Real Estate Markets and Their Price Spreads

The price difference between various real estate markets is what many people try to profit from. This is called a price spread. For example, Manhattan residential real estate prices are roughly $1000 a square foot while Downtown Jersey City and other equivalent outlying urban areas of Manhattan might be $550 a square foot, a price spread of $450 ($1000 less $550) a square foot.

Bond traders or people that trade stocks look for price spreads. Bond traders refer to the spread in basis points and yield to maturity. So if a corporate bond yields 8% and an equivalent term US treasury bond yields 6%, then they would say that corporate bonds trade at a spread of 200 basis points or 2% (8% - 6%) to US treasuries.

With real estate markets people reach out to more far reaching markets in the hope that those markets may mature and/or improve and that prices may rise closing the spread between that market and another. Looking at Brooklyn Heights versus Downtown Jersey City there is a significant price spread. The selling price per square foot for housing in Brooklyn Heights is higher than in Downtown Jersey City. Recently I previewed several properties in Brooklyn Heights selling for about $850 a square. Since real estate in Downtown Jersey City is selling for about $550 per square foot, then this would imply a price spread per square foot of $300 ($850 - $550) between these two markets.

Infact depending on the property and its exact location within Brooklyn Heights, prices can far exceed $850 a square foot. On February 6, 2005 an article was published in the New York Times titled “$8.5 million Brownstone Deal Raises the Bar in Brooklyn” pointing out that the prices of row houses in Brooklyn Heights had reached all time new highs.

A lot of development is transpiring in Downtown Jersey City. This development will probably keep prices down in the near term (next couple of years) as a lot of inventory comes on the market and requires market absorption. However beyond the next couple of years as Downtown Jersey City improves, spreads should narrow.

As larger developers complete their projects and advertise them, more attention should be brought to bear on Downtown Jersey City. I speculate that Donald Trump has every intention of marketing his Trump Plaza Jersey City beyond the local markets. Plus let’s not forget about the new $130 million dollar international golf course near Liberty State Park (called the Liberty National Golf Club) and the $4.8 Billion Liberty Harbor North project. These projects should translate into positive marketing exposure for Downtown Jersey City and should result in some international exposure as well.

So expect to see some price spread movements between the above mentioned markets over the next ten years. Although there is no guarantee that the spreads will narrow, I speculate (based on the above circumstances) that the probabilities point to the spreads narrowing rather than widening.

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