New York and Miami’s Luxury Condo Booms May Finally Be Over

Look up at the New York City skyline — way up, 100 stories or so — and you can't help but notice that the changes over the past few years have been remarkable.

But they may be coming to a halt.

Over the past five years, a luxury housing boom in the city saw private developers scrambling to erect skyscrapers as tall as 100 stories with $100 million penthouses towering over the city's Central Park and Midtown neighborhoods, creating a new mini-neighborhood known as "Billionaire's Row."

The media has breathlessly reported on the often-anonymous foreign buyers allegedly driving the boom, including Russian and Chinese billionaires who leave their apartments vacant for much of the year as if they were merely "safety deposit boxes in the sky," according to New York real estate analyst Jonathan Miller, of Miller Samuel Real Estate Appraisers & Consultants.

In Miami, too, more than 400 new towers have sprung up around the city to meet increasing demand from buyers from Venezuela, Brazil, Argentina, Colombia, and Mexico. Foreign buyers took advantage of a glut of available housing there after the recession and parked their money in what they saw as a more stable economy than their home turf, Miami realty analyst Peter Zalewski said on Thursday.

But now, the buying frenzy may officially be over. Last week the United States Treasury Department announced that it would begin closely monitoring all-cash sales of ultra-luxury condos in Manhattan and Miami for any sign of financial crimes such as money laundering.

All-cash buyers of properties selling for more than $3 million in Manhattan, and $1 million in Miami, will be required to disclose the name of the true buyer or owner — the individuals behind the anonymous limited-liability or shell companies that often make the purchases.

The action by the federal government could chill the already-slowing market and may be the final nail in the coffin for ultra-lux real estate, according to some realtors and analysts.

"It couldn't come at a worse time," Zalewski said. "The market's starting to show signs of reaching a peak, supply is starting to outpace demand, and right now as foreign currency is plummeting against the dollar and buyers are hard to find, this is sure to be a death knell."

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Miller estimated that at the peak of the New York luxury apartments trend, 40 percent of buyers were foreign, mainly Chinese. That number has already dwindled to 30 percent, and will likely continue to fall, he said. The majority of buyers, he said, have always been domestic.

The new regulations are primarily "targeted toward all-cash buyers from outside the country," he claimed, "but their participation has already slowed."

According to Miller, the overwhelming majority of ultra-wealthy buyers in Manhattan are "just wealthy individuals who for security and safety and privacy reasons don't want to be on Page Six," the gossip section of the New York Post.

Now, those buyers may take their time purchasing, waiting to see if the Treasury's Financial Crimes Enforcement Network (FinCEN) renews the six-month trial of the new requirements — and if it does, they may not purchase at all, he said.

Even before the announcement by FinCEN, condo developers who helped drive the selling frenzy that began in 2011 and is tapering off now have given hints over the past year that they are looking at focusing their next projects on the next tier down of wealthy buyers.

"We're starting to see an oversupply of really large units and really expensive units, and we think those are sitting on the market," David Von Spreckelsen of builder Toll Brothers Inc. told Bloomberg nearly six months ago.

Stephen Roth, the CEO of luxury developer Vornado Realty, said nearly a year ago that condos targeting the ultra-wealthy were at risk of being overbuilt. Both companies have moved their focus to the next tier of wealthy buyers: domestic millionaires who are looking to spend between $1 million and $15 million on a condo. Those transactions will be excluded from the federal government's new rules.

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Gary Barnett of Extell Development Co., which sparked the luxury boom when it built the One57 tower — at the time of construction the tallest residential building in Manhattan — is now moving his focus to more moderately-priced luxury condos that he intends to market to Asian buyers, Barnett told Bloomberg. An 800-unit building on Manhattan's Lower East Side with prices between $1 million and $3 million will be marketed first to buyers in China, Malaysia, and Singapore.

The spree of high-priced sales from 2011 through 2013 reflected a new product coming to the market that was hard for consumers to get, Miller said. Developments in engineering over the past decade allowed residential towers to be built extremely high on narrow, small lots in ways they hadn't before, offering better views to buyers. As each tower went up, a scramble ensued by interested buyers who wanted the new product.

Now that many of the ultra-rich have had the chance to purchase the ultra-luxury new products, and there are still more becoming available – Miller estimated that more than 5,000 units became available in 2015 and another 5,000 will become available in 2016 — the demand has slowed.

"The appearance of this frenzy was happening because there was a lot less inventory so people were having to purchase very quickly," Pacey Barron, a broker to high-end buyers at Douglas Elliman, said. "Now that's leveling out. There's more inventory, especially in new development, so people can look at multiple things."

Vickey and Pacey Barron, a mother-daughter team of brokers at Elliman, say that it is too soon to call the end of the luxury land grab and unwise to speculate on how FinCEN's actions may affect it.

"There are people out there spending for sure," Vickey Barron said, noting that she's currently working with a $60 million buyer, a local New York resident with a family looking for a new, 10,000-square foot (1,000 square meter) home. "Those buyers do still exist, both domestic and foreign."

The Barrons said they have seen an uptick in buyers from Turkey in addition to shoppers from Asia, London, and Latin America, particularly Brazil, Argentina, and Mexico.

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But the Barrons agree that much of the foreign money coming in now is targeted in the lower-priced market, Pacey Barron said, noting that buyers may purchase one to three units priced at $1 million to $3 million each rather than one big unit.

"Historically, Manhattan has been proven to be a good place to own real estate and people like having a piece of New York in their portfolio," Vickey Barron said. "Whether they're going to buy one for $30 million or one for $10 million or a few different units, I don't think they're going to make a u-turn and stop buying."

The effects of FinCEN's announcement won't be felt for another few months, they say. But for Zalewski, the writing is on the wall. He said that there has long been speculation in the Miami market that of the billions of dollars in cash pouring into the real estate market there from overseas, some of it would be tied up with criminal enterprises.

"There's crazy stuff going on in this town fairly regularly," he said, recalling a story of Ukrainians trying to sell surface-to-air missiles at a Miami strip mall, "so something probably happened that we're not aware of. This is just one of the pitfalls and thorns of this community."