Employment and lack thereof remains a major concern for the government; rightly so. In response, it is initiating laws and bills to kick-start economic revival by way of employment. Legislation concerning job growth is underway, attempting to bolster job openings, hiring speed, and market confidence. Various bills that will inject over $50 billion are expected to progress the timeline for job growth, which in turn would lead to a more expansive step towards economic recovery.

In order to encourage employers to hire sooner rather than later, this new legislation offers a tax holiday to businesses that hire those individuals who have been unemployed for at least 60 days; an additional $1,000 tax credit will be applied to that hiring firm if the new employee continues to work for at least a year. Chiefly, these are government-issued gifts distributed to those business willing to participate in the hastening of an economic recovery, and meant to encourage otherwise hesitant participants to act accordingly.

There are a number of other bills in effect, whose purpose has been to ease the blow of unemployment by providing various benefits and health insurance subsidies, though they are approaching expiration very soon. A program that will be expanded instead of expiring is the Build America Bond Program, to which $7.6 billion will be added; this way, local governments can take on more construction projects and received subsidized funding from the program, thereby creating a considerable amount of construction jobs, which may in turn spark additional demand for apartments.

This definitely affects the real estate market. The expansion of jobs in the construction division will have a positive impact on apartment demand by attracting a migratory work-force that will fill up apartment units and ease vacancy rates. Job and hiring growth in general will expand rent demographics and allow the prime rent demographic of the New York City (20-35 years old) to afford asking rent prices. In order to properly and successfully address industrial vacancy rates, which currently stand at 12.6 percent nationwide, the government plans to increase private venture capital spending by allowing tax cuts for investors and small businesses; long term investments would receive an exemption from capital gains tax. It is the hope that increased venture capital spending will aid in the absorption of vacant industrial space.

What are you seeing out there? Are the conditions that the government is trying to alleviate with this legislation reflective of your local job and apartment markets?

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Last Saturday’s New York Times article titled “Real Estate Looks Risky, but Less So for Bargain Hunters,” which takes a look at the current climate of commercial real estate investing, posed an interesting question in my mind.

“‘The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,’ said David Frame, global head of alternative investments at J.P. Morgan Private Bank.”

Is the ‘bad’ or the low of the market currently priced into transactions? Transactions before the height of the commercial real estate market, which were predicated upon continuously rising values, certainly had the perceived ‘good’ priced in. However, as the tide turned, many high profile properties that had the ‘good’ priced into them never reached the values that their prices were based upon. The list of buildings that were purchased for staggering amounts and turned out to possess only a fraction of their perceived value is, not surprisingly, expansive. Although hindsight is always 20/20, we can see from the fallout of the commercial real estate market in the past few years that ‘good’ or ‘bad’ are not always truly priced into transactions.

So, do you think that the ‘bad’ is priced into transactions right now? Let me know your thoughts in the comments section.

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1/29/10 – After the collapse of Tishman Speyer’s Stuyvesant Town/Peter Cooper Village deal ending in a deed-in-lieu of foreclosure, suitors of all types are vying for control of the New York multifamily complex. One of them, apparently, is The Donald.

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Please take a moment to urge our public officials to move the the trial of the 9/11 terrorists from Lower Manhattan.

“Lower Manhattan, the center of the financial markets around the world, is the third largest central business district in the country with nearly 100 million square feet of office space, more than 8,000,000 visitors a year, a daily workforce of almost 315,000, a residential population of 140,000, 16 subway lines and the New York/New Jersey PATH train that links the area to the rest of the city and the region. This is the worst possible site for a trial of this magnitude.”

Move The Trial

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As we all read in the news this week, Tishman-Speyer has “given up the keys” on the Peter Cooper/Stuyvesant town asset. Thinking about it reminded me of a few years ago, when the acquisition was made, and the subsequent ripple effect it had through the marketplace. There were many other smaller multifamily purchases which were completed in is shadow–it symbolized to many that New York Multifamily was the place to have your money.

Fast-forward to the present, and the foreclosure has a different meaning for the marketplace (but non-the-less significant) as we are seeing the market transition from paralysis to an understanding that problem assets must be dealt with, and the sooner the better for all involved. This stage in the market cycle must pass before we move on to stabilization and, again, growth.

That leads us to the question of current pricing. For those interested, below you will find a link to order my Manhattan Sales Comparable Report for the sales which occurred in the second half of 2009 (Multifamily only, 4+ units). I hope you find this information valuable in making your next transaction decision. I look forward to your comments.

Recommended Reading

New York Times

Manhattan Sales Comparable Report

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New York Multifamily has changed its look. What do you think?

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December’s index of leading economic indicators, published by The Conference Board, showed an increase of 1.1 percent. The index showed a 1 percent increase in November, and a .3 percent increase in October. Could this mean that we’re out of the woods? The index, which covers stock prices, initial jobless claims and consumer sentiment, among other indicators, has risen month-over-months in each of the past nine months.

Initial claims for unemployment insurance helped bring up the index in December. Early information for January shows an uptick in initial claims, but the rate of job contraction seems to be approaching levels consistent with payroll stabilization. As consumer demand increases throughout 2010, a net gain of approximately 1 million jobs will occur this year.

In the real estate industry, some indicators will continue to show declines throughout the year, as these numbers often lag economic recovery by six months or so.
THE GOOD NEWS:

The multifamily real estate industry, unlike the rest of the commercial real estate industry, may begin to show gains sooner than later. As job gains fuel household growth and recent college graduates find more employment (allowing them to rent their own apartments), the multifamily sector is expected to see some recovery. Apartment vacancy rates are forecast to improve (decrease) by 30 basis points to 7.8% nationwide in 2010. A decrease in new construction will further help improve vacancy rates and rent growth down the road in 2011.

The industrial sector is also expected to see some improvement, according to the report. As consumer and corporate spending revs back up, company inventory will also need to increase, prompting new demand for industrial space. Positive absorption of approximately 16 million square feet of industrial space is expected to occur. Vacancy in the industrial market will continue to increase, but only by 20 basis points in 2010.

I’m excited to see economic indicators continue to increase in the coming months – especially as they relate to the New York commercial real estate market, which was one of the last markets to feel the effects of the ‘great recession.’ If the The Conference Board’s predictions are accurate, we should see transaction velocity in the multifamily market begin to increase as vacancy decreases and rents increase.

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With crude oil prices hovering around $80 a barrel in recent days following the end of the nationwide cold spell, it is an opportune time to discuss the importance of crude oil prices for multifamily building owners and management. This is especially important to owners in Harlem, the Bronx and the Upper East Side, where older heating systems using oil heat are still prevalent.

After real estate taxes, heating oil (for those who use it) is the greatest expense in a multifamily building.  More importantly, oil is an expense that is completely out of your control as a consumer. Major global investment bank energy analysts are predicting short-term prices above $80 per barrel before oil markets tighten in the coming years.

Throughout the New York City area, many residential and multifamily buildings are still heated by oil – but you don’t have to be at the mercy of market price swings, which are affected by any number of factors around the world. It may be possible that switching your heating source from oil to natural gas may decrease your building expenses considerably over the long run.  Natural gas is currently selling for less than half that of oil per million BTU and is therefore a less expensive alternative. However, replacing an oil boiler with a gas system (complete with gas lines) can be a costly endeavor. Electing to replace a failing boiler with a natural gas system can be a sensible, cost-saving idea. Alternatively, if your heating system is running well, you should calculate the life-cycle cost of replacing your system, as you may be better off investing your money elsewhere right now.

Additionally, if you are not yet ready to give up on oil heat, there are several avenues you may still explore. Consider a ‘conversion’ boiler that can be hooked up to both gas and oil sources, and can be run on either fuel depending on which is more cost effective at the time. Oil heating systems can also be run on biofuel blends that are more environmentally friendly and do not require modification to your existing units. Another idea to hedge the price of oil could be purchasing exchange traded funds (ETF’s) of oil companies – if the price of oil rises, your heating costs will increase, but your investment value will increase as well.

Recommended reading:

• MarketWatch

• CNN Money

• The Guardian

• Bloomberg

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I had to post this even this morning when normally on weekend AM there are other things on my mind, but the reaction from this article has been too much. Why would a broker exclaim that the market is headed farther south? Isn’t that shooting himself in the foot? Some additional commentary:

First, any strategy we are going to employ together has to be grounded in reality—that is the only way you can dodge the potholes out there and capitalize on this market. Start with truth, then make money.

Secondly, while this article focuses on commercial rents and office buildings, it is my opinion that the residential market is going to behave very differently over the next few years. No, I am not predicting values to rebound immediately, but think that the worst of the residential rent decline is behind us. To me, and for those who plan on investing in NYC for the long term, 2010 and 2011 represent tremendous opportunities.

Further Slide Seen in Commercial Real Estate

CHRISTINE HAUGHNEY

There are 920 football fields of available office space in Manhattan. More than 180 major buildings totaling $12.5 billion in value — from Columbus Tower at 1775 Broadway to the office tower 400 Madison Avenue — are in trouble, meaning in many cases they face foreclosure or bankruptcy, or have had problems making mortgage payments. Rents for commercial office space fell faster over the past two years than in any such period in the last half century.

“I have been in the business for 12 years. I have never seen it this bad,” Peter Von Der Ahe, vice president of investments for the brokerage Marcus & Millichap, said ofNew York City’s commercial real estate market. According to more veteran colleagues, he said, things have not been so dire since at least the early 1990s.

And that is not the most sobering assessment.

“It hasn’t hit bottom,” Mr. Von Der Ahe added.

He is not alone. More than half a dozen experts on commercial real estate in New York City said that despite some flickering signs of economic recovery here and elsewhere in the country, the universe of big buildings and giant apartment complexes has further to tumble.

Rents, they say, will go lower. Vacancy rates are likely to rise, too. Owners of troubled properties will face a final day of reckoning and in some cases lose their properties.

“We’re projecting the biggest value losses in the nation,” said Aaron Jodka, a senior real estate economist at Property and Portfolio Research, a Boston-based independent real estate research and advisory firm. He predicts that by 2011, the value of New York metropolitan area office buildings will decline by 58 percent from its late 2007 peak. It is already down 40 percent.

Some experts point to the bright sides of a down market — for example, the opportunity to snap up some great bargains. They say that investors who already have been shopping in London for skyscraper deals may set their sights on Manhattan later this year to find deals, and that may fuel some growth in overall sales. Some New Yorkers, especially businesses who have found the market too costly, also may find some deals.

“A correction might give opportunities,” said Jonathan Bowles, director of the Center for an Urban Future, an independent research group. “I think it’s healthy for the city’s real estate market to have a down cycle.”

But most members of the real estate industry are lockstep in their pessimism, and the reasons are multiple: Jobs must recover first to fill offices with workers, and job growth in New York City has been all but invisible. Many buildings are also tied up in complex financial arrangements that could take years to unravel.

Robert Bach, chief economist at the real estate brokerage Grubb & Ellis, compares recovery of the commercial market — which includes everything from office towers to rental apartment buildings to retail space — to turning a big ship around.

Taxes on commercial buildings also make up a sizable share of the revenue base for the city. Residential and commercial development generated $307.7 million in tax revenues, not including property taxes, from 2000 to 2007, according to the Real Estate Board of New York. In fact, the industry had a $12.4 billion effect — including construction costs like salaries and purchases made by workers — on the local economy during that period.

“The tax base is enormous,” said Michael Slattery, the board’s senior vice president of research. “It helps fund many of the basic services that make our city operate.”

Richard Persichetti, director of New York research for Grubb & Ellis, said that when the economy started to slide, office rents fell faster than in any period recorded in at least 50 years. The city has become stuck with more available office space than any other central business district in the nation except Chicago, Washington and Boston. Mr. Persichetti predicts it will take until 2014 to make a major turnaround.

“Rents probably won’t start to recover until job growth is created and some of that available space is absorbed,” he said.

Some foreign investors may swoop in this year and buy up some of the city’s most desirable and stable skyscrapers, said Robert White, president of the research company Real Capital Analytics which tracks the city’s troubled properties. Then the city will be left with properties in financial difficulties that are half empty and in less coveted locations. Recovery for those buildings, Mr. White said, “is going to take a little bit longer. It’s not going to be in a rush.”

No prospective deals on these buildings are apt to be helped by the fact that they are tied up in complicated mortgage structures that grew popular in the boom years. Joseph Harbert, chief operating officer for the New York City region of the commercial brokerageCushman & Wakefield, says that working out ownership disputes for these buildings will take much longer than in past real estate meltdowns.

“In the ’90s, when you had the real estate workouts, you had a lot of single-lender properties. There are more parties and interests in every deal,” said Mr. Harbert.

Regardless of these complications, Mr. Harbert, who remains generally optimistic that parts of the real estate economy could recover this spring, says that lenders, skyscraper buyers and renters will not feel comfortable moving forward until they really see that jobs are being created.

“They’re kind of waiting for positive signs in the economy,” he said. “When jobs are going to recover, that’s the signal of when people are going to lease and buy.”

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2009 Year In Review

Dear Friends & Investors:

2009 posed challenges for the real estate world and most are happy to see it go.  With a declining rental market, and the government taking aim at property owners through harsh legislation and higher real estate taxes, one of the only bright spots last year was when oil actually dropped to the $30’s per barrel.  Looking ahead to this year, a few thoughts:

Federal Capital Gains at 15% Set to Expire in 2010

The federal capital-gains tax rate, which was temporarily lowered to 15% by the Bush administration, is set to change at the end of this year.  As Obama continues to look for ways to increase revenue, this tax is likely to be increased.  If so, more owners will dispose of their assets this year, and create market activity.

2 Classifications of Opportunities

Distress comes in two forms.  This past year, we brought to market a number of assets with Property Distress.  By this, I mean a problem on the property level that the owner cannot or does not want to solve, such as unfinished renovations, structural issues, or a complicated landlord-tenant situation.   On December 4^th 2009, we closed on the sale of a 48-unit elevator building on Overlook Terrace which closed in one day to an investor with the capability to remedy the structural problem.  The sale closed at $3,500,000.  While many claim they want a distressed property, these situations require a buyer to have special skills.  Also there are specific methods a broker uses to find the right buyer for this type of opportunity.

Most are waiting to purchase assets with a component of Seller Distress, meaning the property is operating normally, but the seller needs to solve a financial problem requiring the asset be disposed.  This year, the most aggressively underwritten loans (from 2005, 2006, and 2007 originations) will begin to have their interest-only periods burn off, some come up for refinancing, and the pro-forma numbers will have to be hit.  If not, they are likely to make their way into the marketplace in some form or another.  In May, we sold at auction the LLC’s which were formed to own and operate the buildings located at 448-452 Broome Street.  The properties were operating fine, but the owner defaulted on a development parcel in South Florida causing these to be sold.

A Growing Consensus

In reality purchasing a building either category is not a walk in the park, but as reported in last months’ NAREIT Survey, more that 70% of investors are amassing capital for acquisitions in 2010.  There is no lack of demand for New York Multifamily, and that is a positive for those looking to transact this year.  In the words of a Japanese family which just hired me to exclusively represent them to purchase a Manhattan property: “Ten years from now we will be very happy we acquired a building in 2010.”  It is very hard to disagree with this thinking.  I wish positive and profitable outcomes for each of you this year.  Best of luck.

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