Luxury Real Estate Succumbs to the Law of Supply and Demand

The number of luxury apartments in New York City has seen a skyrocketing rise recently. For instance, there are almost 300 new apartments costing about $5000 per square foot located around a seven-block stretch of 57th Street that are either currently up for sale or will be very soon, most likely in the next 24 months.

Data on luxury real estate in 2013 shows that the volume of sales was about 55 transactions for the year. In the year 2015, however, data showed that the sales of luxury real estate closed at a lower rate of 47 transactions for the year - down by 8 transactions from just two years earlier.

Developers and brokers are expecting the number of transactions for this year to be even lower. This they believe is due to the slow growth of China’s economy, coupled with the falling prices for oil and other market commodities, causing ultra-wealthy investors to become more cautious about spending. This drop in demand is leading to a glut in the luxury market as prices for land, apartments, storefronts and hotel rooms have gotten too high. The result has been a sudden slowdown in the luxury market.

The dangers and risks of focusing solely on the super-rich have become apparent. Some developers have begun cutting prices while others are looking into dividing up larger units and selling them off as smaller apartments. Also, recent plans by one developer to convert a hotel into a luxury residential tower have been shelved.

The effects of the pursuit of oversized profits are already beginning to show. Retailers are beginning to take a step back as landlords around Madison Avenue have increased rents up to $2000 per square foot. The cost of occupancy is now through the roof, making profits more difficult to achieve for retailers. Some storefronts are may become vacant as occupants search for cheaper real estate elsewhere.

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