deconstructing NY Times article about combining apartments to increase value

how the Real Estate Industrial complex works, and why it is unhelpful for consumers
Maybe you people are way ahead of me, but I realized something that seems insightful about the unholy alliance between real estate media outlets such as the New York Times and residential brokerage firms after reading (and questioning) tomorrow’s NY Times Sunday real estate section lead piece, Combine and Conquer: Your Place and Mine, by Vivian Toy. The article talks about how combining apartments can be 1 + 1 = 2.5 math; my realization was why this kind of article is too often 1 + 1 = 1.5.

tomorrow’s news today!
Here is the money quote from the piece; given my insight, it is no surprise that it is from The Miller, the Real Estate Industrial Complex’s go-to guy for fact-based analysis about the Manhattan market:

Jonathan J. Miller, the president of the appraisal firm Miller Samuel, says the 2.5 in the equation is more figurative than literal. “If you have two adjacent apartments and they logically connect to a bigger and better layout,” he said, “it’s not uncommon to see a 20 percent premium on a price-per-square-foot basis. And that’s before the renovations are even done. It’s just the fact that they’re put together.”

To be sure, not all proposed combinations make sense architecturally, but for two units that can easily be merged, Mr. Miller said, buyers are willing to “pay more for the potential to enhance the value.”

if you are a buyer, what do you want to know?
If I were a buyer interested in combining adjoining units, I’d want this article to follow with examples of the “not uncommon” 20% premium. I guess it would be nice for me to know which units are currently offered for sale as combinations (even though I would find that in my search for “4 bedroom apartments” if they were marketed as to-be-combined 4 bedroom apartments), but I would really want to know why there is a premium and when it is operative.

the roll call of those present and absent
The complete roster of other people quoted are:

• one developer who has sold some large apartments and wants to sell more,
• two sales agents for new developments who have sold some new large apartments and want to sell more in new developments,
• one couple who purchased one of the combined large apartments in one of the new developments,
• one agent “who has several combination listings” now offered for sale,
• one agent who represents two adjoining apartments at the Dakota now offered for sale,
• one agent who represents adjoining lofts in Dumbo now offered for sale and both sets of her sellers,
• two agents who represent each piece of a potential combination apartment now offered for sale,
• one agent who represents adjoining units with combinable terraces on the Upper East Side now offered for sale, and
• a mortgage broker about how hard it is for banks to lend into that kind of purchase.

Notice any similarities? See what is missing?

Obviously, I think it significant that nearly everyone quoted is talking about apartments or lofts that are currently offered for sale. Less obviously, perhaps, is that is that there is not a single specific example of the “little-known and somewhat mystifying equation, and that is: 1 + 1 = 2.5”, which is only the thrust of the article.

No one said that the quoted couple who bought the newly combined units at One Grand Army Plaza paid any more for the combined unit than they would have for two units. No one said that the price per foot of already combined closed units in the various new developments exceeds the price per foot of comparable but not combined closed units in the various new developments.

Yes, The Miller can be counted on to support the overall point by noting that “it’s not uncommon to see a 20 percent premium on a price-per-square-foot basis”, but even he was not asked for an example in real life of such a closed sale premium. And, yes, one of the agents opined that “the ideal” way to market adjoining apartments involves making it harder for a buyer to see what the individual pieces are worth individually. Actually, that is not what the agent said, but that is the direct inference of the rationale behind this strategy:

Listing one of the units individually “waters down” the power of the combination, she said, and makes it harder to get as much of a premium, because buyers can see the fair market value of one unit and then “look at the two pieces and argue that they don’t add up to the number you’re asking.”

In other words, with individual units priced to sell in the market: goodbye premium!

not a unicorn, but the dynamic is the dynamic
I don’t doubt that there is such a premium in the right circumstances, as I will explain in a minute. But my basic response to the article started with “sheesh … that’s not very helpful without real past examples”, which led to “why aren’t there real past examples”, which morphed into “no one with the data is motivated to find real past examples”, as the role of the New York Times in the Real Estate Industrial Complex came into focus for me. (Again, this may be obvious to serious fans of Manhattan real estate, but it did not coalesce for me in this way until today.)

Vivian Toy (or any other reporter) does not know where the real life examples are, but maybe she could find some with a great deal of effort. The developers and sales agents for new developments know, but that is not what they really want to talk about. The sales agents with one-off combo listings might or might not know, but that is not what they really want to talk about.

So, in exchange for getting good quotes about the general topic from people who know (or might know), Toy let’s them talk about what they really want to talk about: the currently available listings that offer the potential to combine units to make 2.5. Would it have been rude for her to ask about past examples, to see if the “somewhat mystifying” math can actually be observed in the real world, even if the professionals are principally interested in selling their inventory and only secondarily (if at all) interested in educating the populace? You know, as in a more even exchange of back-scratching than Toy played.

As I mentioned, I believe that this math (or something like it, if not to 2.5) exists, for the reasons stated in the article: mostly, because the market for larger apartments has relatively large demand with relatively small supply (and no significant pipeline of new development supply). As the UES agent said, there is not as much demand and greater supply of 1-bedrooms compared to 3-bedrooms. The 1-bedroom buyers will compare Combo Piece A to other 1-bedrooms (where over-supply lowers prices), and bids accordingly; the 3-bedroom buyers will compare Combo A+B to other 3-bedrooms (where under-supply increases prices), and bids accordingly. When all is in sync, A+B sells for more to one buyer than A would to one buyer and B would to another buyer.

One of the tricks, as indicated by the candid agent, is to avoid the 3-bedroom buyer from putting the ‘wrong’ valuation on A and for B. Another is for the two sellers to present a united front. Imagine this conversation:

Agent: Of course you could buy Apt A at a discount if all you wanted was A, just as you could buy Apt B by itself at a discount. But you can’t buy A+B at a discount because the sellers won’t sell the combo at a discount.

3-BR Buyer: But that’s ridiculous! The Market for A is $xxx and for B is $xxx.

Agent: If you persuade A or B to sell at a discount, how do you then negotiate with B or A when that surviving owner knows you have to overpay to complete your package? How much leverage are you willing to give the surviving seller anyway? Did I mention that there is a 1-BR buyer seriously interested in bidding on Apt A?

3-BR Buyer: grrrrrr …. how much did you say I would have to pay for the two, with simultaneous contracts and closings?

nothing personal
The last time I played with a Vivian Toy piece I went a little overboard, even for a Manhattan Loft Guy post, as I discovered that my blog platform imposes a limit on the length of posts, requiring me to split it in two: my August 22 posts, riffing with Toy + NY Times about higher prices "sprinkled" through Manhattan, including in the loft market (Part 1), and (Part 2) riffing with Toy + NY Times about higher prices "sprinkled" through Manhattan, including in the loft market . Personally, I find her articles informative, but often incomplete. It does not help to have figured out exactly why they are less filling, nor do I expect to impact editorial decisions.

I am just a blogger writing a blog.

© Sandy Mattingly 2011