Will hot NYC real estate burn investors?

 

The answer to this headline question is similar to the sort of responses I’ve been giving for several decades in the stock market; it’s a clear, definite . . . maybe. It all depends on where you look and what you’re hoping to find.

Back in 2000-02, when the stock market plunged in the wake of the bursting of a valuation bubble in well-known tech- and internet-stocks, there were plenty of great opportunities available but not to everybody. Who were the lucky ones? No, not the ones with pull at the big brokerage firms or with pipelines to the hot investment banks. The winners were the those who stuck with boring no-name old-fashioned non-tech companies, especially smaller firms that operated outside the limelight, and chose based on logic and data, not a desperation to keep pace with the herd.

An analogous situation exists now in New York City real estate.

What’s Hot

On 12/21/16, StreetEasy.com issued its prediction regarding the NYC neighborhoods that will be hottest in 2017. Here is their forecast in order from predicted hottest down to number 10.

Table 1

Rank	Borough	Neighborhood	2016 Median Asking . . .
			Price*	Rent*
1	Bx	Kingsbridge	$447,000	$1,750
2	Bk	Fort Greene	$1,400,000	$2,850
3	Bk	Bath Beach	$984,450	$2,000
4	Bk	Prospect Lefferts Gardens	$1,375,000	$2,003
5	Qns	Bayside	$438,000	$2,250
6	Mn	Yorkville	$1,150,000	$2,675
7	Bk	Gowanus	$1,390,000	$3,000
8	Bk	Prospect Park South	$773,500	$2,095
9	Bk	Boerum Hill	$1,850,000	$3,000
10	Qns	Astoria	$795,000	$2,295

* StreetEasy estimates

Yeah, but . . .

Although one can always quibble here and there, I suppose that list generally makes sense. The real question, though, is what do we mean by “hot” and is that a good thing for investors?

Pardon me for introducing some stock market concepts (force of habit after 35+ years in that field) but these work well in that area and could add some clarity to the area of real estate investing.

• Value investing refers to buying cheap in the hope it will become less cheap in the future. That’s the most traditional kind of stock-market investing, the kind most familiar even to the most casual observer. The Value mantra is “Buy low, sell high.” But this is not the only thing investors do. . .
• Momentum means buying what’s hot in the expectation it will continue to be hot. Momentum investors, don’t object to paying low prices, but they are not unwilling to buy expensive, or even admittedly overpriced stocks. They’re fine with “Buy high, sell higher.”
• Growth investing is a branch of momentum. The latter group wants stocks that are moving up, whether the reasons for movement are sound or nonsensical. Growth investors differ in that they look for rational explanations for the price strength (e.g. in the stock market, that would be profit growth).
• Income investors appreciate whatever gains they can get from their stocks, but they are OK with stable prices – if they get what they really crave which is a decent (as they define it) stream of dividend income.

The StreetEasy list is a growth-momentum list and should be interpreted as such. It’s growth if you can make a case that rental income (and NOI) can rise in the future. If not, it’s momentum.

I’ve looked to varying degrees at all of the neighborhoods listed above but did my most detailed analysis of Queens, the home turf of my existing office (LDG Living Development) and the soon-to-debut office with which I just associated (ExitRealty Direct). I can tell you, pretty definitively, that an investor who touches Astoria needs, at the very least, a “growth” mindset and perhaps a flair for “momentum;” the difference being the extent to which you think rents (already higher than in most of Queens) can rise further.

Valuations in Queens

My present focus on investment properties consists of two- to five-family homes in Queens. Having formerly been in the legal division of the NYC Conciliation and Appeals Board (a predecessor to Ney York’s DHCR) and responsible for cases involving rent overcharge and fair-market rent setting, and a stint as Chief Hearing Officer, I strongly suggest that investors stay away from rent regulation (6 units or more in most cases) unless they have the wherewithal to wrestle with a very difficult regulatory scheme; one that is in addition to the already famously “challenging” NYC L&T environment.

Table 2 summarizes some detailed analysis I did for areas in Queens (mainly Western Queens) that have a lot of inventory of the sort of investment properties on which I’m currently focusing.

Table 2

Neighborhood	Average P2R (Price-to-Rental Income) Ratios
	Recently Sold Properties	Recently Expired Listings	Currently For-Sale Listings
Astoria	17.8	19.5	25.5
College Point	19.3	17.7	19.9
Corona	14.5	18.4	18.0
E. Elmhurst	16.1	21.4	11.2
Elmhurst	16.4	22.6	18.1
Flushing	21.7	24.3	26.2
Glendale	14.5	17.3	17.6
Jackson Heights	14.4	25.2	16.0
Jamaica	10.6	12.2	12.6
Maspeth	18.2	15.4	15.4
Middle Village	16.2	13.2	17.3
Ozone Park	12.5	12.9	13.0
Richmond Hill	11.9	13.2	14.5
Ridgewood	20.2	20.7	19.4
S. Ozone Park	12.0	12.6	14.5
Springfield Gdns.	11.1	10.9	12.7
Whitestone	19.0	25.5	22.0
Woodhaven	11.8	13.5	14.8
Woodside	16.8	23.2	20.7

As recent sales go, Astoria has not been the hottest area thus far. Prices have been high but so, too, has rental income. Note, however, the difference between P2R ratios for deals that closed (17.8) versus those implied by prices currently being demanded by sellers (25.5).

Sellers in Astoria have big expectations and are probably thinking along the same lines as the numbers crunchers at StreetEasy. Buyer resistance, however, looks strong. Listings averaging P2Rs of 19.5, above those of recent deals but still well below those being demanded by sellers, have been expiring without deals. But that’s not stopping from sellers from being even more demanding!

Will buyers surrender? Will the sellers eventually win out and eventually get their prices?

If Astoria rents rise as young renters continue to forego Manhattan and join the bridge-and-tunnel crowd, and given the potential capture of demand that could arise as Williamsburg cools off due to the pending lengthy shutdown of the L-train, Astoria may well work out. That’s the case for viewing Astoria in “growth” terms.

The possibility that Astoria may instead, be a “momentum” bet (i.e. rents don’t rise, a scenario likely being considered by would-be buyers who aren’t making offers) is based on the notion that rents do not have lives of their own. They are tied to earning power, disposable income, and that may not support much higher rents in that neighborhood, as Manhattanites emigrate to other outer-borough neighborhoods.

Demand is likely to stay strong in Queens, but if the borough follows the path of Brooklyn, where young affluent renters strayed further inland and away from the river (see, e.g. the migration to Bedford Stuyvesant, Bushwick and even toward East New York), we may see a push into interior areas such as Woodside and Jackson Heights have already been seeing uptrends. These are easy pickings for many; areas like these benefit from strong subway access to Manhattan. Other areas such as Maspeth and Woodhaven require bus-subway transfer, or express bus; or lifestyles that are less Manhattan centric and possibly more automobile oriented.

There are some other considerations likely to impact Queens: the recent popularity of Flushing and Corona.

Those areas have been strong but not based on any sort of Manhattan connection. The influxes there owe much to demand from Asian and Latino immigrants (the latter also having impacted Jackson, Heights). As those areas get too pricey for renters, they may continue to head to such areas as Elmhurst, East Elmhurst, Maspeth or College Point, and to even less-discussed areas like Woodhaven, Middle Village, Ozone Park, Richmond Hill or Glendale.

Distance from Manhattan and lesser subway convince will likely keep prices in these areas below those of areas like Astoria or Long Island City. But as Sam Walton taught the world when he built his Walmart empire, you don’t need luxury goods and pricing to make money. It’s not about setting records (see, e.g. the Million Dollar Listing reality TV series’) and it’s not always about Manhattan. Many New Yorkers do not live Manhattan centric lifestyles and many who do, as they get older and start thinking about families tend to realize they need to re-direct financial resources away from mega rents and toward home ownership, families, or even just plain standard of living (i.e. real apartments instead of a few square feet sectioned off with temporary walls).

Conclusion

So however hot NYC real estate may appear to be, the big headlines may not be telling the whole story. As with the stock market in 2000, there are value pays out there, for those willing to look for needles buried in the inland haystacks – or even in Long Island MLS (the one that best serves Queens).