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Perspectives

What’s next for luxury US residential real estate in 2020?

Author

By Jeff Arestivo, Head of Residential Real Estate Sales – North America

January 28, 2020Posted InReal Estate

As a whole, the US luxury residential real estate market will likely prove challenging once again for sellers in 2020. In various key high-priced locations – including Los Angeles, San Francisco, and New York – we think valuations will continue to ease in favor of buyers. As well as price reductions, other concessions seem likely. That said, though, the picture is far from uniform. Select local markets have been strong lately. Among these are Chicago, Dallas, and Miami/Palm Beach. We believe that valuations could well keep rising in such places. The state of the market overall, however, reflects uncertainty. This is reflected in home ownership levels at eighteen-year lows, with many potential buyers opting to rent while they wait-and-see. But for luxury buyers with longer time horizons and sturdy finances, we believe there are bargains to be had. New York City is a case in point.

For the world’s wealthiest individuals and families, there’s no place quite like New York City. The “Big Apple” is regularly estimated to have more ultra-high net worth (UHNW) residents than any other metropolis on earth. Its attractions are manifold, including its status as a global business and financial center, its diverse cultural scene, its proximity to some of the world’s top universities, and its selection of super-prime residential properties. In recent times, though, demand for the finest homes in Manhattan – the city’s most exclusive borough – has been under pressure. 

In the last three months of 2019, the number of apartment sales completed in Manhattan fell for the eighth time in nine quarters. According to Douglas Elliman, the city’s largest real estate broker, the average price was down 7.5%. This downward momentum is coming from the top end of the market. Whereas the number of sales of apartments priced below $5M was slightly higher, transactions involving units worth more than $5M saw a 37.6% decline. So, what’s behind the persistent weakness in upscale Manhattan homes?

Tax changes appear to be a leading cause. Among the Trump administration’s fiscal reforms was a measure to limit the deductibility of individuals’ state and local tax from their federal tax bills. As a result of this, some luxury property buyers have opted to purchase in lower-tax or no-tax states such as Florida, rather than higher-tax New York. Also, the City of New York introduced a ‘mansion tax’ last year: a progressively rising levy on the purchase price of new homes. This adds 1.5% to the purchase cost of homes worth $2M and up to 3.9% more to those costing above $25M.

International interest in the Manhattan residential market has also eased noticeably in recent times. The US dollar has strengthened considerably since 2014 and remains near multi-year highs. As a result, homes in the borough have become rather expensive for some previously enthusiastic overseas buyers. Chinese citizens – one of the major sources of foreign demand just a few years ago – face capital controls that restrict their ability to invest in the Big Apple.

That said, New York’s desirability as a place to live and do business remains fully intact. As such, today’s lower prices for upscale homes may well represent an opportunity for those taking a longer-term view. Aside from pricing, developers of the many unsold new apartments on the market are making special efforts to entice purchasers. These include concessions on parking and service fees, as well as little touches such as installing water filtration systems and offering workout clothes in the in-house gym. Despite the Manhattan market’s recent weakness, we believe its appeal to US and international buyers will endure over time.