seller of Flatiron loft believes Manhattan loft market is not rational

I have to agree, and sympathize

When the owner of the “2,352 sq ft” second floor loft at 26 West 20 Street brought his “estate condition”, “[b]ring your architect and contractor” property to market in February 2017, he had a fairly recent, very close by comp to consider. His upstairs neighbor sold the 3rd floor as a “blank canvas … ready for you and your architect to build your dream home” in July 2016 for $2.875mm. A believer in data, or someone who believes that the Manhattan residential real estate market is more rational than not, would have viewed the second floor owner as reasonable (and not greedy) for asking that same price.

To say that didn’t work out is an understatement:

(I’m going to ignore the short-lived and overlapping Town listing in January that StreetEasy shows, as it doesn’t show as a co-exclusive and it doesn’t change my narrative.)

To recap: guy with loft to sell looks for a same-building past sale from seven months prior, prices at the same level yet doesn’t get to contract until he drops his price by 13% and then that contract fails (oy); he changes firms and has to drop twice more (by $575,000 in total, 20% off the first ask and the nearby comp), before closing at $2.25mm twenty months after he started. That’s $625,000 less than his nearby neighbor sold in July 2016.

Don’t blame overall market trends. As measured by the StreetEasy Manhattan Price Index, the overall Manhattan residential sales market was a little bumpy but essentially unchanged from the third quarter of 2016 ($1,150,541) to the third quarter of 2018 ($1,154,524) (do the hover-and-hold thing over the chart).

a gut should be a gut

The second floor loft needs … everything. The broker babble hits all the notes that the buyer should expect to erase all the lines on the floor plan, redo all the surfaces, and build out a brand new loft (sorry for the shouting):

currently laid out as 1-bedroom, 1-bathroom in estate condition. This is a rare opportunity to build a dream KEYED ELEVATOR, FULL FLOOR, PRE-WAR LOFT. … a chance to build immediate equity in a prime downtown location. … this blank canvas is currently being used as a live/work space. Convert this unit into a residence and create your dream home with a flexible floor-plan and no load bearing walls. The space could be made into an expansive 3 bedroom, 2.5 bathroom home plus office space and closets galore. …Bring your architect and contractor.

(I didn’t find any “historic pre-war details” in the photos, unless beamed ceilings now qualify as historic.)

do you see anything historic?

one idea for erasing the lines in the top (current) plan and redrawing to get 3 bedrooms in the bottom plan (note the limits imposed by the Long-and-Narrow form: to get that 3rd bedroom, the great room becomes not-so-great)

Back in 2016, the marketing for the third floor loft was not as chatty, but made the same point:

This blank canvas has a large layout ready for you and your architect to build your dream home! … This space must be seen to fully understand the potential!

So that architect or contractor whom a prospective buyer would have invited to view either loft would likely be asked to present a few potential renovation plans, at different price points. At “2,352 sq ft”, the likely math is easy if you use units of hundreds of dollars per foot for different renovation plans: a cheap plan might be as low as $200/ft, or about $470,000; for a renovation at $300/ft, about $700,000; a more expensive plan at $400/ft gets near a million bucks, and (of course) the sky’s the limit ….

thin markets can lead to strange results

Let’s review: the third floor is an “objectively” (LOL) ideal comp for the second floor due to proximity in the same building, with the overall Manhattan residential real estate market being essentially unchanged at the time that each was professionally marketed to the entire marketplace (at least, as measured by the StreetEasy Manhattan Price Index). Indeed, in contrast to other pairs of same-building lofts in which there may be a difference in the quality of “move-in” finishes, this pair is in full gut renovation condition, as much “commodities” as two brand new identically finished luxury lofts in a new development.

But but but … the third floor sold for $2.875mm, the second floor for $2.25mm.

The fact that this would never happen in an efficient market is a tautology. Thus … ta da! … the Manhattan residential real estate is not an efficient market.

That’s not to say that this experience cannot provoke a rational explanation, in theory and especially in hindsight. Lofts are generally the anti-commodities in the market, with more potential buyers for fine “apartments” than for lofts. Then, buyers of to-be-gutted lofts need financial resources that folks who buy move-in units don’t need: the third floor buyer needed at least 20% of the purchase price to put down (to satisfy the bank, and, likely, the coop board) and would also need the projected renovation budget in cash (at a mid-level renovation, that’s $575,000 down plus [say] $700,000), and would need in reserve whatever post-closing and post-renovation liquidity that a prudent bank and prudent board would require. And then, these folks need to carry two living spaces to permit time for the gut renovation to proceed to completion.

There are an amazing number of potential buyers in Manhattan with income that can carry the mortgage on a $2.875mm purchase, many of whom haven’t yet built up the wealth to commit much more than a $575,000 down payment. Or to carry two mortgages.

The potential buyer pool for gut renovation lofts is always more limited than the move-in buyer pool, for these and other reasons. (Not everyone has the confidence that they can manage a contractor / architect relationship to actually end up with the loft of their dreams, to use but one example.) I can’t provide data in support of this, but it is my firm impression that demand for to-be-gutted lofts waxes and wanes on cycles different from demand in the overall market, more as a matter of fashion and changing tastes than anything else.

But as a financial matter alone, fewer folks will qualify as buyers of to-be-gutted lofts, even at the same net price point. (Remember, the third floor buyer committed to [say] $3.575mm in purchase plus renovation but could finance only $2.3mm [80% of the purchase price], while a buyer of a move-in loft at $3.575mm could borrow up to $2.86mm.)

If I find the Manhattan Loft Guy posts from the distant past that I have in mind, I will edit this one, but I recall having posted about same building loft sales in which there was a significant observed market price, unexplainable except by reference to the (apparent) fact that at the time of the first (higher) sale there was only one buyer for such a loft at such a price; by the time the second loft came out, with that buyer no longer in the market, there were no potential buyers at that same value, so the second loft dropped, and dropped, and …, until it found a market-clearing price for buyers then in the market. (Here’s one blast from the past: my August 6, 2011, 28 Laight Street loft sale under-performs neighbor’s sale.)

That has to be what happened here.

There is also the matter that there is a limited pool of buyers who want to spend more than $3.5mm and live in a building without a doorman, or a gym, or a common roof deck (without even getting into uber-amenities like common media rooms or golf simulators). The StreetEasy “list” of “Amenities” at 26 West 20th Street is almost laughably concise: “elevator”.

And who wants to make a significant investment in a building with only three other shareholders? Some folks, certainly, but many will not want that concentration of risk, and even the willing may find it very difficult to borrow on conventional terms in such a small building. (Four units is really small; the perils of small building risk can strike in even much larger buildings, with my April 12, 2011, 95 Greene Street, deadbeat condo owners, and small building risk, hitting what has probably become the Manhattan poster child for small building risk.)

A thin buyer pool can still get thinner and thinner …. But I will stop before I digress again.