flashy 88 Laight Street loft underperforms, answers question “when is a 17 foot ceiling not 17 feet?”

the mezzanine curse of (some) Manhattan lofts afflicts this Tribeca  loft

I am going to save you some SHOUTING (you’re welcome) by noting that the broker babble for the recently sold “1,982 sq ft” Manhattan loft #8 at 88 Laight Street begins this way: “ultra contemporary mega loft with 17′ ceilings”. Some of that babble is true, as we’ll see; the babble continues with a litany of features of what must be a lovely loft: full floor, convertible 3 bedrooms plus home office, landmark city and river views that include the Empire State Building, central air, 4 exposures, over-sized windows, and more (and more).

No one was misled about the nature of the loft, as the listing photos and floor plan tell the story that the words elide. Only the most unsophisticated consumer would be surprised to note on entry that this loft has relatively little volume for a Tribeca loft, and much less volume than 17 foot ceilings, over-sized windows, and “1,982 sq ft” usually imply. The reason is obvious in the main listing photo, showing a ‘great room’ that is about 12 feet wide, or 12 foot narrow:

(Photo by Douglas Elliman, obviously.)

Just out of view, above the photographer from this angle, is the mezzanine that continues along the right wall to the facing wall at the far end. That’s how you get  “1,982 sq ft” (and room for 3 bedrooms and a home office) out of a foot print that seems to be about 55 feet long and (at its widest) about 20 feet deep. (The dimensions on the floor plan don’t add up, but that’s a minor sin in these fraught marketing materials.)

Yes, those are 17 foot ceilings. But they extend only about half of that long south wall, while the entire long north wall and the narrow east and west sides of the loft stack the living space with a wraparound mezzanine, leaving perhaps three-fourths of those “1,982 sq ft” with ceiling heights no more than 8’6″. Look at the photo above, and see the uses in front of that stretch of over-sized windows: a dining table with two dining chairs on one side and a bench no the other, and a seating area with two chairs facing a narrow couch. Not very “mega” to me, but your mileage may vary….

how to underperform the market at nearly $2,000/ft

If you peaked at the StreetEasy listing data you already know that the loft sold for $3.95mm a month ago. Especially considering how many of the “1,982 sq ft” suffer from un-lofty mezzanine ceilings, that is a very impressive $1,993/ft (before adjusting in a small way for the 140 sq ft balcony). That sale took three months to solidify into contract, at a modest discount from the $4.295mm ask. So why the epithet, “underperform”?

The recent seller paid $3.9mm to buy two years ago. The overall Manhattan residential real estate market, as measured in a single number by the StreetEasy Condo Index, is up 19% in those two years (from 196.40 in August 2012 to 234.06 in June 2014, the last month available). It hardly needs calculating, but the recent sale (at a gain of $50,000 before considering the sales fee and transfer taxes … ugh) was a “gain” of … (wait for it) … 1.3%.

Based on the overall Manhattan market stats, the $3.9mm in August 2012 and $3.95mm in July 2014 don’t fit. Of course, the Index is just a representation of the overall market (described modestly by StreetEasy modestly as “giv[ing] a feel” for the Manhattan condo market), so no one loft should be expected to fit precisely. But the gulf between the 1.3% experience of those sellers and the 19% for the overall market is dramatic, especially in a set of current market conditions in which the overall press narrative is that this is a seller’s market.

For anyone using the 2012 and 2014 observed market vales for the 8th floor loft, at least one of these valuations was just wrong. (Put in a more refined way, these two sales are difficult to reconcile with the overall market data.) It is often hard to tell which price in a same-loft sale pair is the wrong one (did the seller get squeezed on the sale, or overpay on the way in?) but in this case it seems that the market-outlier in this matched set was the purchase price in 2012.

how bidding wars can generate data points that complicate future comp analysis

Had the price history of the 8th floor loft matched the valuation implied by the StreetEasy Condo Index, the purchase at $3.9mm in August 2012 would have been followed by a sale in July 2014 above $4.6mm. (Which is another way to make the point about the vast gulf between the 2012-2014 same loft sales history of this particular loft and the overall Manhattan condo market.) Two things suggest to me that the gulf is due more to the 2014 seller having overpaid in 2012 than from having sold below market last month: the recent asking price was only $4.295mm and the 2012 asking price was only $3.625mm.

The recent asking price is interesting because it was the considered judgment of the listing agent and the seller that the loft in 2014 was not worth what the overall market stats would imply based on the 2012 purchase price. Allowing that the seller and agent would not have known when in 2014 the loft would sell, the recent ask was still ‘too low’ in comparison to the $3.9mm purchase price and the StreetEasy index when the loft came to market in March 2014 (the index value in March was essentially flat to June’s value). If the seller and agent had faith in that Price + Market Increase approach, the ask could reasonably have been above $4.6mm; clearly, they did not.

The 2012 asking price is interesting because it provoked a bidding war, which the recent seller “won” by paying $275,000 over the ask. We are getting into murky metaphysics here, in contemplating that a free market valuation established by a willing seller and a willing buyer in either 2012 or 2014 is wrong (cannot be reconciled with other data), but that’s what happens when you try to reconcile two specific data points that are counter-trend.

I will admit to never testing this vigorously, but my working hypothesis when seeing mismatched data points in a same-loft paired resale set is that if one was the product of a bidding war it is most likely that data paint that is funky. When a seller has but one buyer with which to negotiate, the seller has complete information for how many buyers are interested at an asking price that was established to generate buyer interest (that’s easy: the seller sees only one buyer) while the buyer has pretty good information (that there’s no other active buyer, a reasonable inference from not being told that there is another bid); in that situation, the seller might get a buyer to pay the asking price because the buyer is fearful that another buyer might come forward, but the seller can’t get a reasonable buyer to pay more than the ask unless / until that buyer is truly afraid of competition.

But the relative balance of information between seller and buyer breaks down when there is more than one buyer. The seller knows exactly how many buyers there are, what their initial bids were, and how qualified they are. Each buyer, however, operates in a Fog of (Bidding) War, to coin a phrase. Each buyer probably knows whether there is one “or more” bidders, but most seller agents seem to believe it a best practice to not reveal exactly how many bidders there are; similarly, each buyer may be told whether there is a bid at or above ask, but usually not much more. (My analysis assumes, of course, that what seller agents say to buyers in multiple bid situations is true, as that is what I believe whenever my buyer is dealing with an experienced and professional seller agent; I understand that some civilians think my assumption is naive.)

Each buyer in a bidding war is forced to focus less on “what do The Comps say this loft is worth?” and more on “how much is this loft worth to me, given that someone else is trying to buy it away from me?”. That’s a dense fog in which to operate, leaving open the possibility that in August 2012 the recent seller of the 8th floor loft might have won the bidding at $3,700,888 as easily as it won it at $3.9mm. (Clearly, the market value was believed by at least two bidders to be $3.625mm or more.)

I have to wonder if the recent seller worried from the very beginning that it had overpaid in 2012. If it had paid roughly $3.7mm (or later believed $3.7mm to have been the fair market value then), the March 2014 asking price of $4.295mm could be rationalized more easily with the overall market index. $3.7mm plus 19% market appreciation yields an implied value of about $4.4mm … still not quite in sync with the index trend, but closer in scale.

If you are still with me … whew! To recap: I don’t think the “mega loft” babbling fits a loft that has 17 foot ceiling in a small part of the space and a great deal of space with ceilings under 9 feet; and I am easily distracted by market facts (prices agreed to for specific lofts by specific buyers and specific sellers) that run counter to market trends.

I am going to stop before I digress again, but will leave a Note to Self … to consider future instances of same-loft paired resale sets in which at least one data point is off kilter and in which at least one was the product of a bidding war.