New York City real estate: How high is the sky for Asian investors?

By Robert Carey Lobel
President, Bellrock Development Group, LLC

Just as in history past, where once Rome, Athens, Alexandria and London were the center of the world, dominating and driving economics, art, music and culture, New York City has for the last 50 years commanded that lofty title.

The demand from local, national and international investors for New York City real estate, many from Asia over the past four years, has not only continued unabated, but also increased substantially. Hilton’s $1.95 billion sale of Manhattan’s iconic Waldorf-Astoria Hotel to China’s Anbang Insurance Group in October shows how much Chinese and other Asian investors are willing to pump into commercial properties in the Big Apple.

Other high-profile deals include the recent acquisition by China’s Sunshine Insurance Group of the Baccarat Hotel at a record price of over $2 million per room. Shanghai-based Fosun International also purchased One Chase Manhattan Plaza, the downtown office building, for $725 million in 2013. Chinese players have typically bought hotels and commercial office buildings in the city, but not many residential buildings or development sites.

What’s fueling the demand? A flight to quality and stability following the economic meltdown of 2008 is combining with the historically low interest rate environment, drawing disproportionate amounts of investment capital to New York City real estate. This demand has resulted in the classic scenario of compressed yields for existing property and sky-rocketing prices for land.

In the past 30 years, the price of land in New York City has increased more than 10 times. What does this bode for the current and next generation of real estate developments, the price of residential apartments and the sustainability of year over year increases?

In 1985, land for residential development in New York City traded between $65 and $120 per buildable square foot, depending on location, size and zoning. The cost of construction ranged from $75 to $125 per square foot depending on quality, finishes and height of the building. Other project soft costs including construction financing interest costs, were approximately 33% of the land and construction costs combined. The finished project costs therefore ranged from $180 to $320 per square foot. Developers typically work on a minimum mark-up to cost of 30%, thereby resulting in sales prices of $300 to $525 per square feet (after allowing for a loss factor of 14% for space dedicated to non-selling aspects such as lobby, hallways, elevator shafts and stairwells).

In today’s market, land prices range from $650 to $1,250 per buildable square foot, again depending upon location, size and zoning. Construction costs range from $330 to $600 per square foot and soft costs are slightly lower at approximately 27% of land and construction costs combined, due to the low interest rate environment. The finished project costs range from $1,270 to $2,450 per square foot. The end sales price range from $1,925 to $3,475 average per square foot with the higher floors with enhanced light and views trading at premium prices over the lower floors.

Over the past 25 years, the pro-business, growth and development policies of successive Giuliani and Bloomberg mayoral administrations ushered into NYC an unprecedented equalization of neighborhood desirability, resulting in fewer and fewer underpriced neighborhoods left for developers to pioneer. Hell’s Kitchen became Clinton, parts of the Bowery became Nolita, Industrial West Chelsea became the High-Line District and the Lower East Side and Meat Packing districts became chic and cutting edge.

The traditional ratio of land to total project cost of approximately 33% has now increased to over 50% and further skewed the economics of new development projects. The end result is new apartments that are targeted to and afforded only by a narrow buyer segment, especially in the ultra-luxury market where a large part of the available and coming to market inventory are priced in the $20 million plus range.

And yet, the market in New York City shows no signs of slowing down, overheating or over-pricing because there are so few apartments available. The demand and supply of apartment inventory, both new and old, are out of sync by an unusually wide margin. Of the approximately 900,000 condominiums and co-op apartments in the city, less than one half of one percent, a little over 5,000 apartments, were listed for sale in the first quarter of 2015.

Asian investors note: Even at these elevated prices, New York City continues to be a magnet for international buyers and is still far less expensive than other major capital cities including London, Singapore, Hong Kong, Geneva and Monaco and still remains highly competitive with Sydney, Paris, Beijing, Shanghai and Rome.

New York City continues to make and remake itself and generate opportunities rarely or not available elsewhere. With so little land left for development and so much demand locally, nationally and internationally for New York City real estate, how high the sky only applies when looking up, not ahead.

Robert Lobel is a New York City real estate specialist with over 30 years experience in acquisitions and development of commerical office buildings, residential buildings and hotels. He is the president of Bellrock Development Group and can be reached at rlobel@bellrockdevelopment.com

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