After a year of softening or stagnating prices, luxury buyers are turning their attention back to cities
While suburbs, second-home markets, and small cities across the U.S. saw an explosion in activity over the past year, the pandemic has left some of the nation’s top luxury markets out in the cold.
Cities like New York and San Francisco saw softening prices, steep declines in transactions, and previously unheard-of developer concessions, as residents flocked to more spacious single-family properties in nearby suburbs and vacation markets (think Oakland and Marin County for San Francisco, and Greenwich, Westchester, and the Hamptons for New York).
And though Los Angeles’s luxury market has remained relatively robust, the city has seen a steady outflow of residents over the past year, and sales of ultra-high-end luxury properties have slowed, as has the city’s nascent condo market.
“Covid has not been good for large, full-service condo buildings in L.A.,” said Michael Nourmand, president of Nourmand and Associates in Los Angeles.
But even the most pessimistic market observers expect the nation’s most popular cities to bounce back from the pandemic, and inevitably, reports of slowing sales have piqued the interest of bargain-minded luxury buyers.
“In the spring it was, ‘New York’s on sale, that’s not good, I’ve got to leave,’” said Jared Antin, director of sales at Elegran, a New York City-based residential brokerage. “Now they see it as an opportunity. And overall, in terms of discount, buyers will get a better deal now than they did a year ago.”
On Wednesday, Redfin released a 2021 market forecast indicating that demand from U.S. homebuyers this winter is up 60% over 2020, with prices and pending sales rising, and time on the market shrinking. Even in cities that have been hurting this past year, low supply and strong demand are likely to drive markets upward in the first half of the new year.
With deal hunters already starting to swarm, as well as increased optimism around the vaccine rollout and an eventual return to normalcy, struggling luxury markets are poised to resume growth this year. Meaning that buyers hoping to upsize or otherwise take advantage of pandemic-related discounts would do well to make moves sooner rather than later.
Shaking Off a Year of Softening—or Stagnant—Prices
Different luxury markets have seen differing levels of impact from the pandemic, with the supposed exodus of well-off residents from New York City drawing perhaps the most attention.
“We were seeing a lot of slowdown before Covid, which then just put a complete halt [to the market],” said Reba Miller, an agent with Berkshire Hathaway HomeServices New York Properties. “But prior to this, sellers weren’t really believing the market had slowed down. Now, the seller is saying, ‘let’s get within the range’ of their original asking price, whether that range is down 10%, 20%, 25%.”
Though discounts vary significantly depending on a variety of factors including location and the building itself, as a general rule, the higher priced the property, the larger the discount.
“In the higher price points, you’re going to see a bit of a higher discount,” Mr. Antin said. “When you get into the $5 million, $10 million range, you’ll see larger discounts there.”
In San Francisco, after years of nonstop growth across the board, single-family homes have continued to perform well during the pandemic, but condos and properties that require renovation have been struggling.
A 2020 market report from The Agency showed condo sales in San Francisco declining by 2% over the year, and prices dropping 3% in the city.
“I predict that over the next three or four months, you’re going to see developers and sellers reduce their pricing more, maybe another 2% or 3%, then we’ll find the bottom and start seeing the uptick,” said Mauricio Umansky, founder and CEO of The Agency.
Aside from slow condo sales, the softening in Los Angeles has largely been confined to the highest end of the market.
“We’re seeing a very strong $10 million, $20 million, $30 million market being driven by upsizing. Even $5 million and up is super strong,” Mr. Umansky said. “But the uber high end luxury, we’re seeing a bit of a slowdown since those big purchases we all talked about [last year].”
Buyers in the Los Angeles market today “may not be getting a discount over last year, but you’re definitely going to buy for less than you would next year,” Mr. Umansky added. “If you’re going to make a move, this is the time.”
A Window of Opportunity for Local Buyers Looking to Upsize
Months-long lockdowns have largely driven the trend toward upsizing as buyers seek out properties with outdoor space, and all the separate rooms required for a life spent almost entirely at home. But slowing sales markets in big cities have also made the prospect of upsizing appealing to high-end buyers looking to score deals and trade up while their peers are distracted by the second-home market.
“Let’s say you’re selling your apartment that would have been worth $10 million, and now it’s worth $8 million,” said Stephen Kliegerman, president of Brown Harris Stevens Development Marketing in New York City. “On paper you’ve lost $2 million. But now you’re upgrading to a $20 million apartment that’s only selling for $16 million, so you’re really $2 million ahead.”
“I think you’re seeing a lot of that right now,” Mr. Kliegerman added. “You’re seeing upgraders say, ‘I’ll take the hit because I’ll buy another place and come out on top.’”
For luxury markets that are also often driven by strong demand from foreign buyers, the pandemic has created a rare moment where the buyer pool is largely local—and thus, significantly smaller and less competitive than usual.
“What I’m seeing in the luxury market is mostly local buyers,” said New York City-based Corcoran agent Beth Benalloul. “There are a lot of New York City-based buyers or people who want to trade up and take advantage of more price negotiability and lower interest rates. They’re stepping up in anticipation of the fact that once the city really opens up and people start going back to work, we’re going to see a huge influx of buyers.”
San Francisco’s downtown market is recovering at a slower pace, but is still seeing local buyers seizing on the current moment to expand their footprint in the city.
“People want to trade up if they’re coming back,” said Gregory Malin, CEO and founder of luxury home developer Troon Pacific in San Francisco. “In-home amenities are super important. Where value will first come back is to completed homes that are done and ready to move in, and homes that are permit-ready where you can build right away.”
Deal Hunters Already on the Move as Cities Begin to Open Up
Though vaccine rollouts have been frustratingly slow, the process has led to increased optimism about the eventual return of workers, entertainment and tourism to major cities, and bargain shoppers would do well to move quickly.
“It has been a great time to get in, and I think it’s going to be less and less so as things get more positive,” Ms. Miller said. “We’re in that window right now. And we’re seeing empty nesters that were living in Westchester and Connecticut who got an enormous price for the house, because the suburbs hit the lottery, and they know the city is going to come back and are now buying better [properties] than they could have before.”
In San Francisco’s market, “The opportunity is now, especially for luxury high-end co-ops,” said Monica Pauli, an agent with Compass in the Bay Area. “Right now you’re seeing renters who sold in the height of the market in 2017 or 2018, and are getting back in now. Especially with the low interest rates, they see the opportunity to purchase versus rent.”
Though much remains to be seen about how major companies handle bringing workers back to centrally located offices, tech giants like Google are taking advantage of the slow commercial market to lease up large amounts of space in San Francisco, a likely indicator that eventually, high-earning tech employees will be back to work in cities, and making their real estate choices accordingly.
“There’s huge amounts of permitting happening right now in the commercial sector,” Mr. Malin said. “We know that ultimately there’s going to be some resurgence back to that job growth in the city. This is a great time for people that think they’re going to want to be back in an urban environment when things open, especially since interest rates are at all-time lows.”
And after months of trend stories following Los Angeles residents to new homes in cheaper, more tax-friendly states, the city may be poised to see some of its prodigal buyers return.
“I’m not convinced that some of these wealthy people that went to Florida or Texas aren’t going to come back,” Mr. Nourmand said. “The idea of saving millions in taxes sounds really good, but they may or may not like living there.”
Buyers finding their way back to cities later on in the year may find themselves competing with a fresh wave of foreign buyers who were previously discouraged by travel restrictions and harsh immigration policy.
“I have clients from London, China, different areas that are just waiting to come to Los Angeles,” Mr. Umansky said. “We do believe there’s pent-up demand waiting to happen in Los Angeles, and there’s a lack of supply. When you have high demand and low supply, you know what happens there.”
This phenomenon holds true nationwide. A January market report from realtor.com showed the number of U.S. homes for sale falling 42.6% year-over-year, while median listing prices rose by 15.4%.
As for New York City, “We’re seeing a lot more activity, and I attribute that to plain old fear of missing out,” said Dylan Pichulik, CEO of XL Real Property Management. “All these guys want to get a good deal, and are worried once people come back, are sales going to stay where they are, or are they going to jump?”