New York Times revisits valuation of outdoor space, oddly

nice to see numbers, but the article is a mess

Did you see the big piece in Sunday’s New York Times real estate section about valuing balconies, terraces and other outdoor space in Manhattan lofts and apartments? On the one hand, Terrace for Sale, Includes Condo is a refreshingly data driven article, prominently featuring a Warburg agent who keeps a data base of “several thousand” (!) Manhattan sales with outdoor space. On the other hand, the article is a maddeningly meandering mess. On a third, if whimsical, hand, it is shocking to see a Manhattan valuation article in a major organ of the Real Estate Industrial Complex, Manhattan Media Division, that does not include the words “Jonathan Miller”. (Perhaps he forgot to pay his 2014 dues??)

This is going to take a while, as there is some classic Manhattan Loft Guy meandering ahead. So take it slow.

the good news: The Rubric lives

Reporter Julie Satow is in good company in referring to “the industry rule of thumb, which places outdoor space at 20 percent to 50 percent of the price of the interior square footage”, though there’s no citation for this standard. As long-time readers of Manhattan Loft Guy will know, I frequently cite The (missing) Miller in support of a rubric setting 25% to 50% as a baseline for considering the value of outdoor space, with my May 6, 2010, riffing with The Miller on the value of Manhattan terraces, decks + balconies, being probably my most self-cited post. (If you are interested in this topic and have not read that post or the underlying Matrix blog post by The Miller, go there now; I will wait.) (Waiting ….)

I just re-read it myself and I am pleased that my post holds up so well after almost 4 years. Seriously, it is worth it if you are at all interested in the valuation of outdoor spaces in Manhattan.

After Satow cites the Industry Rule of Thumb of 20% to 50%, she then gets a different range from her data source at Warburg:

“There are so many variables, most brokers don’t know how to price outdoor space,” [the Warburg agent] said. “They go into an apartment and say it feels like $5 million, but they don’t have any data to back that up.”

According to her research, up until last year, these spaces sold for roughly one-quarter to one-third the value of the interior space. An apartment priced at $1,000 a square foot, for example, would have a terrace valued at $250 to $330 a square foot. She has found, however, that among the new luxury condominiums going up across Manhattan at a quick clip, the price for outside space can rival the price of the interior space

That claimed historical range of 25% to 33% is remarkably narrow, especially since (as the agent said), “[t]here are so many variables.” I wonder if that agent is the source for Satow’s litany of different kinds of outdoor space, here:

But not all outdoor space is equal. Like so much in this city, there is a hierarchy to heed. On the lowest rung of the ladder is the balcony, typically a cantilevered concrete slab that hangs off the side of a building like a jutting lip; it is used more for bike storage than sunbathing. On the highest is the terrace, usually tucked in a building setback so it opens to the sky, and large enough to host a summer barbecue.

Among terraces, the most sought after are directly accessible from the living room and have both helicopter views and privacy from the peering eyes of neighbors. Shape is also an issue. Wraparound types that stretch across more than one side of a building and offer multiple exposures are considered prime, followed by the square shapes that perfectly suit a dining table. And finally, there are the rectangular slivers that can barely hold potted peonies.

Then there are other kinds of outdoor space: the rooftop garden is loved by some, although it is considered a notch below the terrace because of the inconvenience of having to walk up steps, while maisonettes offer ground-floor gardens that can be large but are often too dark, shadowed by the tall buildings that surround them.

Thus, we have these variables: size, accessibility, views, privacy, shape, light. This list is uncontroversial, though The Miller was a bit more precise in, for example, referring to relative size of outdoor space to indoor space, with a terrace larger than half the size of the interior unit requiring a downward adjustment. Simply reciting a (non-exhautive) list of valuation considerations such as this should make the point that there is no formula that can generally be applied.

I can’t do better than quoting the master, again (his bold):

Disclaimer: No comments by an appraiser would be complete without a disclaimer. It is important to note that these are only rules of thumb to guide you – the value of a terrace is not formula driven – these relationships are developed from market data and can vary significantly depending on the combination of amenities and time. If you are unable to grasp this, close your eyes very tightly, think about a cool ocean breeze on a warm breeze sandy beach, while holding a large set of perfect comps, until memories of this post fade completely away.

Again, that claimed historical range of 25% to 33% is remarkably narrow, if it starts with those crappy outdoor bike storage spaces balconies at 25% and only go to 33% for a setback terrace large enough to host a summer barbecue. But if she has “thousands” of data points I won’t argue with her conclusions based on her data. I will argue from my own data points for Manhattan loft sales below, but let’s get back to the meandering New York Times piece.

and the point is …?

This bit about changing market conditions seems to be the main point of the Satow piece:

The demand for outdoor space has grown so strong that in some instances, prices have exceeded the industry rule of thumb, which places outdoor space at 20 percent to 50 percent of the price of the interior square footage. Some terraces are trading for as much per square foot as the interior space, or even more.

That’s where the wheels come off the article.

First, Satow then quotes that Warburg agent with her data-base derived historical range of 25% to 33%, with the (very) limited observation that in the current market

among the new luxury condominiums going up across Manhattan at a quick clip, the price for outside space can rival the price of the interior space.

The data-driven agent went on to make a general point about a significant part of the market, a point that I find hard to believe (at least as far as Manhattan lofts are concerned):

For co-ops, she found that terraces remain priced at one-quarter to one-third the value of the interior space.

Let’s review the world according to Satow: (a) the industry rule of thumb is that outdoor space is valued from 20% to 50% of the interior space; (b) but one agent who has a data-base thinks the real range has been 20% to 33%; (c) among a narrow subset of the market that gets a great deal of media attention, in “new luxury condominiums” outdoor price-per-foot values “can rival” indoor values; yet, (d) while among coops, terraces still fit the observed narrow historical range (20% to 33%). Additional support for these observations is anecdotal, if weak:

(e) “the average price of a luxury condominium [in downtown Manhattan] with a terrace is $8.3 million; that compares with just $6 million for those without terraces, according to Vanderbilt Appraisal”, a data point offered without consideration of the relative value of interior or exterior on a price per foot basis;

(f) “at Walker Tower, the Chelsea conversion where prices have broken several downtown records, a unit that has a terrace is selling for a premium of more than 40 percent over comparable apartments without outdoor space, according to Vanderbilt”, another data point offered without consideration of the relative value of interior or exterior on a price per foot basis; and

(g) “[a]t the recently completed 200 East 79th Street, [the Warburg agent] estimated the value of a nearly 700-square-foot terrace at more than 100 percent of the value of the interior of its high-floor apartment”, which, if an accurate estimate, is a data point based on relative values, but also a single data point.

Satow lets the Warburg agent tell a story, apparently thinking that the story supports her (only)-new-condos-break-The-Rubric theory. The story concerns a foreign guy who won a bidding war by bidding beyond the comps. Although the bidding concerned a condo with a terrace, there is no way to tell from the article whether the winner overpaid for the terrace, or overpaid for the condo, let alone what the relative values were for the interior and exterior spaces. According to the Warburg agent, that non-U.S. buyer overbid as a global-allocation-of-resources strategy (“for him, to pay a little bit more in New York was actually a good bet, compared to what he would be paying in London or Hong Kong”). That’s a quote appropriate to a different article, the boilerplate rich-foreigners-find-Manhattan-cheap article, rather than a quote that supports newly high relative values for terraces.

In other words, none of these reasons are particularly compelling pieces of direct evidence to support the conclusion that the new luxury condos with terraces represent a new phenomenon in the Manhattan market as far as relative values, indoors and out.

getting stuck in a loop of circular logic

In analyzing the rich foreign guy in that story (the guy who is “worth over $100 million”), the Warburg agent makes an interesting observation, that I just don’t see as adding much value to the article:

“a terrace buyer is an uncompromising buyer,” willing to pay more for what he or she wants.

From the limited facts as given, that guy was uncompromising not because he was a terrace buyer but because he was a rich foreign national who wanted to park wealth in Manhattan real estate, and was rich enough that he would overbid the comps to do so without financial remorse.

If what the agent means is something like “a buyer who has to have a terrace won’t compromise by buying something without a terrace”, that doesn’t seem to add much insight, even though it is likely to be true in almost all cases. It comes down to wealth: “a buyer who has to have a terrace won’t compromise by buying something without a terrace, and will overpay for the terrace if she has the need and the resources to do so“. Again, this seems both a true and an unhelpful way to describe a small class of buyers.

I heartily agree, by the way, that some people will overpay for outdoor space, in the sense that they will pay (and have paid) well beyond the rule of thumb valuations. I said as much in my May 6, 2010 post:

I suspect The Miller would find it prudent to consider how many choices a buyer has that include outdoor space. (Makes sense to me.) In the case of this deck, that seems to me the most likely driver for a premium value: someone who loves lofts has relatively few choices that include exclusive rooftop space. That buyer might be willing to ‘overpay’ to get that amenity, in the same way that people who love views will overpay.

Indeed, that post referenced a loft-with-roofdeck sale that I had then recently hit (in my May 1, 2010, terrace sells for about $1mm at 110 West 25 Street), in which the rooftop space was valued at about 70% of the interior value, despite being (in Miller terms) proportionately too big to even be considered for a uniform outdoor space value.

That loft-with-roofdeck was a condo, but hardly one of the new luxury developments that Satow thinks is breaking new ground. 110 West 25 Street is a lovely 2002 conversion, but with no amenities.

To take one more example from the very recent Manhattan Loft Guy archives, in my March 25, happy Renwick penthouse loft at 808 Broadway sells at $1,643/ft, I hit a coop with a terrace that was so lovely that it seemed to have just sold

essentially at par with the interior space. (If 95%, given all the ballparking here, is “essentially at par”.)

There’s another coop example in my June 1, 2012, loft on top of 303 Mercer Street sold with a very expensive roof deck, in which that roof deck comped out at 138% of the value of the interior. (My Miller-referencing sub-heading in that post was “breaking the Riff-o-meter”.) I was pretty astounded by that result, and struggled to rationalize it. (#FAIL) My conclusion should sound familiar by now:

To be plain: there is no way to rationally value the outdoor space of loft #A608 in a way that is consistent with past sales of lofts in the building without outdoor space, or with the only loft in the building with outdoor space that has sold in similar condition recently. No. Way. At. All.

You could say that the #A608 is an outlier. Or you could say that the buyers overpaid. And you could wonder how a bank appraisal worked for this sale.

are Manhattan lofts so different?

I am sure I could find other examples of outdoor space in lofts that comps out well above The Rubric. And I am sure that this is neither a new phenomenon nor one limited to newly developed uber-loft condos. Taking the Warburg agent at her word about her 4-figure data-base, I have to suspect that she’s got relatively few penthouse lofts in her set, and that (if she looked only at that niche) penthouse lofts are more likely to be outliers than your basic coop “apartment” apartment with outdoor space.

Penthouse lofts are still relatively scarce, which has to drive value for buyers who (a) love lofts, (b) won’t compromise on outdoor space, and (c) are well-heeled. But now I am not only repeating myself, but settling into a tautology loop. So let’s break out of that by wondering again about some odd stuffing in the Satow article.

meandering into some odd diversions

It looks to me as though reporter Satow got some interesting fact nuggets that don’t really fit the apparent point of the article (“demand for outdoor space has grown so strong that in some instances, prices have exceeded the industry rule of thumb …”) but were too juicy to leave out. So they got dumped at the end.

There’s that diversion about the lack of equity among owners at 215 Sullivan Street, where (some) “owners don’t even have to care for their outdoor space”. That story says nothing about the relative value of indoor and outdoor space, though it raised an interesting question for me. If 60% of the unit owners there have terraces or gardens that the condo maintains, do those unit owners have higher common charges to reflect the extra services they get?

And then there’s that diversion about scary terraces that are too high in the sky (“there is also the question of whether you would really want to sit on a terrace 50 stories above the pavement”), with a Rupert Murdoch name check. I can easily see how a terrace can be too high to be as functional as one closer to the ground (what’s the point of hanging out in a windstorm?), but Satow was unwilling to consider how that plays into values.

If the point of the Murdoch penthouse story is that the super-rich with fragile egos will overpay for an amenity so that other super-rich people will be impressed, well okay … but that would be still another story. One not directly related to valuing indoor space and outdoor space, and whether there is, in fact, a trend of outdoor space becoming relatively more valuable.

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