From a small northwestern observatory…

Finance and economics generally focused on real estate

Trophy Property and the Pandemic

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I spend a significant amount of my time at two somewhat opposite ends of the real estate spectrum – “damaged” property (particularly environmentally damaged, such as brownfields) and “trophy” property. Neither of these sectors behave like “normal” real estate even in “normal” times. Damaged property may eventually be remediated, converted, or in some way improved into the normal market. Ironically, demand for some kinds of damaged property, such as foreclosures, may actually improve during recessions or other “normal” market disruptions.

Trophy property is typically any property in the top 2.5% of its subclass. The market for such properties transcends normal markets for that subclass. Consider all of the office buildings in a given city — even New York or London. Investments in Class C and B offices may appeal to local buyers, while Class A properties will typically be marketed to trusts, REITs, pension plans, or the like. However, at the very top — the “named” properties which really anchor the city as a whole — the investment market may be entities or individuals for whom the trophy investment will provide halo effects or collectable effects for the rest of the portfolio. Normal metrics — income or cash/on/cash rates of return and such — may not apply to trophy investments. Much like a fine painting or other object d’art, an investor may want to own a trophy property simply for the sake of owning it. Of course, it doesn’t hurt that over long periods of time, trophy real estate has a great history of maintaining and improving value. It doesn’t hurt that trophy property investors often have very long time horizons, perhaps even multi-generational.

So, how is trophy property faring during this pandemic-induced recession? As with any good analysis, it may be too early to tell, but some anecdotal info coming our way suggests that trophy investors look at this recession as a real opportunity to pick some low-hanging fruit. One case in point was the acquisition of the Viceroy L’Ermitage Beverly Hills Hotel in October by EOS Investors. Admittedly, this property had a “damaged” component — the property had been taken over by the U.S. Government as a result of prosecution of an international money laundering case. Further, hotels in general remain strained, with many transactions falling into the “damage” category. However, EOS ended up paying $100 million for the 116-room trophy property, nearly $1 million per room, a figure that bears almost no connection to the realities of the hospitality market today.

At the other corner of the country, Manhattan trophy residences recorded one of their best weeks of the year in late October, albeit with a fairly large inventory of top-tier properties coming on the market. As an example, a 30,000 square foot, 5-story home on West 11th Street in Greenwich Village sold this month for $45 million. Originally listed for $49.5 million in January, 2019, this was the second highest price residential sale in New York City this year, and the highest since the pandemic began. Another New York City trophy residence sale in late October was a Perry Street (Tribeca) 5-bedroom duplex, with a private pool, for $20 million. According to one source, the average sale-price-to-list-price discount for Manhattan trophy residences stands at 11%, and the average time on the market in this sector is about 2 years. The last week of October showed 5 New York City contracts at $10 million or more.

Finally, in the middle of the continent, trophy ranches continue to sell to investors looking for recreation, retirement, or just pure collection purposes. Recent top-tier sales include the Pole Mountain Ranch in Wyoming (2,300 acres, 8,000 square foot main home, $8 million), a vacant pond-side lot at the Elk Creek Ranch in Colorado ($1.1 million for 2,850 vacant acres), and the Winding River Ranch in Wyoming (376 acres, 1.5 miles of Platt River frontage, custom built 5-bedroom lodge, for $2.2 million).

In short, there is some disruption right now in the trophy property market, as many properties seem to be coming on the market and inventories are strong. However, buyers with cash and/or resources are definitely in the market, and are looking to cherry-pick trophies that come available.

Written by johnkilpatrick

December 11, 2020 at 10:01 am

Posted in Uncategorized

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