Luxury Single-Family Faces Oversupply

LOS ANGELES—The luxury single-family home market is facing oversupply issues. According to Nick Segal, the president of Partners Trust, the market is drying up because of a glut of new development that has recently come online. The issue is specific to the luxury markets east of the 405-freeway, like Beverly Hills, the Beverly Hills Post Office and the bird streets of the Hollywood Hills and in the price range above $3 million. While this is an issue for that segment of the market, Segal says that the lower end of the single-family market, below $2 million, is still extremely robust. To find out more about this supply/demand imbalance and how the luxury market trends with the broader single-family market, we sat down with Segal for an exclusive interview.

GlobeSt.com: What is your take on the luxury market in Los Angeles?

Nick Segal: It really depends on which luxury market we are talking about. If it west of the 405-freeway, it is a very different market. East of the 405-freeway in markets like the Beverly Hills Post Office, Beverly Hills proper and the bird streets of the Hollywood Hills, new development has really taken off, and it is really concept architecture with clean lines and an indoor/outdoor flow. The market ballooned up to $2500 to $3000 per square foot, and that luxury market has really dried up. To give you some statistics, in the Sunset Strip area just east of Beverly Hills, the $5 million to $10 million range has 27 active listing, most of them new construction, and only two properties that have sold and two properties in escrow in the last 90 days. That is not a healthy market. So much of this new product that is coming to market and even more behind it that hasn't been completed is going to create a real glut. No one is buying these things right now. This could be a seasonal pause, but when I look at things west of the 405, like in the Pacific Palisades or Brentwood, the market from $3 million to $5 million and $5 million to $10 million is far more robust.

GlobeSt.com: Is this because demand is drying up, because there is an over supply or a combination?

Segal: I think it is a combination. How many people want a second home and they are willing to spend $20 million for it. From a broker's standpoint, there was a presentation that we are cheap relative to London and New York, and for that reason, Los Angeles will absolutely rise up to those other markets. But, I don't think that we have the same market demand. Those markets are much more of the primary world and Los Angeles is in the secondary world. Now, with the whole tech infusion and money coming in behind that, Los Angeles has a second bona fide industry, and I think that is wonderful; however, all of that is taking place in Silicon Beach and the vast majority of the jobs that are coming in can't support $15 million to $20 million homes yet.

GlobeSt.com: What about the Asian buyer or Asian businessmen that travel back and forth from Asia to Los Angeles. Are they diving any demand?

Segal: It is less about the demand from buyers and more about how much supply is out there. When a Chinese buyer looks at these statistics, they will see blood in the water and look for a good deal. At that point, it is about which of these developers will blink first, and when a developer doesn't just have one house that is sitting on the market but three or four houses, they will blink because they can't carry all of that debt.

GlobeSt.com: It is interesting that there is such an oversupply issue since we are so soon out of the recession. Do you have an opinion about why developers were so bullish and built this bulk of supply so quickly?

Segal: I think that this started 30 to 24 months ago. At that time, there was a leading indicator that there was demand for this type of product, and a lot of people saturated the market. If you look west, there is great development as well, but they haven't tried to push the envelope to $2500 to $3500 per square foot.

GlobeSt.com: Are the fluctuations in the high-end residential market indicative of any negative trends in the low-end of the residential market? Is there a trickle down here?

Segal: No. The lower end of the scale is robust. I negotiate for a client on the lower end of the scale, and we just listed a property for $1.5 million. There were six offers on it and it is going to go for 10% more than the listing. There is definitely a robust market under $3 million anywhere on the Westside. That market is very strong.