NY Data Points - Not Every Single One Bad
Just a quick update on some New York City data points I have come across recently. Strangely, the Fed put out its Beige Book yesterday and the overview of New York (Second District) bears very little resemblance to the anecdotal data I am seeing.
My friend Mike Stoler has an article out in the Real Deal, entitled These hotel room prices are insane, on the plunge in New York City Hotel room rates. Now seasonally, we are not in the strongest of periods for New York City lodging, but the discounts which look to be verging on 50% off peak rates, suggest trouble for what was an over-heated area in terms of new development. As I noted in my piece New York City Hotels Going from Foist to Woist, it was an inopportune time for developers to be pumping an additional 20% more rooms into the New York hotel market, to say the least. But after condo prices flat-lined, hotels became the "highest and best" use of overpriced New York City land. Crain's report Shine comes off Big Apple suggesting that travelers are avoiding New York City due to it's reputation as a high cost destination if true, does not bode well.
In my opinion, there is no way new hotels coming to market are going to be able to survive the pressure on room rates unless they were very conservatively financed. The likelihood of that seem somewhere between slim and none, based on investor behavior across all other asset classes. My bet is a bunch of the new hotel product is going to become bank REO (real estate owned) and unfortunately banks are probably not particularly good managers of hotel assets.
On the subject of banks, Crain's reports on a couple of New York City banks with high Texas ratios (ratios of non-performing loans + REO to tangible equity + reserves for loan losses), who might not survive. One which sounds like it has some real issues is Park Avenue Bank. If this one goes tapioca, and it is definitely not "too big to fail", the headlines are not going to read well for New York City.
New York City unemployment data was just released by the New York State Department of Labor, and as fast as Wall Street is shedding jobs, New York City has not yet caught up to the national unemployment rate. The latest tick shows the New York City unemployment rate at 6.9% up from 4.8% one year ago, while the nation is at 7.6% versus 4.9% last year. According to a CoStar article, the financial services industry is doing more than its fair share of job cutting having "shed 17,600 jobs in the last three months of 2008, close to its fastest pace of decline in at least a decade. U.S. Bureau of Labor Statistics statistics show that the net loss of securities jobs from September to November has only once been exceeded in a three-month period over the last 10 years." The decimation is surely one of the reasons the Daily News reports "Lines snake around block for New York Monster.com job fair at Marriott Marquis Hotel in Times Square."
According to a recent article in The Economist , Robert Lieber, the mayor’s deputy in charge of economic development, insists that “New York is in a good position now.” But, he adds, “We don’t know how long or how deep [the recession] is going to go.” With the 1970s fiscal crisis in mind, when the city teetered towards bankruptcy and 1m people left, Mr Bloomberg is striving to maintain the low crime rate and keep rubbish off the streets, while finding ways to replace or redeploy finance-sector jobs. City Hall has an 11-step plan to help entrepreneurs and venture capitalists.
I hope the 11-step plan is effective. According to this post on blog Zero Hedge, which one of our Urban Digs readers brought to our attention, credit default swaps (CDS), on New York City debt, have blown out to record spreads over treasuries. A JP Morgan model indicates the CDS market is baking in a 50% chance of a default on New York City debt in the next 5 years.
But even through the rather thick thunderheads that have gathered over New York City there are some small rays of light poking through. Crain's reports that enterprising restaurateurs are sorting through the retail wreckage looking at great locations with newly reduced rents to find expansion opportunities. I have actually come across a bank willing to lend 15 year money (unheard of) to business real estate owners to support business expansion. Separately, another brand new New York City bank is on the prowl to put its pristine balance sheet to work for business owners who can bring owners' deposits and transaction balances over.
Maybe some of the incredible liquidity unleashed by the Fed and moral suasion out of Washington is starting to have some impact. I still believe that New York City has a lot of pain to endure before we reach a new lower equilibrium on Wall Street employment, apartment inventory, hotel room supply and bank branch locations, among other things. But let's not forget that downturns rationalize capacity and set the stage for eventual upturns, it is heartening to see at least some sparks of life resulting from the current strife.
Image from Daylife.com
Comments (14)
Jeff, the only caveat I'd add is that much of NYC's higher paid employees receive severance packages when they are laid off that are quite generous. I think they are becoming less so, but there must be a whole slew of folks about to enter the unemployment statistics here shortly.
Also, law firms are joining the shedding like nobody in the business has ever seen before. This just started at the end of 2008, and is picking up demonic speed.
Posted by brenda | March 5, 2009 6:16 PM
You can collect unemployment while still receiving severance pay and would therefor be counted in the unemployment statistics. I know, this is my situation and I've been completely honest with the unemployment people/website.
Posted by Julie | March 5, 2009 7:25 PM
Agreed,
I am sure the unemployment rate in new York City will at least catch up to if not exceed the national rate, unfortunately. We are still in the downside acceleration phase of New York's recession. Let's hope it dosn't hit 10% like California.
Posted by jeff | March 5, 2009 8:15 PM
Jeff,
Notwithstanding I posted the Zerohedge CDS story, I am beginning to believe the rates in CDS land are indicative of "wild betting" on the part of participants (CDS rates on Berkshire Hathaway reached levels that suggest it is a junk credit) rather than being indicative of the odds of default.
I do believe that NYC is in for a world of hurt, much of which has not been really felt yet, but even I do not expect the City to be bankrupt in 5 years (assuming the politicians don't do something stupid).
Posted by lars | March 5, 2009 11:12 PM
Lars,
In the case of equities CDS participants have definitely been using them to game the underlying stocks. Strangely in the case of Berkshire it is one that is hard to manipulate because Buffett controls so much of the float. My guess is that there may be some wild betting going on in NY City CDS, but I'm not sure making money shorting the bonds is the objective. I have to look into NYC's fiscal situation more closely but Governor Paterson said yesterday "New York is at the epicenter of this global financial crisis and the worst is yet to come", meanwhile thousands turned out to protest Bloomberg's budget cuts in front of city hall. According to the OMB, the budget gap for 2010 is $4 billion, whiule spending cust of $2.5 billion were enacted for 2009. It ain't pretty.
Posted by lars | March 6, 2009 9:13 AM
Not sure how that last post came up as Lars. Sorry Lars.
Posted by jeff | March 6, 2009 10:01 AM
It's true that the cuts to the legal industry have finally started to take place as firms realize that the banking business isn't going to return to peak levels.
Many of the large firms are making huge cuts: in some cases, 10% or more of associates (and of course, the support staff).
Severance packages are typically 2-3 months (although I've heard of 1-2 rare instances where firms offered up to 6 months).
And thanks for another on-topic article.
Posted by Thisson | March 6, 2009 11:34 AM
Also, Noah, I hear that the taxes on hotel room rates are ridiculously high here in NYC. That can't help.
Jeff, these protests are nothing compared to what will come, as services continue to decline while taxes on everything go up.
Posted by Thisson | March 6, 2009 11:37 AM
Jeff wrote: "According to the OMB, the budget gap for 2010 is $4 billion, while spending cuts of $2.5 billion were enacted for 2009."
And therein is my caveat of "politicians doing something stupid".
If the pols continue to dramatically spend more money than they receive, in ever greater amounts over the next five years (not unlike the Congress of the US), the City could very well go bankrupt.
Unfortunately, in the case of the US, we won't be bankrupt (as our debts can be paid off conveniently with a printing press), but we will see the dollar go to "zero" and/or inflation levels at never experienced before levels.
All we can hope for is that cooler heads will prevail. Unfortunately, I have significant doubts on that front as I saw the House approved cramdowns, which runs the very risk of making the GSE's the sole providers of mortgage monies in the future. Not a policy indicative of cool heads prevailing, or one that is friendly to the taxpayer.
Posted by lars | March 6, 2009 11:50 AM
Wow, months supply is now at approximately 23 months (10,529 listings/451 signed contracts).
Curious if Jeff or Noah would know when the last time (if ever) the listings to sales ratio was this high for Manhattan?
Posted by lars | March 6, 2009 3:28 PM
I suspect that the cramdowns will get priced into new lending. It will raise everyone else's mortgage rate by a half a percentage point or so.
Maybe that's a good thing, if it erodes inflated housing prices despite the government's attempts to continue propping them up.
Posted by Thisson | March 6, 2009 5:39 PM
I am just starting to follow articles in english about real estate. I consider these beneficial to understand actual economic changes all around the world.
I live in South America, and i am positive we somehow get affected by what its happening in North America and Europe.
My personal opinion is that no matter how difficult things are now, NYC wont go bankrupt, for it is one of the first economies to strengthen after hard times appear.
http://www.veoyalquilo.com/blog
A wider perspective in both English and Spanish articles.
Posted by Christian | March 8, 2009 3:39 PM
I am just starting to follow articles in english about real estate. I consider these beneficial to understand actual economic changes all around the world.
I live in South America, and i am positive we somehow get affected by what its happening in North America and Europe.
My personal opinion is that no matter how difficult things are now, NYC wont go bankrupt, for it is one of the first economies to strengthen after hard times appear.
http://www.veoyalquilo.com/blog
A wider perspective in both English and Spanish articles.
Posted by Christian | March 8, 2009 3:41 PM
Rise and Fall of an apartment
http://www.nytimes.com/2009/03/08/realestate/08deal1.html?ref=realestate
Posted by HT | March 9, 2009 9:18 AM