Looking Forward to Monday Morning
A series of essays on business, architecture, and the business of architecture.
The Case for Estate Condition Co-Ops
by Daniel Frisch
Posted March 4th, 2023

In his 1987 novel, The Bonfire of the Vanities, Tom Wolfe describes a gilded Park Avenue duplex as follows: ”the sort of apartment, the mere thought of which ignites flames of greed and covetousness under people all over New York and, for that matter, all over the world.”   As Wolfe suggests, these Manhattan trophy residences, inhabited by his misogynistically labeled “Masters of the Universe,” are mythic in their scarcity and exclusivity.  More common are the less distinguished run-of-the-mill pre-war apartments in the same buildings, and in buildings just off the gold coast thoroughfares of Central Park West, Park and Fifth Avenues – apartments more resembling those of the fictional Arconia depicted in Only Murders in the Building.  Both Bonfire and Only Murders touch on the unique social rhythms and mores of living co-operatively, but with one very important distinction, at least from an architectural and real estate point of view.  Sherman McCoy’s exceptional duplex apartment is meticulously maintained and updated, whereas a majority of the estate condition apartments in the Arconia appear lovingly dilapidated, just waiting for new buyers to purchase and renovate.

From Ghostbusters to Gossip Girl, pre-war co-operative buildings have provided the visual background for many of our favorite stories. Whether haunting or aspirational, the modern tales are set against the background of another era’s glamour.  The co-operative apartment buildings that set this stage were largely built between 1900 and 1940, prior to the second world war, thus their “pre-war” designation.  After the war, construction technologies and trends in Manhattan changed dramatically, with white-brick apartment buildings and steel and glass high-rises dominating the urban landscape.  Today, new minimalist condo developments are ascendent, and the slender super-towers of Billionaire’s Row soar above Emory Roth’s Central Park West confections.  And yet through it all, the apartments housed within the grand pre-war co-operative buildings remain the gold standard of New York City residential real estate.  Does anyone really want to live on the eightieth floor of a sliver tower, with no known neighbors and pipes that burst when the wind blows, even if dropping a hundred million appeals as a (foreign) investment strategy.

Purchasing a single-family home is typically straightforward; purchasing a co-operative apartment in Manhattan is exponentially more complicated.  Other than the post-closing public recording of the sale price, the purchase process of co-ops is insufferably opaque, with important details cloaked in layers of privacy.  From the very first showing, the prospective buyer must be admitted to the building’s lobby by a uniformed doorman, who is more likely to bar entry than open doors. In the fanciest of buildings, the elevator may also be manned, and for what it is worth, I’ve yet to meet a female doorman or elevator operator.  Once a buyer commits to purchasing a co-op, or more accurately, to joining a private club, and has signed a contract with the seller, the heavy lifting begins.  Letters of recommendation are needed, proof of liquidity must be provided (as much as three times the value of the acquisition), and a voluminous ‘board package’ needs to be submitted by the buyer’s broker to the building’s managing agent.  While co-op boards cannot discriminate based on race or religion, deliberations are secret, and rationales can be created to validate any board rejection or turn-down.  The reasons for such are many.  Perhaps, the price is too low, effectively de-valuing other shareholders’ equity.  Maybe the buyer is too famous, or infamous, or maybe the family has too many pets, if pets are allowed.  Maybe a child goes to Juilliard and practices piano at home.  Never have I met a buyer petitioning to purchase a co-op who admits to having a teenage drummer in the family.  On the stress meter, interviewing with a co-op board ranks high for otherwise established, successful adults, most of whom haven’t printed a resume in years.  This invasive and oftentimes terrifying process is unique to buying a co-operative apartment and only intensifies when the subject property is in “estate condition” and will require significant renovations.  Real estate listings always supply clues about when an apartment needs a full renovation.  When a listing reads “bring your architect,” or “the property is virtually staged,” a significant project awaits.  If all the bathrooms and the kitchen need to be renovated, or perhaps, a new powder room is requested the project scope is more than cosmetic.  If the potential buyer says the apartment will only satisfy if central air is added, an electrical service upgrade is likely.

Estate condition apartments that have not been renovated in a generation, if ever, typically require wholesale modernization to accommodate a new owner.  Original condition pre-war apartments are becoming rare, but ones that have not been touched in thirty or forty years are not.  And if buying a pre-war co-operative apartment is difficult, renovating one is even more challenging.  With every passing year, boards and managing agents write ever-more restrictive alteration agreements, the “contracts” between apartment owners and the building which govern renovations.  Likewise, the Department of Buildings is its own labyrinth. Significantly, both building management and Department of Buildings approvals come before a hammer swings, and approvals alone do little to assure a buyer that project costs and schedules can be controlled.

As a residential architect practicing in New York for thirty-plus years, designing and overseeing renovations of apartments has become old hat.  We recognize the similarities between projects, and strive to make construction costs and schedules predictable, carefully comparing project specifics with data collected from historic projects.  Even though the less common renovation horror stories are loudly broadcast, successes vastly outnumber failures. Just as co-operatives are stable and dependable, so, too, are projects within these apartments when designed and built by experienced professionals.

Despite the challenges of both purchasing and renovating co-op apartments, the allure of the pre-war co-op never fades, and the excitement of bringing an estate condition apartment back to life and making it one’s own more than justifies the headaches (and expense).  Therefore, the curious frequently ask us for our take on the Manhattan residential real estate market, usually at the same time they ask about the cost of renovations. Each quarter, the major brokerage houses publish glossy market reports comparing quarter-over-quarter and year-over-year listings and sales, usually accompanied by a rosy assessment of the data and a prediction for continued growth. If prices and transactions are down, buyers are urged to take advantage, and if prices are rising, buyers are urged to take advantage, with the latter being the norm.  We don’t have much to add except during the anomalous periods when transaction volume is down, and prices are in free-fall.  Studying these periods help us to recognize when the market has softened so significantly that buyers of estate condition apartments can capitalize on outsize opportunities.

The near bankruptcy of the crime-ridden seventies had quite the impact on the City’s residential real estate market, and as the saying goes, Park Avenue apartments couldn’t be given away. We started our firm twenty years later during a recession kicked off by the Black Monday stock market crash of 1987. The City had fully recovered from the seventies, but the fear of a real estate relapse was top of mind.  This, of course, did not happen, and the stories of “if I had only bought then….” still come up when we reminisce about the nineties. 1997, brought a mini-crash, but Manhattan real estate ran right along without significant corrections.  The “Dot Bomb” of March 2000, shook the market, and the next year’s September Eleventh terror attacks brought the market to a temporary halt. The recovery wasn’t overnight, but it came, and our clients who purchased then enjoyed their appreciation while grieving.  More impactfully, the financial crisis of 2008 brought the co-op market and our business almost to a standstill.  We signed only one project in 2008, and the struggles remained monumental through 2011, but even Superstorm Sandy could not slow the recovery when it finally came.  2017, I believe, was the only time when a slow-down was not triggered by a singular and significant event.  Most of us just blamed it on a fellow named DeBlasio and went about our business.  Near the end of 2019, we thought we could finally call the market bottom.  At the end of 2019, we were evaluating two estate condition apartments in buildings we knew well, one on Park Avenue and one on lower Fifth Avenue, and the 2019 apartments were each scheduled to trade for twenty-five percent below the market high of 2017.  The contract prices were so low when compared with earlier transactions, that we were unconvinced the respective boards would approve the purchasers (they did).  A few months later, on March 13, 2020, to be exact, Covid-19 arrived and shuttered the city.  Prices fell off the bottom and construction went from challenging to impossible.

From our perspective, the post-Covid co-op market looks very similar to the 2008 market, and just as then, the case for the value proposition in co-op apartments can be made mathematically.  A typical co-operative apartment which was trading for $1,800 per square foot in 2017, is now available for $1,200 per square foot, a thirty-three percent discount.  At the same time, construction costs for full renovations have increased from an average of $500 per square foot in 2017 to $650 per square foot today, a similar increase of thirty percent.  The resultant total acquisition and construction cost would have been $2,300 per square foot in 2017, compared with $1,850 per square foot today – a discount in real dollars of $450 per square foot or twenty percent (19.57% to be exact) – all at a time when prices for everything else are seeing seven percent inflation.  Written as a simple equation, the comparison of 2017 and 2023 co-op acquisition and construction costs follows:

2017:   $1,800/ft + $500/ft = $2,300/ft
2023:   $1,200/ft + $650/ft = $1,850/ft
Savings:  $450/ft

Despite decreased valuations bringing disappointing returns for sellers, we expect to see a flood of estate condition pre-war co-ops coming to market. Deferred maintenance and carrying costs correlate with downsizing and estate planning pressures; and relocations, whether to a state without an income tax, or to a (formerly) second home.  Rhetorically, “if our kids are out of school, and we are not going into the office every day (if ever), do we really need that Classic Seven in Carnegie Hill that really needs some work?”   For all the families who are downsizing or moving, I am confident that enthusiastic buyers will seize the opportunity.  History tells us the market will rebound as it has every other time, igniting flames for a new generation.

DF, 3-4-2023