Fear Grows About Luxury Condo Real Estate Bubble

With great fanfare, construction started in 2014 on the Ritz-Carlton Residences, Miami Beach, a luxury condominium project in Miami. Designed by famed Italian architect Piero Lissoni, it is expected to contain 111 high-end condominiums residences and 15 stand-alone villas, but the project has been mired in construction delays and controversy. Three lawsuits have been filed against the project. The plaintiffs claim that they placed a down payment for a luxury condo, and the contract said the work would be completed by June 30, 2017. Work still continues on the project.

Condo Building

The Glut of Luxury Condos

The Ritz-Carlton Residences, Miami Beach project is one of many projects that entered the luxury condominium market after the real estate crash. Fueled by a growing demand, Miami, New York, Chicago and other large cities have seen a boom in the construction of inner-city residential towers, especially in the high-end market. New York City saw nearly 30,000 units constructed in 2017. Construction is at a level not seen since the 1980s. Miami has over three years worth of inventory on the market as 70 condo towers with 7,112 units have been completed in Miami-Dade County since 2011.

The huge increase in the number of luxury condominiums has formed a glut in the market and created an oversupply.

“The high-end condo market, such as 432 Park (in New York City), is not selling as well and as fast as the developers wish,” said Maria Wall, a realtor at the Corcoran Group.

The same is true for San Francisco. The high-tech boom super-charged the real estate market, and developers have broken ground on numerous luxury condominiums projects. But the market is saturated with new units.

“The luxury condo market segment is now the weakest segment of the San Francisco market,” Paragon Chief Market Analyst and Vice President of Business Development Patrick Carlisle said. “If more new projects continue to come on the market before existing inventory is sold and without a corresponding increase in demand, the market can only become softer.”

Reduced Demand

Adding to the troubled market is the decline in demand. International buyers have been a key segment for the luxury condo market, but the high value of the dollar is hurting the buying power of international clients. The drop in oil prices has also reduced the demand for luxury residences among wealthy people from Russia and the Middle East, who had been buying many of the high-end units.

“In the wake of some extremely high-ticket purchases that took place with Russian buyers, there was an anticipation that it would be a deeper market for us,” said Frederick Peters, chief executive at a Manhattan real estate company.

Besides the decline in international buyers, places like New York are dealing with the repercussions of tax reform that passed at the end of 2017. The new tax laws limits deduction for state property taxes. That has made some buyers, especially in the high-end market, skittish.

Financing has also become a problem. The Miami Association of Realtors reported that only a small fraction of condo buildings in Miami have been able to get access to Federal Housing Administration loans.

Condo Interior

Worries About a Bubble

The change in the luxury condominium market has started to raise concerns among economists, and people within the real estate industry. Janet Yellon, former Federal Reserve chair, warned last year that the prices for some commercial projects, which include luxury condominiums, were valued too high.

“Now, is that a bubble or is too high?” she said. “And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

The Federal Reserve has been working to tighten credit for commercial projects since 2015 when it issued a warning to banks about commercial real estate bank loans. The central bank was concerned about lax limitations on commercial real estate loans, and it outlined a series of steps it wanted commercial lenders to make. The move has made it more difficult to finance commercial developments.

Buyers Market

The reduced demand and glutted market are having a direct impact on the luxury condominium market. In early 2018, real estate sales declined 25% year-over-year in Manhattan. The decline was especially noticeable in the luxury condominium market. Prices fell 15% and sales were down 24%. Units are staying on the market for an average of a year and a half, a sharp increase.

“The next couple of years will be all about price discovery,” said Jonathan Miller, president of Miller Samuel.

Even while the market has shown signs of weakness, developers are continuing to build. It can take years to build a high-rise tower so many of these projects won’t be completed anytime soon. That means the number of luxury condominium units on the market is only going to increase, fueling the chances of a bubble.

“The onslaught of high-end development in Manhattan and Brooklyn shows no signs of slowing down,” said StreetEasy senior economist Grant Long.

Cash-strapped developers in Miami are now asking for a 50% deposit on some new condo project. That is more than twice the national average. The move puts more pressure on the market.

Buyers are also able to negotiate with sellers and developers on the price of a condominium. The huge glut has created a buyers’ market, and unlike the single-family residential market, buyers are in the driver’s seat.

“For deals to happen, the sellers are traveling a lot further to meet the buyer in price than they were a year ago,” Miller said. “That’s a good thing in the long run. It’s a sign of the market adjusting.”

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