now asking $1,650,000. Four rooms and two baths (approximately 1,000 square feet) in a new condo in West Harlem (south of 125th St.) now costs $1,000 per foot, or $1 million. Increasingly, we see families in this price range reluctantly moving deeper into Brooklyn or to the suburbs where a four bedroom house with a yard can be cheaper than a small apartment in Manhattan or brownstone Brooklyn.

New construction does little to ease the logjam in this segment of the market. Because land and building costs have risen so high, developers focus mostly on larger properties which can command a higher price per foot (the only exceptions are in outlier areas like the Financial District and the far West Side below 60^th Street, or historically inexpensive areas like Harlem or Crown Heights). So while we may find ourselves a year from now with more $25 or $30 million condos on 57th Street than the market can bear, we will remain short of large one bedroom and two bedroom apartments costing $2 million or less.  Now THAT is a story!