Shopping for a big-city luxury home? Then surely you’ve noticed that properties touting “luxury” are about as common as New York pizzerias claiming to be “famous.”
A quick “luxury” keyword search on Zillow.com turns up plenty of fakes. Take, for instance, this apartment, an aggressively unlovely, 819-square-foot, one bedroom for sale near downtown Fort Lee, N.J. It promises “all the comforts and amenities of a luxury high-rise,” but given the Formica countertops, the single cramped bathroom and the $79,000 asking price, surely even the agent who wrote of the unit’s “luxury” appeal must know she is reaching.
To me, luxury means something extraordinary—something endowed with advantages that don’t easily depreciate. We must look for those qualities that time doesn’t change: location, unobstructed views and light, architectural uniqueness, ceiling heights and sheer square footage. And shrug at the stuff that doesn’t matter.
Like big price tags. There are 544 large homes for sale currently in Chicago priced above $1 million. In Los Angeles there are 1,400. In New York, there are 3,800. The problem with expensive real estate these days is that often it’s not unique. It’s almost a commodity. And commodity real estate can be just as maddeningly prone to depreciation as any other property.
Let’s be clear: Even wealthy buyers who have multiple homes regard their big-city luxury condos as more than just shelter. They see them as an investment. And many were startled by how much value they lost during the housing crash. According to the S&P/ Case-Shiller Composite-10 Index, average homes in the 10 biggest metropolitan areas shed 35 percent of their value on average between the housing market’s peak in June 2006 and its nadir in March 2012. The most expensive tier of homes in the U.S. was not immune from these losses.
Are fancy amenities a guarantee of luxury? Well, yes and no. This year wealthy homebuyers snapped up dozens of lavish condos in a newly developed building called One Ocean in Miami Beach, paying as much as $1,500 per square foot. Its amenities included “exclusive membership to a private beach club,” a “Zen park” and a “24-hour on-site concierge service that can be tapped into directly from an iPad to create bespoke dining, event and travel experiences.”
Yet I wouldn’t dwell so much on amenities. After all, one man’s “Zen park” and “bespoke meal” experience is another’s patch of grass and dinner reservations. And One Ocean’s beach club, while undoubtedly charming, is nowhere near the building. Perhaps you’d be just as well off with a place at Continuum, a statuesque building developed in 2001 that rests on beachfront land across the street. Wealthy buyers have been purchasing units there this year for the same per-square foot prices they would have paid at One Ocean. Continuum’s slight location advantage is permanent.
If you’re a would-be buyer of real estate pondering the meaning of luxury, you’re hardly alone. Luxury, as in something immune from commoditization and somewhat resistant to economic downturns, is increasingly hard to spot. And I don’t mean just in real estate.
Largely, it’s a triumph of high-end manufacturing. Materials and goods that were once considered luxurious—designer furniture, German sports sedans, cashmere wool, perfume, leather handbags—can now be mass produced for a fraction of their original production cost. Furniture stores like Ikea and Target knock off expensive designs and sell to consumers for a fraction of the original price. J. Crew sells their cashmere sweaters made of yarn the company quietly buys from the Italian luxury clothier Loro Piana for approximately $300, while a genuine labeled Loro Piana sweater can run upwards of $3,000. Drugstore beauty brands like Revlon and L’Oréal make products that closely replicate the colors and ingredients of high-end lines like Dior, Chanel and Nars. The Porsche Cayenne will run you a whopping $146,000, while the fully loaded Audi Q7, similar in look, built on the very same assembly line, yet roomier, more fuel efficient and with better torque, retails for $60,000.
I live in Manhattan, where the apartments in virtually every new building must be sold at a Loro Piana price. Developers calculate the price of land here not by its acreage but rather by the potential square footage of condo space that local zoning and codes dictate is buildable on the land. And lately that number has zoomed to over $2,000. That means a small plot of Manhattan dirt zoned to support, say, the construction of a tower of 100 spacious homes averaging 2,000 square feet each would sell for $400 million. That cost, along with the costs of construction and the developer’s profit, is eventually borne by homebuyers. Bottom line: new Manhattan builds are selling for $10,000 and now even asking $12,000 per square foot.
Of course, the developers have to make sure their units seem more luxurious than existing Manhattan apartments whose underlying land costs were sunken years or decades earlier. That’s not easy. But they’ve been remarkably successful at it, often by heavily marketing gimmicks like entertainment facilities, unusual services and unheard-of materials.
Some of the amenities are outlandish. I recently toured a popular new building that offered its incoming homeowners trendy outdoor showers on its rooftop—a marvel in January, I’m sure. Another had a pet spa. Another claimed their wine cellar was actually a “champagne toasting chamber.”
Yet wealthy buyers are drawn to newness and frivolity. Units in all of these buildings were selling for more than comparable units in buildings not so far away that were just a few years older. According to Miller Samuel, the Manhattan third-quarter median sales price of an apartment was $855,000, but for new-builds, it was $1,426,250. There has always been a spread, naturally, but it has widened considerably in the past five years, as most developers now only build luxury properties here.
To support the rising prices on new buildings, developers pay up for very seductive marketing campaigns. The budget to promote the dream is often 10 percent of the total projected revenues of the development. You might think that buyers who are comparing the cost of purchasing a new-build to the cost of buying in an established building would notice the premium, but they either don’t notice or don’t care. It’s easy to get personally wrapped up in the possibilities of the building, consider the possible future appreciation to be a sure thing and then use that to justify a premium. Sure, occasionally the marketing hype does come true. Just as a successful IPO from a tech company can reset pricing in the stock market, an exciting new development can redefine—and re-price—a neighborhood. But once the promotional campaign lets up, prices may soften considerably.
Certainly real estate isn’t the only industry where we’ve seen this pricing phenomenon. Look at the fine wine trade. A heavy marketing campaign can excite customers to pay $600 for a 2005 Chateau Haut Brion. Meanwhile, the savvier drinkers scoff, knowing the bottle of the mature and ready to drink 1990 vintage is available for a mere $400.
If you’re shopping for luxury real estate, wouldn’t you rather be the clever one who enjoys the older, more drinkable wine for less? Here are nine things to avoid overpaying for:
Superfluous Amenities. Curiously, the clearly frivolous ones are the most seductive for first-time luxury buyers: concierge services, pet spas, massage rooms, libraries, champagne chambers, common entertainment rooms, complimentary lobby breakfasts, mini-golf greens, and on and on. There’s no lasting value to these.
Custom kitchens. Kitchens can be easily upgraded. Granite counters and stainless steel appliances are ubiquitous.
Outdoor space. Convenient if you have pets, but will you use it? You should know appraisers tend to value this area at 30 percent of the interior price per square foot.
Finishes and fixtures. With very, very few exceptions—I have seen apartments whose finishes and fixtures would qualify as a work of art—don’t focus on the bling. The fixtures you fall in love with will be ripped out by the next wealthy homeowner.
Space-age materials. The engineered materials from the factory may look good, but they’re not the real thing. Avoid new modern materials you’ve never heard of—operative words are ‘artificial’ or ‘engineered’—and focus on timeless, high-quality natural wood, stone and metals.
Audio Video Systems. Don’t fall for gimmicky systems. The rate at which these become outdated is alarming. As long as your residence is wired for custom audio-video, you’re okay.
Prodigy developers. Yes, every great developer was a rookie once. Trouble is, if your builder hasn’t traditionally built high-end, he probably won’t accomplish this feat for your luxury apartment. Look at the track record. If he or she is a rookie, they should offer you a discount, not demand a premium.
The Doorman. Don’t they keep you safe? Well, it’s not their responsibility to intervene in security matters. How about accepting packages and handling visitors when you are out of town? Those tasks can be accomplished electronically now. Some find the cameras and virtual doorman systems as a good as a fully staffed building.
Tax Schemes. The value of a tax abatement is a straightforward calculation based on the benefit amount saved over a specific period of time. Once these benefits phase out, they’re gone. Keep the imminent increase in mind and avoid paying a premium for this trait.
Ultimately purchasing real estate for your own use is a highly subjective experience. Just keep in mind that when you go to sell, the more superfluous items may not translate to value for the next buyer. Next time, I’ll share with you my list of the substantive qualities you should be looking for when you buy luxury real estate.