Geoffrey Kayton, CPA
Berdon Industry Insights | 3.9.20
In many ways, today’s New York City (NYC) real estate market reflects the current state of the global economy. However, while it is subject to the same domestic and international forces, it also offers a refuge and a safe harbor from those same forces. For this reason, along with others, the NYC real estate market is incredibly unique. If there is a flight to safety, it is nearly always to the United States, and often to, NYC real estate. Nevertheless, at the present time, the NYC real estate market faces a host of changes and concerns, which will likely have unexpected results and will not be fully understood until completely absorbed.
Election year politicking is always a concern, and this particular cycle is as divisive and contentious as any in recent memory. Generally, 2020 will also see hundreds of new buildings and concerns mount as to what the election results in November will mean for the marketplace.1
While there are some bright spots, the dominant recent trends in the NYC residential market has been declining prices and increasing supply. In fact, the Manhattan market prices fell to their lowest levels in five years, with the average price falling 11% to $1.83M and the median price slipping 3% to $995,000. 2
There is consensus among professionals that 2020 will be a buyer’s market, due to, among other things, regulatory pressures, oversaturation, the recent decrease in interest rates, and additional inventory yet to come on the market.3
Of course, taxation and new laws are always important factors and that is particularly true now. Here are some key influencers:
- Mansion Tax: For 2020, the statewide mansion tax is 1% for property purchased for $1 million or more. For NYC, this tax rises incrementally with purchase prices of $2 million or more. There is a cap of 3.9% for properties sold at $25 million or above.
- Stronger Tenant and Rent Laws: The Housing Stability and Tenant Protection Act of 2019 extended and made certain provisions of law permanent relating to rent control and rent stabilization. The act, fundamentally, altered how and when property owners can increase stabilized rents or destabilize apartments. It repealed vacancy decontrol and high-income deregulation as well as the vacancy bonus and the longevity bonus among other changes. Rent laws are changing the way owners look at stabilized buildings. In some cases, buildings are being sold at a discount. See Sweeping New Tenant Protections Raise Uncertainties About the Future of Affordable Housing 4 for a more detailed analysis.
- Limitation of the SALT Tax Deduction: Imposed as part of 2017’s Tax Cuts and Jobs Act, this limitation placed a $10,000 cap on the state and local tax deduction for individuals. Various states and the House of Representatives have attempted measures to eliminate and mitigate the effects. The only successful workarounds have taken the form of business income taxes that are then credited to resident owners’ tax liability. No solution has mitigated the issue for non-business owning individual taxpayers.
- Increased Transfer Tax: The New York State transfer tax is 0.4% for properties below $3 million and 0.65% for those $3 million and above. The NYC transfer tax increased from 1% to 1.425% when over $500,000.
- Outlook for Property Tax Reform: Political motivation to overhaul New York’s property tax system is currently leaning in the direction of shifting the tax burden to wealthier neighborhoods while lessening it for low- and moderate-income homeowners. 5
Various emerging technologies such as Artificial Intelligence (AI), Data Analytics, Robotic Process Automation, and the various applications developed around these technologies may have a revolutionary impact on the real estate industry. The revolution may impact areas as diverse as finding buyers, building more attractive and efficient buildings, and reducing operational costs. For a more detailed analysis of the potential impact of AI, see: How New Technologies Are Transforming The Real Estate Industry. 6
Although the strength of the Manhattan market has been strained, its resiliency continues to and has historically been extremely remarkable. Brooklyn is its own destination, and Queens is taking in the overflow of people being priced out of both. Many parts of Brooklyn and Queens are clearly growth markets, but the wealth in Manhattan always serves to prop up the market even during downturns. Moreover, Hudson Yards, the $25 billion, mixed-use development, which includes high-end retail, luxury residential, office space, and a five-acre public park, is the largest private real estate development by area in U.S. history. Its longer-term impact and the impact of other new mega-developments is yet to be determined.
Finally, low interest rates have continued to give life to real estate markets everywhere, but if rates rise, it will put downward pressure on the market. For additional perspectives on the future of NYC real estate, watch Berdon’s 2019 Real Estate Executive Forum Panel 7 where industry leaders provide both insights and projections.
Despite many uncertainties, NYC real estate remains a coveted prize sought by many. As we move further into 2020 and beyond, we will continue to monitor the various forces – tax, legal, business, financial, political, and social – to gauge their impact on the evolution of this dynamic market.
Questions? Contact Geoffrey Kayton at 212.331.7525 | firstname.lastname@example.org or reach out to your Berdon advisor
Berdon LLP, New York Accountants