Tag Archives: new york

5th Avenue blues

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Hat tip Evilspeculator

They counted 48 vacant properties (I presume mostly street-front) from 59th to 14th Streets on 5th Avenue in Manhattan. I don’t have any stats to compare this to, but it is clear that times are not so good for landlords (and their banks) in NYC. I used to live on the same block as one very large storefront shown here, and I happen to know that that particular property has been vacant for over 18 months, ever since its former tenant, a nationwide retail chain, went bankrupt.

I have noticed that many of the “for rent” signs you see in Manhattan bear the name of Vornado or other such REITs. That sector is still doomed, though traders seem to have forgotten to ask, “where’s the equity?” I suspect that in most cases, an honest accounting would reveal that net of debt and marked to market, there is none at all.

At last, NYC rental and condo markets softening

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Hat tip to Dima for this article in AM New York.

For this first time in a long time, rents are either holding steady or falling in Manhattan, signifying a broader weakness in the city’s rental market, observers said.

What’s more, many landlords throughout the city are getting creative (if not desperate), agreeing to pay broker’s fees, or giving away the first month’s rent free; sometimes free parking, a gym membership or moving expenses are thrown in.

“Last year at this time, there was no such thing as concessions like these,” said David Calderazzo, a broker with Chelsea-based Luxx Realty.

I can attest to that statement. My rent went up 10% a year for the 3 years I rented in Manhattan. The last hike was this past January (they let me sign for just 2 months that last time). They would always offer the option of a 2-year lease to lock in only a 15% hike, but I always went for the one-year, at first to leave my options open, and later because I thought that rents couldn’t possibly continue up at that pace.

Calderazzo found an apartment for roommates Nick Parisi and Greg Wagner. They had their broker’s fee paid for when they moved into a converted two-bedroom in The Chesapeake, a luxury building on the Upper East Side. Their rent? $3,300 a month.

For some perspective, here’s what reviewers have to say about their building. $3,300 for a 2BR in Manhattan sounds like a bargain, but it is on the edge of the wilderness, up on 94th Street by the East River, a long walk from the Subway. We were paying $3400 for a 1BR in central Midtown, but even this area is not so inviting in the wee hours.

The young professional demographic in NYC is being hit hard, as banks and law firms trim the fat. These industries are still morbidly obese from the credit binge, so I expect a lot of former structured finance and M&A hotshots to head back to the nest or consolidate living space. This is not a crowd with big savings, since taxes eat half of salaries and rent takes half the rest. Then there’s often student debt, and most of what’s left goes to enjoying NYC.

Figures from Citi Habitats show apartment prices largely steady compared to last summer. The Real Estate Group of New York found signs of declines in most categories, with two-bedrooms in non-doorman buildings dropping 5 percent to $3,968.

The NYC market is where the nationwide market was in 2006. Prices are sticky, but volume is drying up fast. The Sun reports that condo sales are down sharply:

As we approach the end of summer, the sales volume of New York City condominiums is way down, and it is harder than at any time in recent history for purchasers to qualify for residential mortgages, most developers and brokers say. Still, many are hopeful that the situation is merely a case of the summer doldrums, and that activity will pick up again in the fourth quarter of 2008.

“The indicator which sticks out most for condominium sales for 2008 is that the total number of transactions are down 21% in Manhattan and 26% from 2007,” a broker at Prudential Douglas Elliman, Christopher De Weaver, said. “The number of days on the market has blown out from 117 to 135, so it’s taking almost a month longer to sell fewer apartments which are inventory. Nevertheless, prices continue to hold up. But having said that, we are still selling at sales volume of 2006 in terms of number of transactions.”

Volume is down so much over last year because 2007 was such a blowout year for NYC, as everyone was flush with their record bonuses from ’06 and rightly expected a near-repeat in ’07. Stocks made higher highs, and deal mania was strong through the first half.

“We are selling less, and working longer with a product that hasn’t yet adjusted downward in price, while having to navigate a mortgage landscape that changes weekly and daily.”

The CEO of Coldwell Banker Hunt Kennedy, David Michonski, said, “Sales are down about 32% and open business, meaning contracts signed, is down about 40%. This means the closed sales figures will get worse.”

This guy sounds like he knows what’s coming:

“Sellers of condos in this market are coming to realize that sales are slow, and they are looking at the fall selling season as a litmus test of how much discounting they will have to do in 2009,” the president of the Troutbrook Company, Marc Freud, said.

Another broker tries to be upbeat:

“The summer makes it an unfair comparison. Let’s see what happens in September, but my gut tells me that if there is not stability in the stock market, and we continue to see the types of swings and lack of traction, people will be hesitant to pull the trigger unless they really have to.”

This is the key change, from investment mania bidding to regular living expense decisions:

This is a large shift in buyer mentality from several years ago, when potential buyers moved quickly because they feared that units would sell quickly and prices may go up.

In NYC as everywhere, credit is the culprit:

No longer can a purchaser obtain financing with as little as 5% or 10%. The bar today requires at least a 20% or 30% down payment and higher credit scores.

This reminds me of the bit in Sex and the City (circa 1999, pre-bubble) where Carrie needs to buy her apartment but doesn’t have the 30k down payment. “30 grand? Who has 30 grand?” Turns out she had 40k worth of shoes in her closet. One broker just doesn’t get that this is a big deal:

“With regard to getting a mortgage, it now takes longer and requires more paperwork. Yes, a purchaser is required to put 25% to 35% of the purchase price down. So what? So we are back to the way we did business for 30 years. It’s only a shock to those too young to remember,” he said.

So what? Well, 30 years ago Jim Rogers bought a townhouse for $10 a square foot, that’s what. He got a great deal in what was then a lousy part of town, but even Park Avenue footage could be had for $50 (about $150-200 in 2008 dollars). The good stuff is $2000 today. And household savings rates were over 10% in the ’70s. Savings have been zero to negative of late, though just last quarter they rose to a whopping 2.6% (a sign of deflationary tight-fistedness).

“On the positive side, there are plenty of buyers out there,” Mr. Michonski said. “Every week our agents tell us they have many buyers. The issue is they are not buying, but hoping to buy, or thinking of buying, or intending to buy. In other words, they lack an urgency to act. When they get that urgency, there will be a flood of buyers, as they are waiting in the wings. They all want a bargain, so unless you can convince them that something is a bargain, they don’t bite.”

The only thing that will make them bite is lower prices. Potential buyers see which way the wind is blowing, and are waiting for prices to come down. Once they start falling, they’ll feel even more incentive to wait, especially with softening rents. That is a key part of how deflation works – - a slower velocity of money. People are in no hurry to spend.

“The other good news is that bottom fishers are out in force. They are everywhere. There is no lack of confidence to buy on their part. They are relishing the prospect of buying and searching everywhere for bargains. It is not a market without buyers, a very critical distinction. Rather, it is a market full of buyers who want a bargain and can wait and are waiting. Thus, they waste a lot of time for brokers because they want to see everything and then more of everything, and they put in low-ball offers that require endless negotiations.”

Silly broker. Next year he’s going to be begging those same buyers to come back with thier “low-ball offers.” Those offers are the market, and the market is not moving up. Also, the jobs situation is still not that bad, with Wall Street layoffs so far only in the low-mid single digits, as opposed to 17% in the dot-com bust.

Finally, no discussion of NYC real estate would be complete without mention of those supposed saviors, the foreign buyers:

“The foreign buyers believe in our market and want to have a pied-à-terre or an investment property here. We also have new nationalities buying here now: Russians, Indians, Chinese.”

Yes, that’s all well and good, but how will they like getting their irises scanned and logging their trip itineraries with DHS? Our politicians and press are doing all they can to antagonise those very Chinese and Russians, for whom it is no easy thing to get just a tourist visa. And sure, NYC will retain its gritty charm, but so does Buenos Aires, a hopping market for foreign buyers after prices crashed 75% in their financial crisis. Did foreigners save that city? Only if you consider it salvation to pay under 100k for the beautiful pre-war pads of formerly middle class Portenos made desperate by banking and currency failures.

New York muni-bond defaults coming

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Bloomberg reports on the budget gap:

Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a “safe harbor,” protecting against penalties for underpayment.

“It will be a number of years before Wall Street starts paying taxes again,” the mayor said at a press conference yesterday in Manhattan. “They will carry forward all of those losses.”

Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said.

I wonder what portion of revenue comes from industries that are dependent on Wall Street, such as law firms that handle M&A and other transactions, accounting firms, hotels for business travelers, luxury apartment rentals, commercial real estate, and high-end shopping and entertainment. Since manufacturing departed decades ago, NYC has become strictly a boom-time town. This hugely wealthy financial center was a drug-infested war zone during the 1970s bear market. All of its top industries are highly cyclical: advertising always slips in recessions, and these are tough times for the fashion biz as well, as even the wives of multi-millionaires wonder how many $500 shoes they really need.

Emergency Session

New York Governor David Paterson called the Legislature back to work next week in an emergency session to address widening deficits as revenue, including tax receipts from Wall Street, declines. Sixteen of the state’s largest banks sent taxes totaling $5 million to the state treasury in the most recent reporting period, a 97 percent decrease from a year earlier, when they accounted for $173 million in revenue, Paterson said.

The state faces a $26 billion deficit over the next three years and a $630 million shortfall in the current year that began April 1, Paterson has said. The governor yesterday outlined $630 million in administrative spending cuts he intends to apply this year, and he called upon legislators to cut at least $600 million more later in August.

Good luck enacting any meaningful cuts. We learned in the 2005 MTA strike that $63,000 plus full benefits was not enough for the bus drivers:

The sense of entitlement that has been encouraged for decades will ensure that this ends in default, but of course Moody’s or S&P won’t admit that.

New York City won its highest debt ratings in recent years, AA from Standard & Poor’s and Aa3 from Moody’s Investors Service, as Wall Street profits soared and the real estate market boomed. The largest Wall Street firms paid a combined $30 billion in bonuses in early 2007 because of record 2006 profits, Turner said.

New York state has $50 billion of outstanding debt. Ratings range from AAA for bonds backed by personal income taxes or sales tax, to AA for state general obligation debt and AA- for bonds that require appropriations by the Legislature, according to Standard & Poor’s.

“I am worried about the state’s bond rating, and it will start to fall if the governor doesn’t do something about his budget problems now,” Bloomberg said. “The rating agencies are cognizant of what’s happening to our economy.”

The cumulative projected deficit the state faces over the next three years has widened 22 percent since May, to $26.2 billion from $21.5 billion, Paterson said. The current budget is $80.5 billion, excluding capital projects and federal aid.

This is yet another example of the meaninglessness of ratings from the cartel. How could NYC’s huge pile of debt have ever been investment grade? And how can it still retain those ratings after deficits have widened 22% in three months? The answer of course is that they pay S&P and Moody’s good money for those ratings, and that the government supports this sham through special rights for the few agencies it chooses to recognize. In credit ratings as in anything, when the government restricts a market, quality goes down. Does anyone believe that a ratings agency that kept MBIA and Ambac debt AAA until 2008 would survive in a free market?

The only realistic way default could be avoided for NYC’s debt and thousands of other municipal bonds is for the federal government to step in and bail out the states and towns. I would not rule this out, since what is another few trillion when you’re already on the hook for $50-100 trillion?