The ongoing lull in Manhattan’s real estate market might have some homeowners feeling bitter, but more than a decade of housing data shows the borough remains one of the safest real estate investments out there as long as you stick to the market’s sweet spots.
The U.S. is now in the longest period of economic expansion since World War II, a fact that has economists predicting (and investors fearing) an impending downturn in the next one to four years. The good news is that Manhattan housing historically has marched to the beat of its own drum when it comes to market cycles, which have been particularly brief when it comes to entry-level luxury apartments in established residential neighborhoods, according to experts and market data.
"Manhattan real estate is a good investment regardless of the macro-economic cycle because those big economic events have not had a major effect," said Michael Slattery, senior vice president for research at the Real Estate Board of New York. "The exception was the recession of 2008-09, but that was a quick recovery. It was two quarters and then things began moving up very rapidly after that."
These days, the Big Apple offers a better opportunity for price appreciation than many other global financial centers, according to a report from UBS bank’s Chief Investment Office. The bank’s wealth management division publishes an annual Global Real Estate Bubble index, which has rated New York City prices "fair value"—especially compared to hot markets like San Francisco, Hong Kong, Toronto, Sydney and London—for nine out of the last 10 years.
Strength in Entry-Level Luxury Manhattan’s sweet spots for making a return on investment are entry-level luxury apartments, which have had the most stability in terms of buyer demand over time, said Raymond Chalme, president and chief executive of Broad Street Development, the firm behind new project 40 Bleecker St. in NoHo. He pegs affordable luxury these days at between $2 million and $6 million.
"In any other market, it would seem like luxury," Mr. Chalme said. "But it’s almost like the starter apartment for people who have well-paying jobs—technology, biotech, universities, finance."
This segment of buyers, which he referred to as "the working rich," fuel demand even during the natural ups and downs of the market cycle.
"They need to live somewhere," he said. "That’s where the breadth of the market is."
A cooldown in Manhattan’s ultra luxury market over the past year underscores Mr. Chalme’s point.
From week to week, luxury homes priced under $6 million continue to see robust sales, while those over $10 million have gotten more significant price cuts and are sitting on the market for longer, according to data from the Olshan Report, produced by brokerage Olshan Realty. The report tracks weekly contracts signed for Manhattan homes priced at $4 million or more.
More Bedrooms, More Risk In a similar vein to expensive property, large apartments with many bedrooms tend to have more price volatility than your standard one- or two-bedroom apartment, data shows.
Part of the issue is that apartments with four or five bedrooms, as well as townhouses, are rarer and thus harder to value correctly, leaving them vulnerable to longer periods on the market and greater negotiability.
The median price of apartments with at least four bedrooms more than quadrupled between the late 1980s and the run-up to the Great Recession, hitting $12 million in the first quarter of 2008, according to quarterly price data from appraisal firm Miller Samuel. But the economic turmoil quickly sent four-bedroom-plus pricing into a tailspin, and median price plummeted 67% to $3.92 million in the second quarter of 2009, and median price has still not returned the 2007 peak. Meanwhile, median prices of one bedrooms and two bedrooms in Manhattan have surpassed their pre-crisis peaks, the data show.
Holly Parker, one of Douglas Elliman’s top-selling agents, led sales in Jean Nouvel-designed 100 11th Ave. between 2009 and 2011, the most challenging years post-recession. She recalled the incredible demand for the building’s one-bedroom condos.
"We had 176 letters of interest for 28 one-bedrooms. People were crying," Ms. Parker said. "They couldn’t get their hands on them fast enough."
Two-bedroom apartments are also a popular product because it offers space to grow into, she said. "You can have a guest room or get a roommate. You can have a baby."
Look for Quality But ultimately, it’s the quality of the product that will help it sell and make it worth owning and living in, she said. "One of the things I try and say—and say loudly because I’ve been doing this for 23 years—please remember to get your hands on the best product you can," Ms. Parker said.
Buyers should look for homes with intrinsic value added from expert construction, tons of natural light, outdoor space, nearby schools and a well-established neighborhood, said Wendy J. Sarasohn, a broker with Brown Harris Stevens who began working as a real estate agent in New York City in 1987. Since then, Ms. Sarasohn has worked through the the Great Recession and the downturns of the early 1990s and post-9/11 and and learned to avoid trendiness.
"I don’t believe in real estate as a marketing gimmick. If they’ve got the most high-tech bells and whistles I can see that in a few years, that’s going to get old," Ms. Sarasohn said, comparing the process of home-buying to collecting quality art.
"There’s a lot of product, but there’s not a lot of quality product," she added.
In that same vein, a buyer looking to live in a home that will maintain its value or appreciate should look in iconic neighborhoods with an identity, as they tend to see better price stability than "up-and-coming areas," said Mr. Slattery, REBNY’s senior vice president for research.
Stable areas include the Upper East Side, Upper West Side, SoHo and Greenwich Village, Mr. Slattery said.
"Where you see volatility is where you see emerging neighborhoods, and that’s only in the beginning, when they are in transition," he said.
Due to a major safety push starting in the ’90s, much of Manhattan has transitioned into established residential neighborhoods. But there are pockets still in flux as luxury developments rise in previously average or non-residential areas, including the far West Side, which developers are turning into a luxury enclave at the edge of Hell’s Kitchen and Midtown, as well as parts of the Financial District, where prices are prone to exaggerated gains and falls.
"When you go to those fringe areas, that’s where there’s more price volatility," said developer Mr. Chalme. "Successful people always want to be in those locations that are near the fabric of what we traditionally call New York City."