The Northeastern U.S. can’t catch a break. As Americans continue to reel from the devastation Superstorm Sandy, a Nor’easter now threatens to dump up to a foot of snow on the battered region, where hundreds of thousands remain without power and tens of thousands have tragically lost homes.
Research companies estimate the storm’s damages will cost upwards of $50 billion, thanks to power outages, lost business revenue and destroyed homes. But there’s another factor contributing to the anticipated high costs: the underlying value of Northeastern real estate. It’s expensive — really expensive. And now, in the coming year, it may become more so.
In terms of residential real estate, the region peddles some of the country’s highest home prices (and property taxes). It boasts the most expensive ZIP code and five of the 10 most expensive homes for sale. The August median sales price of a home in the Northeast was $249,800, according to the National Association of Realtors. That’s higher than the other three regions tracked by the association and 35% higher than the national price. In other words, relative to comparable properties across the U.S., the region’s real estate — from beachside bungalows in blue collar communities to multimillion dollar mansions in Wall Street-centric enclaves — is among the most expensive in America.
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“The cost of building in New York is one of the most expensive in the country so I am certain that the widespread damage will result in near-record amounts spent on construction,” says Jonathan Miller, chief executive of Miller Samuel, New YorkCity-based appraisal company. “In some of these areas that have been blue collar communities, for example, the affordability levels may shift.”
In addition to the cost of construction, the price of insurance is likely to rise, especially along the waterfront. Greg McBride, a senior analyst at Bankrate.com, suspects insurers will now rejigger their exposure to the Northeastern markets, particularly along the New Jersey shore and around the New York metro area. If insurers’ activity in Florida following the past two major hurricanes is any indication, some companies will exit these markets altogether, decreasing competition. The ones that continue to offer plans will more than likely raise premiums.
There’s also the issue of financing. Mortgage lending has been incredibly tight, as banks continue to hemorrhage foreclosure losses and low interest rates deincentivize the underwriting of new loans. In flood-prone areas like New York City’s Zone A, where waterfront neighborhoods comprise a mandatory evacuation zone, financing may become more difficult to acquire now. (Underwriters are already pushing pause on mortgage loans and refinancing for homes around the region until reinspections can be done.) That may put downward pressure on prices in some areas of the Northeast in the short-term, but in pricey Manhattan the effects could be slightly different.
Manhattan residential inventory is very limited compared to demand, creating a tiny 1% vacancy rate. Below 14th Street, it has pushed average condo price per square foot up 4% year-over-year, according to CitiHabitats. Post-storm reassessments will help ensure the inventory levels stay low as developers experience development delays. So while Sandy’s effects will propel some skittish buyers and owners to surrender water views for higher ground, in “safe-haven” Manhattan, more will fill those vacancies, flush with foreign cash and drawn by luxury amenities that include those amazing views. This will likely be true in Battery Park City, where tax abatements persist, buildings offer outrageous extras, and celebrity homeowners like Leonardo DiCaprio and Russell Simmons add to the allure. After 9/11, people thought the fledgling neighborhood would stagnate; instead property prices more than doubled over the next 10 years as it became one of the fastest growing areas in the city.
How rebuilding efforts affect the cost of real estate is of course hyper-localized. “It’s in pockets,” says Dottie Herman, chief executive of Prudential Douglas Elliman, a luxury realty firm with more than 70 offices scattered around the New York metro area. She has been organizing relief efforts wherever the company has an office. It’s provided her with firsthand exposure to the hardest hit areas. “The parts of New York, New Jersey and Connecticut where there is a lot of damage from trees, those people are suffering from no electricity and severe house damage, but I believe those areas will come back relatively soon; where there is tremendous flood damage, those areas are currently decimated.”
In New York the damage comes down to address. Earlier this week, the Department of Buildings declared roughly a dozen Manhattan apartment complexes unsafe or restricted, meaning evacuated residents cannot return until repairs and further inspections take place.
One such example is 2 Gold Street, where flooding caused critical damage to mechanical systems. Sofia Estevez, executive vice president of TF Cornerstone, the building’s management company, has estimated it will take two weeks to assess the damage and at least two months to make repairs. Residents will be able to return once those repairs are complete, unless they prefer to break their leases. Units in the Financial District high rise have ranged from $2,850 per month for a studio to $5,225 for a three bedroom, according to Streeteasy.com. Those lost rental revenues will incur an “astronomical cost” for the insured real estate developer. It may also mean higher rents for neighborhood residents: with 650 rental units now out-of-commission, already low inventory levels have been further depleted while displaced renters have increased demand (at least in the short-term). When TF Cornerstone offered Gold Street inhabitants available units in other buildings, every one was was snatched up within hours.
South of the city, the Jersey Shore was ravaged. The storm shattered the boardwalk in Seaside Heights, the party town famous for those MTV ‘guidos’ and guidettes’, plunging the roller coaster into the ocean. But it wasn’t the only beach town to suffer and certainly not the most expensive: tony enclaves like Manasquan and Mantoloking, where homes run into the millions, suffered devastating losses as well.
“It’s still very raw. There are certain areas we haven’t even been able to get into yet,” says Keith Kernan, a broker with Ward Wight Sotheby’s International Realty. His firm handles luxury real estate in the Shore’s ritzier enclaves. He and others note that it’s too early to know just how much inventory has been wiped out, let alone what Sandy’s effects will mean on the market in future months. Still, based off of recovery efforts along the shore following storms past, “We are cautiously optimistic that those attracted to the Jersey Shore will always be attracted to it,” adds Kernan.
Buyers pay premium prices for waterfront real estate already. But it may turn out that, in the longer-term, the “attraction” can only be pursued by a wealthier consumer base capable of affording both higher premiums and the potentially high out-of-pocket costs of rebuilding if market value can’t be recouped from insurance companies (an issue already beginning to arise in New Jersey).
“I am highly skeptical that waterfront communities, particularly on Long Island Sound, will see any meaningful change in consumer behavior,” says Miller. Other real estate veterans echo his sentiment. “It will all come down to the cost of housing…if the flow of financing is cut off and the cost of insurance rises, you change the dynamic of what actually gets built.”
