Spotlight LIC: Risk w/ Plenty of Reward
Noah's recent posts on the Jumbo mortgage crunch, new condo closings and new trend to conservative appraisals (yes the Hating has begun) inspired me to write about an up and coming NYC market that is both near and dear to my heart, but also could be both problematic for developers and an opportunity for long-term investors in the near-term. 
That market is Long Island City (LIC). Interestingly, my friend Mike Stoler, who is widely recognized as one of the most informed investors on the Manhattan market has recently written favorably (in a long-term sense) on the area in his New York Sun Column of October 4th, and he will be hosting a panel of mega LIC developers on his Stoler Report TV show on October 23rd. I mention this because I think with the primer below and Mike's article and panel potential homebuyers should become very well informed on this emerging NYC market. I have no doubt it will be a winning market from a quality of life and investment standpoint over ten years. But let me be clear here, a large surge of new product - 15,000 new residential and rental units by my count - coming on the market in the next few years in an emerging neighborhood that lacks critical mass and retail infrastructure means I see deals on new construction ahead. Note this mention of sponsor incentives in LIC in the Wall Street Journal recently. Couple this with my opinion that NYC will suffer a mild real estate price downturn, focused on condos and the boroughs and I think a potential homebuyer, buying for utilization ahead of investment may get a good deal on both in LIC in the next 18 months. Okay sorry for the preface, now everything you might want to know on LIC and gulp.... more (sorry for the length).
P.S.1, the world renowned showcase for cutting-edge contemporary artists, was founded in an abandoned school building in Long Island City in 1971. This was the beginning of the cultural re-emergence of Long Island City.
After going dark in the 1920s, the lights were turned back on at the old Astoria Film Studios in Long Island City in 1976, stoking the potential for the industrial neighborhood as a base for film and television production. Within 6 years, Silvercup Studios, Eaves & Brooks Costume Company, Bond Film Storage Service, Variety Scenis Studios and Film Treat International had relocated to Long Island City.
In 1984, Citibank acquired a 2-acre, 82,000 sq ft trapezoidal shaped site in LIC for an estimated $3.5MM ($42.68 per sq ft). This was reportedly 75% cheaper than land in Manhattan at the time. In February 1989, Citibank built the 48-story 1.4MM square foot One Court Square building. Citibank did not intend to take the entire building for occupancy, but was unable to attract other tenants.
In 2000, Michael Bailkin and Paul Travis of the Arete Group tried to buy two larger sites, including a large city-owned garage, at the junction of Queens Plaza and Jackson Avenue. they also bought air rights to part of Sunnyside Yards. These moves prompted the Department of City Planning to devise the Queens Plaza Special District (approved in 2001), which featured incentive bonuses and urban design guidelines that called for broad setbacks, new parks, and ground-floor retail shops to enliven the street. The lots Arete sought have since been sold to Tishman Speyer and were upzoned to Floor Area Ratio (FAR) 12, signaling a dense future for LIC.
In May 2001, MetLife announced that it entered into a lease with Brause Realty for the former Brewster building at 27-01 Bridge Plaza North. The city reportedly provided MetLife with 426MM in real estate tax abatements and other incentives for the move. Two years later, Brause finished an adjacent 12-story, 282,000 sq ft building which was connected to 1 MetLife Plaza. The location of the MetLife Plaza - proximate to a Twin Donut where Rikers Island inmates were released after serving their time - made this a poor choice for an early corporate relocation to LIC. MetLife has since moved its people back to Manhattan - the only real setback in the progress LIC has made in recent years.
In July 2001, the New York City Council approved the re-zoning of 37 blocks along Jackson Ave. The re-zoning was designed to facilitate commercial development and allow new residential projects. It was hoped that this re-zoning sould spur reinvestment and redevelopment, taking advantage of the neighborhood's proximity to Manhattan, outstanding mass transit and potential for significant development.
Th population of LIC is set to explode and demographics are about to change radically. Only 25,595 people lived in LIC as the the 2000 Census. The median household income level was $28,872 or only 68% of the U.S. average, with 27% below the poverty line. There will be more than 15,000 rental and condominium units entering the market over the next four year's according to Guild Partners' project database. Applying the 2000 average of 2.56 people per household to these units implies population growth of 38,400 people or a 150% increase over the next six years or so. The economic backdrop will be inexorably altered as well, considering that the median home value was $187,200 in 2000, while the vast majority of new units being added are selling for $500,000 and up. Commerce in LIC will also be impacted by the growth in commercial activity, as 7MM square feet of commercial space is set to enter the market over the next five years. Significant new office developments that are contemplated or in progress include Citicorp Square II, Silvercup Studios West, Queens Port and Gotham Center.
Planned improvements to street appearance and traffic flows will remake the streetscapes of LIC, particularly its downtown. Jackson Avenue is envisioned as the business district's main boulevard linking Queens Plaza with Court Square. It will also be revitalized with new planted medians, punlic art, pedestrian furniture, street lighting and improvement f nearby open spaces. Renovations to Queens Plaza are to be completed by 2009, with construction expected to start in 2007.
The post-war residential story of LIC is now being written in bold face. Bars and dining are on the upswing including Water Taxi Beach, Waterfront Crabhouse, Smokey's Bar & Grill, Riverview Restaurant/Lounge, Tournesol Bistro, P.J. Leahy's, Cafe Henri, Manetta's Restaurant, Manducatis, Tuk Tuk, Dorian Cafe, Brazil Coffee House, The Creek and the Cave, Dominie's Hoek, Meridian cafe, Lounge 47, LIC Bar, Brooks 1890 Restaurant, La Vuelta and Jackson Ave Steakhouse.
New additions to LIC retail scene include: Briggs & Costa, chish carries an array of imported furniture, household goods, candles, textiles, lighting and art. Several new businesses on Vernon Boulevard include a State Farm insurance office, photo studio/gallery and Blend - a new Latin Fusion restaurant.
Recreation:
P.S. 1
Chocolate Factory Theatre
Bernard Gallery
Socrates Sculpture Park
5 Pointz Gallery
Silvercup Studios
Thalia Spanish Theatre
Fisher Landau Center for Art
The Sculpture Center
Noguchi Museum
Several parks offer recreation opportunities in the area including the East Coast Esplanade, Hunters Point Community Park, Queens Bridge Park and Rainy Park. The recently approved waterfront development plan will expand Gantry Plaza State Park into a 1.5 mile esplanade punctuated by relaxation and recreation options. The views of Manhattan from Gantry Park - just one stop from Grand central on the #7 train - are nothing short of spectacular and worth a trip in and of themselves.
Condos and rentals in my favorite corner of LIC, Hunters Point, at The Gantry, City Lights, RiverEast (Rockrose) and 5 SL (Toll Bros.) have been absorbed well to date. In fact 5 SL by Toll Bros. increased prices at least 6 times during pre-sales and has busted through the $1,000 per square foot price point on some units (closing in on Manhattan prices).Still, I think the big backlog of units coming to market will make for some deals to be had. Also note, that sell out for properties nearer to the gritty Queens Plaza area have been slower than in the Hunters Point area and there have been some grumbles on blogs about quality of construction and service levels for otherwise highly publicized developments like the Arris Lofts.
Related Bloggings:
LIC Rising Update - New Site, Many Drawings (Curbed)
LIC Finally Reaches Critical Mass (NY Sun)
$1,000 Per SFT in the LIC (Curbed)
Condo Market Still Hot - In LIC At Least (A Fine Blog)
Bubblemania Returns To LIC (Curbed)
LICBDC Map of LIC Developments (OuterB)
Changing Tides in LIC (Greater New York)
Some New Orleans Flavor Comes to LIC (Long Island City Blog)
The Long & Short of LIC (New Media Newsroom 2007 A)
Image Source: Photo (c) John Roleke; About.com
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Comments (9)
Thanks for the informative post. Do you really think the real estate downturn will be mild, and if so, by what measure in terms of a percentage? I have read that it could be at least 15% - 20%+, and that it wasn't long after the last real estate boom in NYC, that there was in turn, a formidable downturn, even in Manhattan, upwards of 30%+ adjusted for inflation.
Can you give a reasonable projection or are you not really "allowed" legally, within a post?
Thank you again, from a future first time homebuyer (I don't think I will jump in quite yet).
Posted by Mort | October 15, 2007 3:45 PM
Thanks for another the infomercial about LIC.
It is hard to believe that the writer didn't provide this excellent interactive map of NYC subprime:
http://www.nytimes.com/interactive/2007/10/12/nyregion/20071012_SUBPRIME_GRAPHIC.html.
Check it out, this is one rare occasion that the Times put together something thats "fit for print" and if you go to LIC you will see subprime rates of 20%-70% !!!!!
In addition to 15K new condo units there will be many other available units in what may become the Florida by the east river.
Dear investor, dont hold your breath, the perferct storm is just over our heads.
Posted by Ronen | October 15, 2007 11:59 PM
Ronen - the post was written by Jeff Bernstein, who is a partner at a development firm in LIC. So take that into account.
However, if you are right and LIC is becoming the Florida by the east river, then I personally would be very interested at getting a deal when one pops up that is far discounted from sales in years prior!
Unfortunately, I dont know anything about that area!
Posted by Noah | October 16, 2007 7:45 AM
Hunters Point in LIC is one subway stop from Grand Central and one of the safest areas in NYC with still a nice neighborhood feel. Amish Market and Duane Reade will open there next year. Yet you can still buy a new condo there for $650-700 per square foot. It's one thing if the whole NYC market tanks (including Manhattan) but if that doesn't happen, how on earth would it be possible that LIC "becomes another Florida"?
Posted by KB | October 16, 2007 8:09 AM
Also, Jeff clearly notes:
"Still, I think the big backlog of units coming to market will make for some deals to be had. "
I think this is great commentary from an insider in this market, telling would be investors of the supply side coming to market and negotiability that probably can be made! I also heard good things about Hunters Point. Never made it there yet, so I cant say from my personal trips over.
Posted by Noah | October 16, 2007 8:22 AM
Hunters Point and the western parts of LIC have had a huge explosion of units over the past few years, and is posed to have even more, and like Williamsburg, will be saturated with inventory once the proverbial (bleep) hits the fan. It will surely fall dramatically in terms of price, and there will be deals to be had, although I am not sure it's quite the Florida on the East River mentioned above.
I urge people who have not gotten into the market yet, to wait before prices drop markedly, and I base my suggestion on substantiated economic research which has gone under the radar during this recent boom. By some measures, New York will fall over 15% and San Francisco almost 30% if not more;two of the most attractive cities this country has to offer!
Of course not even I can say for sure, but this is my STRONG belief, so if you can wait, please. wait!
Posted by Moshe | October 16, 2007 9:31 AM
great comment Moshe! Thanks for writing your thoughts on the topic.
Posted by Noah | October 16, 2007 10:09 AM
A couple of comments on the questions and other comments on the LIC article. First off, if I could tell you how big and bad the NYC real estate downturn was going to be with precision I would be George Soros or some other fabulously wealthy hedge fund manager with precision foresight. What I can say is that NYC is a unique market....which I have written about in the past....in that its dominated by renters and a large percentage of the housing stock is rent stabilized. The amount of supply that can be brought on is limited due to land, zoning etc.......I know you all know unit additions have tripled in the last 3 - 4 years, but through all of the 90s they were miserly and we are still in a catch up mode according to appraisal and development guys who know the numbers cold. As a result of the lack of Manhattan supply markets like Brooklyn have exploded and hosted much of the net growth in units. LIC is right behind Brooklyn here...and I would argue Harlem although in Manhattan is a similar "secondary" market. My feeling is additional supply and any softening of Manhattan prices will soak up some demand for these scondary markets and cause pain for prices in these markets. However, Away from a recession which causes significant job losses, Manhattan's contraction should be mild due to lack of forced sales. Manhattan dosn't have sub prime issues due to coop boards credit standards ....we will have to see on condos. Note that I don't have a strong feeling about a looming recession...yet....again if I knew this for sure I would be George Soros. Lastly, foreclosures in Queens are likely multi-family and other properties that are not comparable to the new condo properties coming on the market, which really have not existed until just recently, so while they may cause some general pressure on pricing, its not the same as if people were coughing up new condo units right and left. My conclusion remains, if you have a ten year view, in the next 18 months you are likely to get some really nice opportunities to buy new construction in the fabulous LIC market at a great price. Not a great flipping opportunity, great buying and ownership opportunity. LIC will only get better as a place to live and eventually work.
Posted by Jeff | October 17, 2007 1:01 PM
I agree that NYC is a unique market. Thus during the periods of growth (last 4 -5 years), there was little new inventory to absorb additional demand (low supply elasticity). As a result we saw substantial price inflation and the neighborhood effect (LIC/Brooklyn) that you refer too. Unfortunately, that process works in reverse as well. You don't need "significant" job losses or deep recession- all you need is slowdown in previously expected demand which is already reflected in the current high prices/low cap rates. And it will lead to decreases in price - especially in the neighborhoods like LIC. Also, since I work and socialize almost exclusively in financial industry, I know anecdotally that there are substantial job losses are taking place right now and no one is hiring. If this trend lasts for additional 6 months/year, these people will have to leave NYC to find a job and then Manhattan market would be badly affected. We (financial industry) are highly levered to the growth in rest of the country/world. The notion that NYC will not suffer significantly when our growth in the last few years was dependent on the growth elsewhere, frankly, does not make sense.
As far as LIC is concerned, I remember reading articles about LIC's emergence in the 80s before the last crash of late 80s/early 90s. Why is this time different?
Posted by EV | March 6, 2008 10:50 AM