Manhattan Real Estate Still in Flux

These market reports depict closed sales for the third quarter of 2009 and have a lag relative to real-time activity. It takes roughly two to three months to close after a price is agreed upon. Hence, prices reported are those that traded in June or July.

Since then, my real-time observation is that prices have declined further, and by the time the fourth quarter report is published I won't be surprised if prices are 3% to 7% lower than the third quarter. But transaction volume has indeed been increasing.

Buyer's Market

Yes, brokerage firms paint a picture of an improving market. However, there are negatives, including unemployment hitting 10%, expiration of the first-time home-buyer credit in November and of course, the glut of new development units in Manhattan. Inventory in Manhattan is around 8,400 units, which is higher than the 10-year average of about 7,100 units.

Every week, we hear news about a developer announcing potential bankruptcy or something related to an inability to repay loans.

For the buyer ready to get into the market, now presents the advantages of low interest rates and a buyer's market because everyone seems to be running away from real estate. The current market obviously favors the buyer and here are suggestions to effectively negotiate the next deal.

• 1. Winter will be a great time to buy because it's a dead season. This means developers will be more willing to extend better deals.
• 2. Be aggressive when negotiating. You want to be the beneficiary of the downturn, not the victim of it. Even before potential buyers ask for a better price, sellers are already offering a lower price compared with the listed price. Prudential's third-quarter report shows the average price per square foot for a condo as $1,101. But we've observed even very nice new developments selling at 10% to 20% lower.
• 3. Cash buyers should be even more aggressive when negotiating. If you're a cash buyer, you're gold because no credit is required and closing is a lot faster. We have seen buyers who offered to purchase multiple units at a substantial discount and wanted a response on the spot. Of course, the seller gave in because despite a lower price these are units that will very likely close. Each additional signed contract increases the developer's credibility with the bank and with the next potential buyer.
• 4. Do the numbers. Compare the price per square foot you would be paying relative to what has closed in the same building. It's all public information. Also, look at the number of units for sale and for rent, both of which will tell you a lot about the demand for the building.

  The cap rate of a Manhattan condo is about 3% to 4% while it's about 5% for a mixed-use building. The cap rate is the net rental yield assuming no financing involved. Hence for investors, it can be compared against a stock's dividend yield, a bond's coupon or a bank certificate of deposit.

• Finally, get a fixed mortgage. With the Obama stimulus plans, we will have higher inflation ahead.

This is one reason why gold prices have shot up recently. With inflation, prices of all things increase and this includes property value and rental income. In residential real estate, mortgages could be fixed for up to 30 years; in commercial, up to 10 years. By fixing your mortgage, you are essentially repaying the debt with weakened currency over time. If you're renting out the property, rental income will rise with inflation while mortgage payments stay the same. This leads to a larger cash flow over time.

Inflation is the reason why buildings in Manhattan today that are worth $300 million were only $10 million 30 years ago. The successful landlords understand and practice this concept of using real estate as an inflation hedge and letting inflation do its work over time.

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