How super-luxury apartments became a major global investment tool.
The $100 million duplex penthouse to be perched astride the 73rd and 74th floors at 220 Central Park South will offer five bedrooms, six bathrooms, a gallery, library and a 713-square-foot terrace. The luxe building is one of a handful now springing up on Manhattan’s nascent Billionaire’s Row, and its penthouse is just one of at least a dozen area units expected to be priced in the nine* figures. The second Gilded Age will not lack for monuments to its greatness.
“It’s not that prices rose to this level,” Jonathan Miller, president of the real estate appraisal firm Miller Samuel, told the Real Deal, an industry bulletin, “but that a new housing category has been created.”
Glass and steel tributes to the lords of industry and finance are sprouting up fast on the south side of Central Park. The price points might be extreme. But they also illustrate a larger trend in the post-crisis housing market: while spending on residential construction in New York City grew by 73 percent in 2014, the number of new units only grew by 11 percent, according to the New York Building Congress. Here’s how NYBC President Richard Anderson put it to Marketplace: Just 5 or 10 years ago, “… it was more a range of housing, more outer borough housing, more affordable housing. Now, we’re spending more money but getting less housing units.”
In this way, housing construction is failing to keep up with growing populations in the most desirable cities, pushing rents upward. In New York City, NYU’s Furman Center estimates that more than half of renting households were rent burdened in 2012, meaning they paid more than 30 percent their income in rent and utilities. But the development of apartments in economic command posts like New York is in many ways unrelated to the housing needs of actual people. Rather, it is tied up in the chaos and imbalance of the global economy: The super-rich are pouring enormous sums into urban real estate and heavily influencing market outcomes.
“Sometimes we mistake a real good for a financial good,” says George McCarthy, an economist and president of the Lincoln Institute of Land Policy. “And unfortunately, housing is both. It’s a real and a financial good.”
That such a large quantity of global capital is seeking real estate assets in cities like New York, San Francisco, Los Angeles, Miami Beach, Chicago, Boston, Seattle, Washington D.C., Sydney, London, Singapore, and Dubai means that the “laws” of housing supply and demand are not functioning like the simple model presented in an introductory economics textbook. According to the prevailing theory, adding more housing supply at any price point should ease the upward pressure on rents across the board, and ultimately lower prices. But the overseas demand for such housing assets, for both investors and buyers, has of late been basically insatiable. In Manhattan, Billionaire’s Row is one very shiny example.
“New York City has not only regained the glamour that it used to have but has increased its importance as a global financial capital, and as a place where wealth wants to be,” says Pamela Liebman, president and chief executive officer of the Corcoran Group, a high-end real estate firm. The wealthy want “a safe harbor for their money,” adds Liebman. “The appreciation in New York City real estate has been quite extraordinary. Over the last five years, the Manhattan luxury new development market has appreciated 57 percent. So people feel pretty good about putting their cash here.”
Indeed, Laurence D. Fink, the chairman and chief executive officer of the asset-management firm BlackRock, recently announced that "apartments in Manhattan, apartments in Vancouver [and] in London," along with fine art, have now replaced gold as the primary store of wealth.
“Gold has lost its lustre,” said Fink, as quoted by Bloomberg. “It’s become much more accessible for global families worldwide to store wealth outside their country ... And they don’t have to own gold.”
There is no large-scale data on exactly who is buying super luxury high rise units in U.S. cities. In part, that’s because many are purchased by shell companies that shield the true owner’s identity, as The New York Times discovered in a February investigation of the Time Warner Center on Columbus Circle. The Times found that the “majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names.” At least some of these purchasers have good reason to shield their identities: they include government officials and their associates from China, Colombia, and Russia, and people tied to inquiries into environmental and financial misconduct.
As long as the demand for such “safe deposit boxes in the sky” remains strong, the overriding economic incentive for developers in these cities will be to build for the global super rich. Some buy them to live in, but also as an investment asset (though many are apparently underoccupied). At a time when tight credit, tough mortgage requirements and stagnant wages have excluded many from the housing market, purchasers of New York ultra-luxury condos nearly always pay in cash, says Liebman.
Obviously, highrise developers must raise massive amounts of funding to cover construction budgets that can run to $1 billion (or in the case of one planned West 57th Street project in Manhattan, twice that amount). And it’s often ended up being overseas investors who are funding the demand for ultra-luxury highrises, including a Middle Eastern sovereign wealth fund, a British hedge fund, the Singapore-based United Overseas Bank and the Bank of China.
“These deals where people are purchasing a $100 million condominium are pretty attractive deals for people who want to make money,” says McCarthy. “The developers don't have very much trouble raising the capital for that.”
According to the Real Deal, Chinese investors put more than $3 billion into New York real estate in 2014, a 43 percent increase from 2013.
None of the seven major luxury high rises on Billionaire’s Row is reportedly being financed by a domestic bank, but U.S. economic policy has played a big role in fueling the luxury housing boom. The Federal Reserve’s low interest rates and quantitative easing—a recently wound-down bond buying program engineered to pump liquidity into the market—have lured investors toward real estate, including real estate investment trusts (REITs). In 2014, REIT stocks had a booming total return including dividends of 32.3 percent, according to The Wall Street Journal.
Fears over the potential return of higher interest rates have recently caused REIT stocks to decline somewhat, but real estate, commercial properties very much included, remains an attractive investment. That’s become especially true since last month’s report that the U.S. economy had contracted in the first quarter, likely pushing an inevitable interest rate hike further down the road.
In addition, land prices in the hottest markets are high, which makes funding more affordable projects unattractive or even impossible for private developers. The concern is that super-luxury developments could make things even worse, driving land prices higher and fomenting a virtuous cycle for investors who view high-end real estate as a constantly appreciating asset—unless and until it's a bubble that goes pop.
“It’s like buying a flawless diamond: you just have to have faith in the strength of the market and that it will continue,” says Liebman. “That’s the million dollar question—or should we say the $100 million question. How deep is this market? … If governments crack down on this flight capital it’s going to be very impactful to the New York City market. But right now it’s really healthy. I’ve never seen anything like it. It’s extraordinary."
Like any potential speculative bubble, this extraordinary market is a product not just of elite whims but of enormous political and economic shifts that have restructured the economy in recent decades, shifting wealth from manufacturing to a service economy where the FIRE sector (Finance, Insurance, and Real Estate) and technology hold sway. But the redistribution of wealth has not simply been between classes—it’s also occurred between places worldwide. The new service-dominated economy has created select urban headquarters, what scholars, following the sociologist Saskia Sassen, call “global cities.”
The new economic order has rendered these global cities producers of enormously profitable assets in the form of real estate—assets that are attractive to the very investors who have benefited from that global order's reallocation of wealth. Significantly, sovereign wealth funds (state-owned investment funds) worldwide, including in Norway, the United Arab Emirates, Saudi Arabia, and China, are bursting with cash and increasingly eager to invest in real estate.
Norway's sovereign wealth fund, thought to be the world's largest, reportedly purchased $7.6 billion in property worldwide in 2014, more than any other. The fund is focusing on cities like New York and San Francisco, where “the prospects for solid long-term return are good,” a spokesperson for the arm of the Norwegian central bank that runs the fund told the Wall Street Journal.
The increasing globalization of real estate investment has no doubt further disassociated residential properties from their local context. But the financialization of U.S. real estate is of course far from new.
After World War II, the U.S. government heavily subsidized mortgages, locking down the financial prerogatives of white privilege in racially exclusionary suburbs. For many Americans (though certainly not all), that worked well until the 1970s, when America’s debt load became unsustainable as manufacturing declined. In the lead up to the most recent crisis, financial markets were liberalized, real estate was transformed into a liquid asset that could be sold and traded on the global market, and lending standards were relaxed. Mortgages were bundled up into overrated collateralized debt obligations that would later prove to be a toxic and nuclear mess.
Today, luxury housing and other real estate assets are serving a new role as the premier global store of wealth. This speculative craze doesn’t pose the same financial risk as subprime mortgages, given the affluence of these buyers. But it also doesn't bode well for meeting urban housing needs.
“Somebody said that there’s not enough housing. That’s a good sign,” outgoing Mayor Michael Bloomberg said in October 2013. “That will bring in investment, for people to build for all income levels, different kinds of housing.”
This particular argument draws upon basic economic models dealing with supply, demand and price. If demand is high and supply is constrained, then prices will rise. Thus, adding more housing at any price point increases the supply to meet demand—lowering prices.
There’s some elemental truth to this: adding new capacity can no doubt release some of the upward pressure on rents. But what many of the world’s hottest global cities are currently discovering is that left to its own devices, the market is adding only a relatively small amount of supply concentrated at the very top of the market, which doesn’t do much, if anything, to help keep rents more affordable across the board. In reality, it could very well be making things worse.
“It feeds the frenzy because when you have new high rise luxury development, it makes real estate in the surrounding areas more attractive, and will increase land values and attract more development,” says Thomas Angotti, a professor of urban affairs and planning at Hunter College. “The markets always build for the high end of the market, and it jacks up land values and prices at all levels. So that market doesn't work.”
Liebman, of the Corcoran Group, disagrees with Angotti as to the economic merits of places like Billionaire’s Row. But she likewise thinks that luxury developments will likely drive up nearby real estate. She also believes that they create demand for New York real estate that would not otherwise exist. Super-rich buyers aren't looking for just any real estate in New York. They want to buy in the super-talls.
“I think many of them would not be buying in New York without having the opportunity to live in these extraordinary towers,” she says. "These are people of great wealth and they won't settle for mediocrity. They want something spectacular and that’s what these towers deliver.”
Even if the construction of luxury housing can help sate demand and stem rent hikes across the board, as many hope it will do in places like Washington, D.C., it will likely only do so at the margins. So far, D.C.'s construction boom has failed to check rent increases for most residents, according to The Washington Post. New York City, for example, confronted a housing crisis of this magnitude in the mid-twentieth century only through widespread construction of both public housing and government-backed Mitchell-Lama housing developments, and rent regulation. Today's public policy status quo won't be of much help—federal subsidies for homeowners now dwarfs support for affordable housing.
The big threat isn't the yuppie moving in down the block, as some gentrification opponents have it. But those in the housing debate who are focused solely on supply seem to miss the current contours of the market they so desperately want to unleash: the influx of massive amounts of global capital has turned certain real estate markets into a speculative asset, driving up the value of land and housing and making affordable housing less, and not more, viable.
During the pre-crash mortgage boom, the prevailing view was that easy credit and lax lending standards would help poor households achieve the American dream of owning a home. Now, the breakneck construction of housing for wealthy people is touted as the improbable solution to affordable housing for everyone else. But today’s market mostly works for those who can pay. Too many Americans are straight-up broke. Global investors are ravenous. The rent is, indeed, too damn high.
*CORRECTION: An earlier version of this story referred to the wrong number for targeted sales prices of top-end apartments in Manhattan. They are expected to sell in the nine figures, not the ten figures.
This story is part of the Highrise Report, in collaboration with the National Film Board of Canada. CityLab is proud to host the U.S. premiere of “Universe Within: Digital Lives in the Global Highrise,” the final interactive documentary to come out of the HIGHRISE project, produced by the NFB.