By Cody and Zach Vichinsky, co-founders of Bespoke Real Estate
With global inflation rising, concerns are growing about a global recession. But as many first-time real estate investors discovered in 2008, economic uncertainty presents opportunities for real estate acquisitions. This is especially true for ultra-luxury markets.
As the value of the dollar remains volatile, we’ve seen more new customers looking to park their money in a low-risk, luxury asset with a higher likelihood of appreciation, forged by historically beautiful surrounding neighborhoods, sprawling acreage, and square footage of newly renovated buildings.
In almost all cases, ultra-luxury properties are increasing in value. For example, in 2016, the average retail price in the $10+ million Hamptons segment was $15.52 million; so far in 2022, it’s been $19.95 million, and it could go up before the end of the year. While this median price metric fluctuated from quarter to quarter across all markets, the median value of ultra-luxury homes has ultimately risen to a total return of 28.54% over the long term, even with market volatility over the years.
There are salacious headlines suggesting that all markets are headed for doom and gloom given the current macroeconomic conditions. It’s true that interest rates are higher, which makes financing a new home more expensive. It’s also true for those whose $10 million+ investment is their primary residence, to get their home back on the market they need to replace it; Since current interest rates are higher than the interest rate of 2020 or 2021, trading a house now would be more expensive. As a result, many have taken their homes off the market, leading to inventory absorption.
In other words, this slowdown in trading activity says nothing about demand, but rather about supply. I can’t remember the last time our firm had so many eager buyers willing to put cash into a $10+ million home when we had so few offers to sell them .
On the secondary markets, a decrease in trading volume compared to 2020 and 2021 is also a sign of market stabilization. South Florida, an emerging pre-Covid alpha market, quadrupled between 2019 and 2021 and saw a massive influx of buyers from the Northeast. The 46% decline in trading volume in the third quarter compared to the same period last year is a sign of a slowdown in market velocity, which tends to mature and sustain in a market cycle. In the Hamptons, the third quarter had a lower volume of transactions worth over $10 million across 15 trades but ended with 20 deals, suggesting demand remains but buyers are patiently waiting for the right price that comes to market. While the Hamptons have had incredible success in 2020 and 2021, they’re still showing very strong performance compared to their pre-pandemic rates. Between 2016 and 2021, the average number of ultra-luxury homes sold per year was 70; In 2022 we are on track to surpass this with 61 trades to date followed by another 20 contracts and a full fourth quarter ahead.
While New York City certainly performs better compared to its 2020 levels, ultra-luxury buyers in New York City have different incentives than those who fled to the Hamptons or South Florida during Covid. Today, smart money buyers are biding their time, willing to wait for a property and what they deem fair market value. Bidding wars have eased in all markets over the past two years. The patience of buyers is best demonstrated by the high number of sales we saw in the third quarter of properties valued at $40+ million, which represented 22% of all sales over $10 million compared to their historical average of 13 %. As the largest and most expensive price segment, the few discerning buyers able to trade over $40 million have found fair market value by capitalizing on patience and market volatility. As with the $40+ million segment, expectations between sellers and buyers across the ultra-luxury market need to be aligned for the sell rate to stabilize again.
The city also saw record high rates of new development business in the most recent quarter. Ultra-luxury property development skyrocketed in 2020 and 2021 as developers braced for the eventual return of people to the city, with new-build sales topping every single quarter for the past three years. So far this year, they’ve accounted for 39% of all transactions worth over $10 million, compared to an average of about 18% in other years, indicating continued demand for quality inventory.
There has never been more buy-side liquidity for quality real estate, but that liquidity is smarter than ever. While buyers are willing to pay fair value when quality inventory becomes available, as the new year begins, sellers’ price expectations are beginning to align with buyers’ perceptions of value, making ultra-luxury more attractive than ever.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.