It's no secret that new developments in NYC tend to command a higher price compared to resale condos. However, you may be surprised to learn that this premium doesn't last as long as you might think due to the premium decay phenomenon.
What Is the Premium Decay Phenomenon?
The premium decay phenomenon refers to the trend of new construction buildings in NYC quickly losing the premium they enjoy over the rest of the market as they age. When a new build in Manhattan first opens, it typically commands a higher price compared to older buildings due to its modern features and the novelty of being brand new.
For instance, the average price per square foot of a new condo development in NYC in Q1 of 2024 was $1,947, while the average price per square foot for resale condos was $1,403, a difference of about 32%. The gap between new condos in New York and resale apartments continues to widen every year as developments become increasingly extravagant to cater to the tastes of wealthy homebuyers.
However, the evidence shows that this price advantage doesn't last forever. While it stays intact for the first few years, as time goes on, the price begins to fall and more closely resembles the market price of a resale condo. This premium decay phenomenon is due to the fact that over time, the freshness that once gave the home an added appeal starts to fade as styles change, features become outdated, and the home retains more wear and tear. After about 15 years, the price of new condominiums in NYC can drop as much as 30%, essentially canceling out the price boost the home once enjoyed when it was brand new.
Does the Premium Decay Phenomenon Indicate a Loss in Value?
According to John Walkup, co-founder of Urban Digs Analytics, "The premium decay of new development condos doesn't indicate a loss in property value. Instead, it reflects a reduction in the initial price premium as these buildings transition from new to resale status. This trend typically follows a pattern where the premium for the building's newness remains stable for the first five years, then gradually decreases by 10-15% as the building ages.
A common misconception is that new dev condos will always command high premiums. In reality, as these buildings age, their prices begin to align more closely with the broader resale market, reducing the premium associated with their newness and modern amenities. Importantly, the new development premium is categorical and evolving; it applies to buildings within the category of new developments, and as they age out of this category, they no longer benefit from the premium. Instead, the premium shifts to a new set of buildings entering the market with the latest features and designs."
Do New Homes Appreciate Faster?
A common misconception is that NYC new developments appreciate faster than resale condos. However, this isn't always the case in the long term, partially due to the premium decay phenomenon. New condos in NYC do tend to appreciate faster than resale apartments in the first few years after the completion of the development. However, this growth can often stabilize or even begin to decline as time goes on, in a similar fashion to their price premium.
Resale homes, in comparison, don't enjoy the same type of quick boost. However, historically, older homes, especially those in prominent neighborhoods, tend to show strong returns in the long term. That isn't to say that new construction homes don't appreciate, although data shows that it may be at a lower rate than older homes. The US Federal Housing Finance Agency shows that on average the appreciation rate for homes across the US is 4%, while the appreciation rate for new construction was 2.8%.
Is New Construction a Good Investment?
There are many pros and cons of new build homes that you should consider before making a purchase. However, that doesn't mean they are a bad investment. Purchasing a brand-new home in a reputable New York condo development can be a great investment for the future as long as you do your due diligence to ensure the construction is built to last.
However, it is important to be aware of how New York new build condos tend to perform compared to the rest of the market. Be aware of the premium decay phenomenon and consider how it may impact the eventual sales price. If you plan on selling after ten years, look at other resale homes as an indication of what you can expect, not other new developments.
Even if you paid a premium for the property when you first bought it, there’s no guarantee someone else will if it's no longer considered new. That doesn't mean you'll lose money or the price will continue to decline until the property is worthless, however, you should be aware of this phenomenon to set realistic expectations of the long-term resale value of the home.
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