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Big Apple Riding Out Recession
Published: May 01, 2008
By Michael Russo, MHN Contributing Editor
New Yorkers have a reputation for resilience, and the same can be said for the real estate market centered on Manhattan. While other large cities are paying a stiff price for speculating in the market, the NY metropolitan area remains a healthy place for top real estate developers and investors.
Despite Wall Street's woes, the meltdown of Bear Stearns, tight credit and the loss of a tax abatement program, the multihousing market in New York is stable—albeit not growing at the double-digit rates of previous years.
"There are concerns about the amount of inventory in the market, but so far the demand has sustained this growth," says veteran appraiser Jonathan Miller. "As we flirt with recession, New York doesn't have the excessive inventories of cities like San Diego or Phoenix, and the demand here is not motivated by speculators."
Miller, who has studied the New York market for more than 20 years, is co-founder of residential real estate appraiser Miller Samuel and managing principal of commercial firm Miller Cicero.
"We keep hearing the market is going to tumble, but this hasn't happened with condos," adds Michael Slattery, senior vice president of the Real Estate Board of New York. "As the economy gets softer, we hear more and more negative forecasts, but it hasn't affected us."
Like Miller, Slattery has worked in the New York area for more than two decades.
"Every downturn is different, and it gets exacerbated positively or negatively by the media," observes Ian Levine, COO and CFO of R.A.L. Companies and president of Spandrel Property Services. "Most only read the headlines that rates are up. However, you can still get a 30-year fixed at 6.25 percent, worst-case. That's a gold mine."
While the New York real estate market may be resilient, it still requires a solid reputation to do business in Manhattan.
"As far as financing, unless you have a track record, forget it," says Levine. "Years ago, everyone wanted to be a developer, and a lot of people without the experience got the money. That's all changed, as the deals are really being scrutinized."
"The lending market is dramatically different," agrees Francis Greenburger, CEO and chairman of Time Equities in New York. "Sixty percent of the lenders are no longer in the market at all, and the others are only working with their best customers or making new relationships with the top developers."
For small and medium-size developers, "no banks are reaching out to make their liquidity available," Greenburger says.
A 'significant' inventory
With all the negative news about real estate on national TV, one assumes there would be worries in New York about the market being flooded with new condominiums. However, none of the experts interviewed by MHN in mid-April expressed grave concerns about large inventories.
"There's no flooding of the market overall," says Levine. "It depends on what sub-market you are looking at."
"We're not seeing that in New York City or anywhere else," agrees Melina Starr, director of sales and marketing at Prudential Douglas Elliman. "Absorption is down somewhat, but not significantly. And in Williamsburg (Brooklyn), there's just a lot on the market at the same time."
However, the First Quarter 2008 Manhattan Market Overview recently published by Prudential shows that sales of condos and co-ops dropped more than 34 percent last quarter, compared with the first quarter of 2007.
Miller, whose company prepared the report, described the sales downturn as a "transition period, reflected in the sharp decline of sales (last) quarter and modest up-tick in inventory."
The report points to a "more price-sensitive market and a lack of urgency" among buyers who are ready to purchase, according to Dottie Herman, president and CEO of Prudential.
"Clearly, there is a significant inventory and the market has slowed," says Greenburger. "In terms of a healthy market, the ability to absorb (inventory) was reasonably there."
Greenburger, who has seen his share of downturns over the past 40 years, describes the current market as moving in "spits and starts."
"At the beginning of the year, the absolute inventory of condos had dropped, but this didn't speak to later deliveries," he says. "The market was slower last Nov. and Dec., picked up in January and slowed down again in March."
The Prudential report did show that the median price of all units increased 13.2 percent to a record $945,276. The report attributed the increase to greater activity at the high end of the market.
For those who worry about excessive inventory, Miller predicts that, "tight credit will affect future development and rein in new product flow, which may be a good and natural thing."
In fact, the existing condo inventory and number of new filings is actually down in Long Island City where Starr works.
Less than 20 minutes driving time from Manhattan, Long Island City and its location are unique. The area offers dramatic views of Manhattan, which is just across the East River via the 59th St. Bridge. For many brokers, the neighborhood has become known as "Midtown East-East."
For buyers who cannot afford the condo prices of Manhattan, Brooklyn was their only other option—until now.
"Long Island City is without parallel in terms of location and proximity to Manhattan," says Starr. "Over the last year, the area has transitioned into a neighborhood of significance. People don't feel like pioneers moving out here anymore."
However, Starr says that major supermarket chains and other off-site amenities are just now coming on line.
"Those early residents who did the pioneering got a good deal and they need to be patient," says Greenburg, whose company is not involved in residential development in Long Island City. "There's going to be a gap in the infrastructure, but retail and service suppliers will quickly fill it in."
Why love New York?
Condo sales may be down, but there's still a lot to like about the New York metropolitan market. As an international city, foreign demand helps absorb new condo development in Manhattan. Starr estimates foreign sales at about 20 percent, but with the weak dollar, this figure may rise.
The city also benefits from record levels of tourism and occupancy. Most buyers are primary or secondary home purchasers, which reduces speculation and the "flipping" of condos.
Wall Street also has a significant affect on New York real estate—for better or worse.
"Over the last five years, Wall Street's successes and the bonuses generated from them have been a key driver in the market," says Miller. "With the current problems in the financial sector, that stimulus has become a question mark."
However, in the past year, the average price of a Manhattan condo rose 52 percent, according to Gregory Heym, chief economist at Brown Harris Stevens and Halstead Property, LLC.
"The luxury market is driving condo prices higher," says Heym, who is author of Brown Harris Stevens' first quarter (2008) Manhattan residential market report.
While the high end of the market is clearly leading pricing gains, other indicators are pointing to the continued strength of the overall market, according to the study. The median price, which represents the middle of the market and is not as impacted by increased high-end activity, rose 13 percent over the past year to a new record of $855,000. Also, the average price rose for all size categories from the first quarter of 2007 by at least 15 percent.
"Since virtually all new development is condominium, this number is a good reflection of the resale market in Manhattan," says Heym. "While many feared our market would start to feel the effects of the credit crisis at the beginning of 2008, the data has yet to show any significant impact."
Before the credit crunch, a bubble did occur as developers rushed to lay foundations before the July 1, 2008 expiration of the 421a tax abatement program. The new tax law will make construction more expensive for developers.
For Levine, success boils down to the "intrinsic value of the real estate being developed." He insists that there's still untapped growth in the New York market.
"Compared with south Florida and southern California, this is a very positive environment," adds Greenburger.
Taxi riders take virtual condo tours
With a marketing idea that could only work in New York, the Extell Development Company is giving 1,000 taxicab riders a virtual tour of its condominium, The Lucida.
Each time a new fare enters a cab, a television segment on the Lucida will play on Open House TV using Taxi 2.0, the interactive television installed in New York City taxis.
The 90-second broadcast of the Upper East Side's first LEED-certified residential green building will be viewed by more than one million cab riders before the program's conclusion in mid-May.
Extell says that the response to the Lucida segment has been so successful that another company property—the Avery on Riverside Drive South—will be featured in an upcoming segment.
To comment, email Teresa O'Dea Hein at thein@multi-housingnews.com
