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Letting Air Out Of The Tire

Letting Air Out Of The Tire

Update: 2020-10-29
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On today’s show we are talking about the fall in prices. There is a wide range of opinion on where real estate prices are heading in the next 12 months.


Prices have continued to rise during the pandemic despite massive job losses, economic contraction, and falling revenues.


The long predicted fall in prices is now just starting to become visible. My family lived in NYC for about 25 years. My aunt and uncle lived on fifth avenue and 72nd street overlooking Central Park. That part of fifth avenue is residential because it’s overlooking Central Park.


So the shopping street is one block east on Madison Avenue. A group of three properties recently came on the market back in August. They’re located on Madison Avenue and 70th street. But before we talk about those properties, let me complete the picture of this neighborhood.


Manhattan has many different areas. This is one of the most expensive areas, but not the most expensive area. It’s not Billionaires row which can be found about 12 blocks south on 59 th street.


This is maybe the second or third most expensive areas in the city. After my aunt and uncle died, their apartment was sold to Keith Richards from the Rolling Stones. Prices in this area have averaged over $6,000 per SF for much of the past decade. In the last couple of years, prices have risen to over $7,000 per square foot and in some cases even flirted with $8,000 per square foot.


Not surprisingly, prices for retail space one block away have tracked these sky high prices. Prices in the area for commercial space peaked about six years ago when another building six blocks away sold for a massive $7,589 per SF.


Now this most recent sale on Madison and 70th was at a price of $1,340 per SF. This is a drop of over 83% compared with prices 6 years ago.


Now I know what you are thinking, $1,340 per SF is still a very big number. Some of you are having a hard time considering that to be a bargain.


When I saw the story of this property cross my desk, I saw something in the story that most people probably missed. Most are shocked by the drop in price.


I saw the fact that there were 20 offers on the property. This was an auction environment. To the other 19 buyers, this property was worth even less, probably much less. When you have 20 offers, you are still in that auction environment. In an auction, the buyer almost always ends up paying too much.


I regularly speak with investors who keep telling me that they are having a hard time finding deals. My message to them is consistent.


The smart money is being patient. The smart money didn’t win the bidding war for this distressed property on Madison Avenue, even with a deep discount to the local market.


These distressed properties are not appearing because of the freeze that governments have tried to impose on the markets.


The industry has used the term shadow inventory in the past to describe properties that have not appeared on the market. But we don’t quite have a shadow inventory yet. I’m going to define a new term which I’m calling the invisible inventory. That invisible inventory will first transition to the shadow inventory before it transitions to the the real market inventory of distressed properties.


So be patient folks, the wave is coming. We are seeing just the tip of the iceberg.

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Letting Air Out Of The Tire

Letting Air Out Of The Tire

Victor Menasce