New York City real estate lags on luxury speculation

as many construction projects finally come to fruition years later, it appears many investors have missed the boat.

as many construction projects finally come to fruition years later, it appears many investors have missed the boat.

 

It's been no secret that real estate is booming in the U.S., but evidence of its rapid growth can be hard to find from the view on the street. Instead, one must travel to one of the nation's densely-packed cities and look up to see that evidence.

As of the summer of 2015, New York City was poised to break records for building. The Wall Street Journal reported last July that the number of building permits issued to developers from the city exceeded 42,000 in the first six months of the year. The city would end up well exceeding its previous record of almost 50,000 permits, set in 1963.

"Luxury real estate is often used as an investment rather than a residence."

According to the Journal, much of this building and investment was focused on tapping the most lucrative segment of the real estate market since the beginning of the decade: luxury high-rises. With post-recession economic conditions and tax advantages, wealthy investors began pouring money into multi-million dollar condominiums and apartments in New York and elsewhere. Rather than using them as a residence, however, these luxury apartments often sat empty, instead being used as promising investment vehicles in a global economy that offered few avenues for solid returns on capital.

Luxury wave crests

Now, as many construction projects often take years to complete, it appears many investors have missed the critical importance of proper forecasting. As the New York Times reported July 11, the high-end real estate wave in New York City may have finally crested, possibly an example of overzealous speculation. Along with global market uncertainty that hasn't abated, more economic pressures at home and abroad have caused wealthy financiers to reconsider their options. Britain's vote to exit the European Union is just the latest in a series of developments that have preempted a chill in this once booming market. In China, the home of many investors who had been snapping up luxury real estate in the city, the national government has decided to restrict capital outflows in the hopes of keeping more money at home. And the U.S. government has begun to shift more attention to investors who may be using luxury real estate to shelter money from taxation, according to the Times.

In the short-term, this has led to appraisals trending lower for big-ticket real estate, in New York and elsewhere. In some cases, the Times found, luxury apartments were seeing price reductions amounting to nearly half their original value. Of course, a reduction of $40 million from $80 million doesn't put these spaces within the reach of the average renter, exactly, but it's a notable trend nonetheless.

New York
Investment in luxury real estate may be finally tapped out.

Planning ahead

This is especially true when taken as a signal for a shift in not only the local New York City real estate market, but in cities around the country as well. According to financial new source The Street, developers around the city are now hoping to focus on new market opportunities. This includes assisted living properties, which are expected to see growing demand in the near-term. One real estate appraisal analyst told The Street that with more than 100,000 seniors and retirees living in Manhattan alone, the market for modestly-priced assisted living high-rise properties could be a very safe bet.

These trends playing out around New York and other U.S. urban centers show the impact of substantiated appraisal practices on the real estate market at large. Although speculation may be inevitable in some instances, valuation professionals can be relied on to provide insight into the current state of even the most dynamic and fast-paced markets.