WHITE PAPER: Keep An Eye Out for Bulk Condo Opportunities

WHITE PAPER: Keep An Eye Out for Bulk Condo Opportunities 3 Feb 2021

By James Nelson

Now is the time for bulk condo sales purchases. As challenged as the residential sales market has been post COVID, this is an investment certainly worth exploring.

According to a Marketproof report, there are 15,000 unsold condos in New York City. The New York Times wrote that one in four apartments in the City remain unsold. If that weren’t enough, some brokerage firms speculate that there could be as much as $33-40 billion in additional shadow inventory, which hasn’t even hit the market.

Meanwhile closings have been cut more than in half post COVID. The Miller Samuel Report cited that the number of condo sales in 2020 fell 20.6% from the same period last year. This was the most significant year over year decline in thirty years of record keeping.

There is no doubt a massive wave of distress coming. The luxury market which the Olshan Report defines as over $4,000,000, already has an average of over 800 days on the market to sell. It could take a decade or more to clear out this high priced inventory. But where there is distress, comes opportunity.

It’s essential not to paint the entire residential sales market with one brush. The opportunity exists to purchase “affordable” condos in bulk which will continue to appeal to New Yorkers who are not speculating or parking foreign capital, but to live in. In most cases, they buy in boutique projects in neighborhoods, as opposed to penthouses on Billionaire’s row.

In any investment, one must also look for the outlier trend. Consider the following search on Streeteasy, there are:

  • 4,391 Manhattan Condos for Sale in Manhattan
  • 2,972 Manhattan Condos for Sale in Manhattan under $3m
  • 383 Manhattan Condos for Sale in Manhattan under $3m that were built since 2018
  • 65 Manhattan Condos for Sale in Manhattan under $3m that were built since 2018 which are under $1,500/SF

Thus, on the surface it would seem there are thousands of apartments in the market, but when examining more closely those “affordable” units under $3,000,000 and under $1,500/SF are few and far between – 65 to be exact. Jonathan Miller’s report confirms that much of the demand is focused at this price point.

Although currently the sale spigot would seem to have been shut off, historically there has been great appetite for Manhattan apartments. Halstead reported $13 billion in closings since 2018 with $2.2 billion currently in contract compared to the $5.7 billion in current inventory.

With mortgage rates at all time lows, it would seem buyers would begin to come back into the market once vaccinations are prevalent and office begin to open back up hopefully by the fall at the latest. One could also look at the $5 trillion sitting in money markets that has been pulled out of the market and sitting on the sidelines. This even surpasses the peak of the Financial Crisis.

If the opportunity exists in the under $3 million dollar space, where do these apartments exist? According to the Real Deal, in 2019 80% of the 51 Manhattan condo projects had less than 50 units which would be a good place to start. These condos also for the most part do not have high common charges to cover sprawling amenity spaces.

It would also seem the number of total Manhattan condos filed for have slowed over the last year. In the same Real Deal report, they counted 1,837 apartments completed in 2019 versus 3,451 in 2018.  In this cycle’s last peak, 2013 recorded 4,226.

Land sales have plummeted in Manhattan this year. In 2020, Avison Young reports only 30 of land sales for a total buildable square footage of 1.7 million. This is a fraction of the peak markets in 2015 where there were a total of 182 sales for a total of just over 9 million BSF. With equity and debt almost non-existent for new condo development, there will be almost a complete void of brand-new product in 2-3 years. That will be when the opportunity to resell will occur.

There is now an opportunity to purchase bulk condos from developers who are eager to get inventory off the shelf. Lenders will have to no doubt cooperate as in many of these situations the equity has been wiped out. Lenders will have to agree to short sales, to drop below their previous release prices which have made retail individual sales all the more impossible.

Buying bulk condos in this moment of time when the pendulum has swung too far and “affordable” condos have been batched into the rest of the luxury condo distress would be well timed. Renting to those would-be home buyers on the sidelines, will help carry the investment until the time to harvest returns.

The last recovery from 2009-2015 saw a 74.5% increase in condo prices. Those investors who bought in during those distressed times were well rewarded for their contrarian investment. This next cycle may no doubt bring the same opportunity.