Quick Manhattan Snapshot: Market Pricing OUT Fear

Posted by urbandigs

Tue Jun 30th, 2009 10:26 AM

A: I have been too busy to blog lately, which is nice of course, but wanted to give a quick snapshot of what I see out there - take it as such, a quick snapshot of what I see out there. Basically what has happened over the course of the past 2-3 months is an acceleration of activity from the March lows, as this market priced OUT Armageddon. Strange to hear it that way, but basically that is what I see happening. I see deals happening at slightly higher levels today than only 3-4 months ago because of the shift in both buy and sell side confidence - leaving out whether this shift is warranted or not. Does that mean a new sustainable bull market, of course not. It means we went through some extreme times, and the market is adjusting and equalizing. While every price point has been affected by this crisis and trading in their own unique ranges down from peak, it seems transactions taking place over the past 7-9 weeks are not as pressured, or 'fear based', as those that took place in February and early March when fear was highest. The shift in psychology from fear to reflation/confidence is responsible; and a 40% equity rally from the lows + a wave down in prices helped that shift to occur. Looking at inventory trends, you can see this shift rather clearly. Don't forget though, the fear months will close first - so we will have to wait 2-3 months to see the 'less pressured' deals I am referring to here.

Contracts continued to be signed and you may have noticed some listings on your radar exit the active marketplace. Combine this activity with listings taken off the market for seasonal reasons, and you see a notable reduction of active inventory over the past 2 months. Take a look at Manhattan Active Inventory trends both before and after the March lows and know that there was a bit of a lag for the confidence and action to get going - mid April to mid June were noticeably active and the trend started to reflect this in early May:


Now, you must keep in mind where we came from and understand that very few trends go in straight lines forever. There are blips, bumps, corrections, retracements, and countertrend surges - all in the way natural markets behave. To ignore the increase in inventory and only concentrate on the last 2-3 months to build a sustainable bullish argument, is flawed. Always look at where you came from. Nevertheless, this market seems to me to continue to be active and I can see this trend continuing for a bit longer before we head into the normally slower summer months! Time will tell how this summer compares to previous ones, considering how different this year has become - I am referring to a wave down in prices that most thought impossible only a year ago.

Here is the trend in contracts signed, at a lag of course, that is displayed as a weekly average so to avoid the spikiness that comes from little to no data updates over the weekend. You could clearly see the pickup in activity that was discussed here months ago:


I would expect confidence to continue to mirror the equity market and major headlines moving forward, on top of seasonal changes in activity for the 2nd half of the year. Should you see a deep correction in stock prices, expect to see activity dry up again for our local marketplace. On the flip side, should stocks continue the rally and surge, sellers will be less motivated to hit a low ball bid (unique financial circumstances aside) and I'm sure brokers will continue to benefit from a ready, willing and able buyer pool - lets see how sellers, appraisers, underwriters, and co-op boards react. Predicting a shocking event or a systemic risk at this point in time, seems dangerous given the path taken by the fed and government. This is evident in the fall of the VIX to its lowest levels since Lehman's collapse - a lower VIX means fear is subsiding and traders view this as a contrary indicator (a low vix may mean complaceny sets in, while a high vix may mean fear is peaking). How long it lasts is another story as the markets seem to be pricing in a V-recovery and not a deep, prolonged, or W-double dip recession possibility - will the market be disappointed if data doesn't come in to support this?

For those trying to Price In Downturn Risk right now, you are probably finding it harder than you previously thought; especially if you were seriously bidding in the fear months of February and early March! When fear was high then, pricing in future downturn risk was easier to get away with as sellers desperately hit bids after 4 months of severe illiquidity / stocks falling to lows / and systemic risk high. But today, with the market pricing out Armageddon and total collapse, I'm sure you will see deals happen at higher levels than what units in contract 2-3 months already are closing at now from the fear months - the lag of property transactions at work. Strange and interesting to see how Armageddon discovery comes first and whether buyers will consider those deals outliers or the new baseline for future bids. Don't forget, that while the buyer dictates the value of any property at any given point in time, it is the seller that must sign off on it. Therefore, you can't discount the psychology changes that came on the sell side as well as the buy side, as traffic heated up and bids started to come in at stronger levels. For me, I still focus on the buy side as a gauge to current marketplace health. With that said, let me be perfectly clear that this market is not a frenzy like it was in early 2007 and deals continue to be had at the noted range discounts discussed here previously for each price point - albeit closer to the lower end of that range now that Armageddon seems to be priced out of transactions.

Interesting times indeed and remember, don't look in the rear view mirror if you want to look ahead. And don't analyze a seasonal market by focusing on month to month changes! When Q2 data comes out in the next few days, expect a significant tick UP in contracts signed from Q1 to Q2 but a drop in closed number of sales on a year over year basis! Because of the lagging nature of our markets from contract signing to closing, we could see a rather bullish Q3 sales number down the road - reflecting the active market from mid April to present! Its the sustainability of this activity that I call into question and as we get deeper into the summer, I would expect things to quite down a bit again in line with the seasonal nature of our marketplace.

New Development Offering Plans & "Special Risks"

Posted by Toes

Tue Jun 30th, 2009 09:50 AM

(Christine Toes here)

When reviewing a condo offering plan (a huge document that, when accompanied by its amendments, explains basically everything about a building), one of the first sections your attorney will visit is the "Special Risks" section. The good and bad thing about this section is that the developer must disclose every single possible thing that could go wrong in order to make the Attorney General's office (A.G.) happy.

A few things to look for:
1. Chances are only the first $100K of your deposit on the contract for the apartment is FDIC insured.
2. Sponsor retains voting control of the condo board, often until 75%-95% of the building is sold. Sometimes they can waive control of the board prior to that time. After a certain % of the building is sold and the condo board is formed, the sponsor may be able to have more than one vote on the board or appoint more than one representative.
3. As long as the sponsor still owns (for example) 25% of the building (or up to 5 years after the first closing), the board may not be able to make any material changes to the common areas, change employees, enter into contracts for work/services, borrow money on behalf of the condo, or exercise a right of first refusal UNLESS these changes are required by law or the condo's insurer or are approved by the sponsor.
4. Most buildings don't establish a reserve fund for the building (most or all of the building's systems should, in theory, be new) but they do require approx two months common charges to be put into a reserve fund by each buyer at closing.
5. Some buildings require the condo board to buy the super's unit and the costs are rolled into the first year's budget. Others require the buyer to pay for the unit out of pocket, which could be $10K - $25K in extra closing costs! Some buildings rent the super's unit to the condo and at a later date, sell it to the board.
6. Purchasers should be aware that the amenities and the full building staff (doormen, porters, etc) may not be in place in the building after closings begin, sometimes for a year after closings start. The hours and dates for move in may be restricted because of construction.
7. Construction may be noisy and messy while work in the building is being finished.
8. Real estate taxes are estimates (frequently estimated by the sponsor's tax attorney) and may change (New York City can come up with their own numbers).
9. Pay attention to what can go into the commercial space in the building. Sometimes the commercial space may be banks, bars, parking garages, theatres, spas or commercial office space. Usually there is a promise that nothing "obscene or pornographic" such as an "Adult Physical Culture Establishment" (I'm translating this to mean "strip club"?) will be in the common space. Sometimes they also promise that no abortion clinics or family planning establishments or dry cleaners will be in the commercial space. One Gramercy area building neglected to tell buyers that a McDonalds would be going into the commercial space.
10. Sponsors usually reserve the right to rent out unsold apartments and may be able to rent them out as short term furnished rentals.
11. Buyers frequently can not "flip" their units until at least one year after the first closing.
12. Window treatments may need to be white on the window side of the building to promote architectural unity.
13. Check for "lot line" windows and whether you would be required to pay to brick them up should another building go up next door.
14. Check to see how much over budget the sponsor is allowed to go (sometimes by 25%) when it comes to common charges; Always plan for the worst.
15. Check to see how late the sponsor can be on delivering the building (sometimes a year after the closings are projected to begin) before you can pull out of the deal. Toes says: Make sure your landlord is flexible on lease extensions!

Other items to keep an eye on:
Check whether labor mentioned in the budget is union or non-union. If the budget calls for union labor, assume that the common charges will be a bit higher.
What building systems / mechanicals have been updated? No matter whether it is a ground up building or a conversion, find out what warranties are in place on the roof, boilers, elevators, etc. (Note: The appliances in your apartment should be under warranty.)
Frequently, any major repairs needed on terraces that are not the fault of that unit owner are divvied up between ALL unit owners.
You may be charged a fee (example, $150) to clean the interior and exterior of your windows twice a year.
Sometimes after the first few years of being members of a building's "Club" or "Spa" for free, the unit owners will be responsible for paying fees through increased common charges.
Doublecheck how the square footage of the apartment is measured (i.e. are the common elements of the building included in the square footage?)

Toes says: I can't underscore enough how important it is to hire a NYC real estate attorney. You want to hire someone who has seen hundreds (if not thousands) of NYC condo offering plans and knows what to look for. And you want an attorney who knows how to amend the contract / structure the deal so you are protected against whatever issues arise.

The Beav Gets Creative

Posted by jeff

Mon Jun 29th, 2009 05:12 PM

Beaver.jpgJust a quick update on the William Beaver House, which we discussed in a piece a little while ago as exemplifying the difficulties of downtown developments in the current environment. Last week Business Week did a piece on a new innovative approach to attracting investors to purchase some of the inventory of new condominiums that has piled up in certain markets, including those at William Beaver House downtown. Real Estate broker Roger Nino is being credited with applying "Master Lease" structures to this task. In a nutshell, the sponsor deposits funds representing a couple of years worth of rental income in an escrow account to be paid to a prospective income oriented investor buying a new condominium. Additionally, the sponsor either rents or promises to rent out the unit for the investor.

“The investor doesn’t want to take a chance on what the rent could be,” Nino explains. “It’s an interesting mechanism that helps you deal with the uncertainty.”

So there you have it, add "Master Leasing" to the list of incentives including "Price Protection" and "Rent to Own" that condominium sponsors are trying in order to address construction loan maturities. I would not be surprised at all to see more sponsors adopting this technique.

Commercial Real Estate - Chasing the Ball Downhill

Posted by jeff

Sun Jun 28th, 2009 11:15 AM

Bolder.jpgThe sale of One Worldwide Plaza,at 8th Avenue and 49th street, reportedly fell through for the 3rd time last week. It is perhaps a metaphor for the commercial real estate market as a whole. The building was purchased by Harry Macklowe from Blackstone near the peak of the economic expansion and commercial real estate transaction bubble, when they were flipping Sam Zell's Equity Office Property portfolio. There have been a couple swipes taken at this apple. The latest was a second offer by George Comfort & Sons and real estate private equity firm RCG Longview to buy the building using financing from the original lender, Deutsche Bank, which would have retained a stake in the building.

The reasons for the deal falling apart are only speculation at present; Deutsche Bank was said to be the one who pulled the plug, unhappy with the rumored mid-$300 per square foot valuation. The building is said to be as much as 50% vacant. So while this appears to be a case where a bank is reluctant to take a mark on an individual property, that might also impact the value on its books (and others') of similar properties, it seems to be somewhat feudal when one considers the macro picture in commercial real estate land as illustrated below.


This chart was lifted from Calculated Risk. It shows the Case Shiller residential home price index overlayed by the Moody's/Real Commercial Property Index (CPPI). I think it speaks for itself, but to put it simply, it shows that the commercial market appears to be going the way of the residential market, but with a lag. Importantly, the latest click on the Moody's CPPI showed a decline of 8.6% in April, the largest recorded so far in this down cycle. Commercial Real Estate News quotes Moody's as suggesting that "Large price declines may act as a catalyst to cause the bid-ask gap to narrow, which in turn may lead to an increasing number of transactions."

Okay, so nothing new here so far that hasn't been covered by others. I would aver, though, that the seeming similarity in the glide slopes of the residential and commercial real estate market downturns is unlikely to hold going forward. The commercial market is likely to decline much more rapidly than the residential market, once the barf-out gets under way in earnest. I just have a couple comments about why the commercial market is different than the residential market and why I see a step function change in prices.

The residential financing environment has been bolstered by the government's cushioning of lending through:

1) The takeover of Fan & Fred, making implicit the assumed federal backing of their guarantees.

2) Fed purchases of Fan & Fred paper, which are keeping mortgage spreads from blowing out.

3) The demographics of household formation, which despite the loss of romanticism in making home purchases and the negative impact on household formation of the economic downturn, inevitably increases demand and bolsters residential property sales if the rent vs. buy equation tilts in the right direction. (We have discussed previously on Urban Digs, why we think housing formation is actually linked to the housing market in so far as so many jobs were produced by the housing bubble and so much immigration was induced by these job openings).

In comparison to the above, the commercial real estate market is currently characterized by a complete collapse of financing. The CMBS market, which was responsible for roughly half of the commercial real estate financing market and a larger percentage of the "big deals", is dead. The one corner of the lending world that has not been decimated by residential real estate losses thus far has been the smaller savings banks and savings & loans. These institutions, while technically still very well capitalized, are likely to experience a sudden and extreme pressure on their capital bases due to the ballooning losses in commercial real estate.

Unlike the residential world, where new customers are created constantly, the commercial real estate world has no inherent growth in its investor base. Yes, new funds have been raised to take advantage of distressed real estate sales, but many argue that the equity available is still not large enough to absorb all the bad debt. Think of it this way: if there was 75% LTV debt available in the bad old days to buy a $10 million building, the debt outstanding is $7.5 million. Fast forward to today, where it is very hard to get debt at all with LTVs of only 50 - 65% available from a bank depending on property type. On a straight sale of the property at the value of the debt, a buyer would require $2.6 million to $3.75 million in cash. For note purchases LTVs are down at 50% or less and the debt available is very expensive. Instead of the $2.5 million of equity originally used to buy the building - a buyer today would have to either put up 100% of the equity or go to a private lender and take a 50% LTV loan with a 14 to 16% interest rate. So even if the debt on our theoretical $10MM property sold for 50 cents on the dollar, you would be putting up $3.8MM in cash. Or if the buyer were willing to go with a private lender they could keep their equity outlay down to $1.9MM, not much less than the equity originally put up by the defaulting borrower. The combination of equity losses to be taken by the commercial real estate industry coupled with the un-availability of leverage to make purchases and the large volume of bad debt to be dealt with suggests only one thing.....much lower prices.

Interestingly, I recently took a client to visit the workout department of a NYC-based bank. The bank personnel were very polite, but assured us that they would not be selling debt at big discounts to face value. As we discussed property valuation, they cautioned that if we did lots of cash flow modeling, etc., we would probably never buy one of their discounted notes, because the numbers just wouldn't work. To keep the dialogue open, my very savvy clients replied, "that's okay we are location buyers"....as in we are willing to pay for future upside to the location in land value or rehab results. But of course, those things can be modeled as well. So essentially, what the bank was telling us and themselves is that they were looking for irrational buyers, who would continue to pay irrational prices....and without the enticement of cheap debt. Maybe they consider their core borrowing customers of old to be stalwart in this environment. I personally would not be making that bet.

Bids are due for the re-auction of One Worldwide Plaza July 15. I'm betting the price will not be improved much if at all.....of course, terms and conditions will be opaque, so it is never easy to really understand why the current deal is going south or why a new bid is better or worse. The bottom line is today's buyers are likely to be utilizing significant amounts of cash, and to get the double-digit IRRs they look for and promise their investors, purchase prices will have to be much lower (and going-in cap rates, much higher).

Jonathan Miller Podcast w/ Noah Rosenblatt

Posted by urbandigs

Fri Jun 26th, 2009 10:04 AM

A: I had the pleasure to be a guest on Jonathan Miller's Housing Helix Podcasts earlier this week that is now published. This is the first of a few appearances I'm told, so hopefully I get another invite back in the future! This interview was mostly about me, as a person and entrepreneur (thats right, I have been technically self-employed since I graduated college), and how urbandigs got started, about how I got into trading, a little about my first website venture (www.hotspothaven.com), a little about national housing markets, a little about how change is a coming to our local marketplace, a little about the fed and its money printing policies, and a little bit about the natural order of markets. We stayed away from the future of UrbanDigs 2.0 and the current state of the Manhattan marketplace, sorry, but hopefully very soon I will be invited back with no attachments to any employing brokerage to discuss these things in great detail. Anyway, I hope you enjoy and check out the bottom of this post to see what UrbanDigs was originally going to be!



Did you know that UrbanDigs.com originally was designed and modeled in early 2004 to be a replacement for the NY Times Search Directory? I bet you didnt! Originally, my goal for UrbanDigs - before I got my re sales license in June 2004 - was to become the new and improved MLS system for NYC real estate! I had the designs all made out but startup costs were too high and I couldnt get anyone to give me money to launch it. You can see the mid 2005 dates on the image below, as this design was like the 5th revision to the idea that started about a year earlier. Here is the model of what UrbanDigs originally was to become, before I decided to make it a blog and did my first post later in 2005 - notice the model derived from the hotspothaven.com search engine design (view larger image)!


Funny isnt it!

Wall Street Salaries Rising

Posted by jeff

Wed Jun 24th, 2009 10:36 AM

verklempt.jpgSo I'm still banging away on research towards a piece on Wall Street employment and compensation. But I'm going to steal a little of my own thunder to get info to you in a timely way. I have had some recent conversations with friends from the street and what I am being told is now being confirmed in a Bloomberg article entitled "CitiGroup Plans to Raise Salaries by as Much as 50%":

Citigroup Inc., the U.S. bank that got $45 billion of government funds, will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses, a person familiar with the plan said.

The biggest increases will go to investment bankers and traders, said the person who declined to be identified. Workers in consumer banking, credit cards, legal and risk management will see smaller salary adjustments.
No you are not hallucinating. Due to the restrictions on compensation for those banks accepting TARP funds, banks and brokers are raising salaries in order to hold onto their employees who will no longer be receiving large year-end bonuses.

One friend of mine told me that "The sell side is raising salaries (to retain people and because "bonus" is a 4-letter word so that's a way around it." According to the Bloomberg article, C "will raise base salaries by as much as 50 percent to help compensate for a reduction in annual bonuses." Bloomberg goes on to list Morgan Stanley and UBS as firms that have already boosted salaries. I am told by additional contacts that other banks are following, Bloomberg mentions B of A as well.

I am told that hedge funds in general continue to reduce headcount and that high water marks that have not been exceeded will significantly impact bonus pools.

The net of these trends is a positive for lower value residential real estate, which Wall Streeters will feel comfortable buying, but tough on those multi-million dollar penthouses, which will be out of reach for many.

This is NOT wage inflation
, this is a substitution of a small increase in base pay to replace potentially large bonuses. Also, it increases banks' fixed costs but reduces variable cost growth in booming times. Not a great recipe for bolstering banks' bottom line should tough times return. While it is unclear the extent of the limitations on employee compensation will be after regulatory reform, it is likely that we are moving from a 'multiple of salary' bonus environment to one where employees will get a percentage of their salary in compensation. Net net, it seems to me that overall compensation is clearly going down.

I'm a bit verklempt. Talk amongst yourselves. Here, Ill give you a topic. A wall street bonus is neither a wall or a street...discuss!

Fed Day

Posted by urbandigs

Wed Jun 24th, 2009 09:21 AM

A: Markets will be very slow until 2:15PM when the fed will announce their NON MOVE and issue the more important accompanying statement.

No way the fed raises rates. Expect ZIRP for at least another 2-3 quarters until unemployment shows signs of stabilization. Things to look for in the statement:

1) any verbiage on future purchases of MBS, up to $1.25Trln in MBS and $200Bln in agency debt - extension of quantitative easing policy
2) any verbiage on future Treasury purchases, up from the $300Bln they announced already - extension of quantitative easing policy
3) any verbiage on signs of economic stabilization - dont expect the fed to say anything about growth given the near term uncertainty
4) any verbiage on inflation - doubtful if we see anything here other than the 'subdued' remark from last time, deflation is still the bigger threat
5) any verbiage on downside risks - perhaps a change, but doubtful. Watch out for pace of contraction statements that may actually buoy stocks
6) any verbiage on household spending, saving or net worth changes

This statement will likely have a bigger impact on the US dollar and dollar denominated plays such as metals and oil, then the overall equity markets. Just my opinion.


Prime Jumbo MBS Downgrades From 1998?

Posted by urbandigs

Tue Jun 23rd, 2009 03:49 PM

A: Hat tip to Calculated Risk for bringing this one out to people's attention. Umm, one would think that the real questionable prime jumbo loans (at the height of the credit boom) were issued between 2005-2007 or so, before the securitization market decided to go the way of the dodo bird. To hear that we are getting downgrades on '102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004', makes me wonder how deep this problem goes. Where were these guys marked? Oh what a tangled web we weave.

You may wonder why some of the holders as far back as 1998 may be defaulting if they saw the equity of their home skyrocket with the housing boom. Well, the answer to that would be MEW. How much did the homeowner cash out during the boom, and how did the subsequent fall in prices kill the LTV ratio for the homeowner? We all know how people used their homes as an ATM machine for at least 3-4 years, big time! Now the house is worth less, yet the debts remain. Couple that with this severe slowdown and rise in unemployment and pressure has been building on these once 'high quality' borrowers.

Prime Jumbo and the rest of the stuff sitting lord knows where on the banks balance sheets (helocs, credit cards, lbo's, commercial mbs, etc..), are all part of my concerns over a 2nd wave of writedowns, capital raising, activation of the planned toxic junk-disposal programs, etc..Just be prepared thats all. The banks raised a lot of money with this equity rally, and got some earnings behind them from Q1. This could help capital ratios and TCE for a bit longer. But ultimately we will have to face the music on the higher quality debt classes and other types of debt that are still sitting there, rotting away.

From Marketwatch.com, "S&P downgrades prime jumbo mortgage securities":

S&P said it lowered ratings on 102 classes from 33 U.S. prime jumbo residential mortgage-backed securities that were issued from 1998 to 2004. The rating agency also affirmed ratings on 669 classes from 32 of the downgraded deals, as well as 34 other deals.

"The downgrades reflect our opinion that projected credit support for the affected classes is insufficient to maintain the previous ratings, given our current projected losses," S&P said in a statement.

Prime mortgages were originally thought to be less vulnerable to housing cycles. Home loans offered before 2005 -- when the lending binge really took off -- were also considered more solid. But the rapid increase in unemployment has undermined these assumptions.
Careful about that complacency thing setting in that this credit crisis is over.

Nenner: Deflation Now, Inflation Later

Posted by urbandigs

Mon Jun 22nd, 2009 09:39 AM

A: Charles Nenner is out today with a call that the deflationary episode is not yet over, and still has to run its course. Meanwhile, he discusses how inflation will kick in down the road (18 months) and continue in an 'upcycle' for about 30 years. I have to admit, I am in a very similar camp as Nenner in terms of another wave of deflationary pressures before the true inflation cycle begins.

Charles Nenner, founder of the Charles Nenner Research Center, discusses on Yahoo Ticker:

Renowned for his cycle work, Nenner sees deflation remaining dominant until year-end and inflation not picking up for another 18 months. But that will be the start of a 30-year (yes, year) upcycle for inflation says Nenner, who spent 12 years as a market-timing consultant for Goldman Sachs. Nenner believes the "deflation trade" is about to reassert itself in the short-term, meaning strength in the dollar and Treasuries, and weakness commodities and equities, as we'll discuss in more detail in a forthcoming segment.

For those who believe the dollar is doomed, Nenner notes "all currencies are bad." In other words, currency trading will be a game of relative bets vs. a one-way trade against the greenback, as so many expect.
Nenner did discuss the deflation 'scare' in late 2007. Here is a question for you:

Q: If the fed continues with a Zero Interest Rate Policy, stimulus everywhere both monetary and fiscal, tons of credit facilities and programs to recapitalize the banks, bailouts galore, and pure QE money printing to the tune of trillions of greenbacks out of thin air, then WHY oh WHY won't there be hyperinflation, or at least inflation in our immediate future?

This is a question many people ask me, as if I am omnipotent or something. I'm not. But I do have my views on this topic, like most people. Fact is, YES, the fed is printing trillions of dollars and stimulating like mad, and you can see the surge in the adjusted monetary base - but that surge is mainly sitting idle in excess reserves. Thats the thing. Our fractional reserve system of banking, with its money multiplying debt creation effects, is not operating normally and very rightfully so.

If you have trouble grasping this concept, that the newly created money is not entering 'the system' so to speak, think of it this way: the money that Helicopter Ben is printing and dropping from the air is caught in an updraft and circling high above us! Its not hitting ground where we all pick it up and go willy nilly spending it. This is evident in the plunge in the velocity of money, that I discussed back in January. Fact is credit is contracting, HELOCs are being cut, loans are harder to get as underwriting standards have tightened, the shadow banking system saw hundreds of billions of lost wealth, trillions of lost wealth from housing and stock market collapse - does any of this sound inflationary to you? No.

The main reasons why the feds printing and stimulus wont produce hard core inflation right off the bat, include:

1) The deflationary episode we are in will negate any inflationary effects for as long as the system takes to delever, restructure, handle bankruptcies and failures, write down toxic assets, and destruction of bad debts through defaults - this is ongoing and WAVE 2 still lies ahead of us

2) The feds hundreds of billions of money printing is sitting idle in excess reserves and not being lent out - this is what is keeping the multiplier effect of our fractional reserve system muted. Recall that the fed requested and received authority to pay interest on excess reserves last September, and since that approval came in, boooooom, excess reserves started to surge. The reason the fed did this was to sterilize their stimulus and money printing policies so that the banks had an incentive to keep that money sitting idle instead of putting it to work through new loan creation that could have sent the system overboard in terms of credit creation and inflation. Plus, the fed knew the banks needed to recapitalize and still had loan losses and toxic assets improperly marked that needed to be taken care of.

Recall Jeff's statement on excess reserves in January: "My guess is that these excess reserves will be melted away as banks absorb losses on delinquent loans and as marked down securities see their income streams actually collapse."

3) Credit is contracting! Mish is all over this and a believer that money supply contract/expansion and credit contraction and expansion play a major role in the definition of inflation. In short, you cant have hyperinflation if credit is contracting! I tend to agree 100%!

4) Destruction of credit is greater than money creation - think of Printer Ben pouring hundreds of billions of newly created dollars onto the ground, except, there is a huge hole in this ground that represents the destruction of hundreds of billions in credit. This money is not piling up on the ground, ready for people to take, because it is falling into the big hole, not to be seen!

These are the main reasons why I dont see inflation as a threat right now, or even in 2010. Yes, we are seeing a stimulus induced reflation trade that people are building foundations of hope on. Not me. I am still cautious, will continue to ask questions about the stuff sitting on balance sheets (off and on) and the accounting tricks that allowed things to get covered over, and I am less bearish than I was in late 2007 before the process really got going. At least now it is happening and we felt a great deal of pain already, which tells me we are on our way to get through this mess that our system created! But, its hard to solve a debt deflation problem with more debt and accounting tricks. Hence my caution.

Sudden Debt has a great piece out discussing how the boom during the past decade was really a 'debt fueled' unsustainable growth period:
This blog's position has always been that the US economy's performance post-2000 has been due to ever-increasing assumption of debt, particularly by households to finance real estate purchases and personal consumption. I don't think anyone can dispute this any more: just look at the chart below. Debt kept accelerating while GDP remained "stuck" at around 5% annually (these are nominal figures). In the end, the debt boom created its own bust and dragged down the entire economy. Cement shoes come to mind...

We are now deep in a debt-bust crisis and it is the first time since at least 1953 that household debt is decreasing in absolute numbers, year on year.

Interesting stuff. My stance has been deflationary since early 2008, and prior to that I used statements such as 'housing deflation + commodity inflation' to discuss the pressures facing our national economy. I still expect another wave of deflationary forces before this cycle is done that will be triggered by pressures from cmbs, helocs, prime, jumbo prime, credit cards, lbo's, types of holdings. I am not sue when this will hit, or if it will be as severe as the first wave that we went through, but I think it's something that needs to come and go for us to get through this cycle. This is not your ordinary recession and there are no free lunches. Any inflation that does show up at first will be in the form of higher food, energy, metals, commodities, health care, types of costs. Basically the stuff we need to live will see the first wave of inflation and it will be the form of inflation that squeezes consumers wallets and pressures corporate margins, at first. The policy makers will have to shift their policy to combat this form of inflation and that means higher rates. The cycle's endgame in full effect. Of course this has not happened yet and is only my opinion on the topic. Because of the nature of what we experienced, how the world has changed, I do not see inflation sending house prices surging. But it should kick in at some point down the road to help stabilize the downfall. I think Nenner might be on to something here.

A touchy topic I know, and one I would love to hear your thoughts on.

NYC Unemployment Surges

Posted by jeff

Thu Jun 18th, 2009 06:02 PM

Bread%20Line.jpg I have been promising a piece on financial sector employment, which I am working on. In the course of that work I've been collecting some data from the New York State Bureau of Labor Statistics....which may give me carpal tunnel syndrome before all is said and done. But I happened to have called James Brown at the New York State Department of Labor's Manhattan research office to ask some questions about available data and to get some preliminary comments on trends this morning. He told me "We see continually widening job losses and no indication that the losses are stopping". He also gave me the heads up that the latest data would be out yesterday, so I should keep my eyes peeled. Well here it is:


The state's unemployment rate reached a 16 year high in the month of May, with the number of unemployed exceeding 800,000, which is the highest in 33 years. The data above and the chart below (from the New York Fed) show that New York City, which going into this recession was growing faster than the rest of the country and held up better in the initial stages of the recession, has now started to catch down to the State of New York and the country overall. (Interestngly, this seems to be in keeping with the last recession).


A year ago, in May of 2008, the city's unemployment rate sat at just 5.1%, trailing the state by 10 basis points and the country by 40 basis points. By April of 2009, unemployment in New York City was running 60 basis points above the rest of the state (sans NYC) at 8%, but still trailing the rest of the country by almost 1 percentage point. In the month of May, unemployment in New York City surged a full 100 basis points to 9%, more than three times the increase of the rest of the state (sans NYC) . The big surge in May can't be viewed positively and of course accelerating unemployment is not good for residential real estate prices.

There has been some debate lately about whether job losses in New York City will actually be a fair amount lower than the worst expectations of a few months ago, due to the federal bailouts of the financial industry. Urban Digs readers know that for trading markets, results versus perceptions are quite important and the second derivative of change...even if its only "less worse"...can have a big impact. However, in the real world absolutes matter and the latest click on New York City unemployment is absolutely not a good thing, even if expectations were that things could be worse. Stay tuned.

Market Has Been Active; Where Deals Are Happening

Posted by Toes

Wed Jun 17th, 2009 09:59 AM

(Christine Toes here)

Consistent with the pickup discussed here, I have also seen a huge pickup in my business in the last 4-7 weeks & Noah asked me to share where the deals are actually getting done - as that clearly is the most real time information I can provide to you. To give you a frame of reference, before September 2008, I used to do a consistent 1 - 2 sales per month (and a lot of rentals). Last fall and early spring were pretty abysmal, I did about 4 sales in 6 months. In the last two weeks of May, I had 4 signed contracts. For June, I have 4 signed contracts, 1 contract out that might be signed by early next week, and 1 offer that was just accepted.

Where are these deals happening, who is buying & why are they buying now?

West 100s - just over $2M. (Over ask) An extremely similar apt in the building sold for $3M in June 2008. So this is a 33% drop over last year. This seems pretty consistent with what other brokers are seeing in the higher end market. There was a bidding war, both buyers were all cash. Best deal in the neighborhood, Central Park Views, approx $1,000/sq ft., which was a 2004 price for this building. Pied a terre. Buyers first Manhattan purchase. Legal field. Would say that this was a "value" buyer.

Village straight studio - Approx $315K (Slightly below last ask)
. Came on market in Feb for approx $350K. Price reduction to $325K when my buyer jumped on it - this is about the least expensive studio you can get in the Village in an elevator building. Apt needs work. Similar apt sold in late 2005 for this price. In 2008 this would probably have sold for about $375K, so this is approx a 15% drop. First time buyer who is currently renting and thought it made more sense for her to buy at these prices and interest rates. Web Designer. Qualifies for first time buyers homeowners credit. Would say this was a "location" buyer.

Gramercy alcove studio - Approx $375K (Slightly below last ask). This is a 2005-2006 price for this building. 2008 prices were approx $420K. This is approx an 11% decrease. First time buyer who has been looking for 9 months for the absolute best deal out there. Architect.

Upper East Side alcove studio, unrenovated. Approx $360K (ask)
. Bidding war (had offers over ask but buyers not as qualified). Retired couple. Primary residence. "Value" buyer (building has very low maintenance).

Village one bedroom. On market since August. Approx 25% off original ask (determined at close to height of market). First time buyers. $600K-$700K price point, apt has outdoor space. Construction & marketing fields. "Location" buyers.

Approx $400K condo. Brooklyn new development offering 10% off asking prices but no other concessions
. First time buyer who saw everything else in Brooklyn and LIC, determined this was best value - not that many condos in this price point that are a good quality/location. There was also only one line of apts w/ the exposure that he liked & this was the only apt in that line in his budget, so he had an incentive to buy earlier than he probably would have liked. Concern about whether they will sell enough units to get a competitive mortgage rate but building's preferred lender is lending at just .25 more than current rate so buyer decided the risk was worth the potential reward. Internet field. Qualifies for first time buyers homeowners credit.

Brooklyn prewar conversion. $500K-$575K price range, 2 bedroom. Small, pre-war building. Prices reduced by 20% from last year. First time buyer. Internet field. Qualifies for first time buyers homeowners credit. Charm/value were most important to this buyer.

Upper West Side prewar conversion. When they were determining original offering prices for this apt, they were going to list at over $3M. Buyers paying approx 35% less for an apt that is being customized to their specs (which developers never used to do). Buyers felt that net costs of purchasing were less than what they would be paying in rent, wanted to build equity + take advantage of low rates. Looked at over 35 apts including every new development & condo conversion on the UWS. Made several very low offers before determining where best "deal" was. These buyers spent months searching for value, quality, charm & location. Finance and health care sectors.

Village one bedroom, $700K-$800K range. Hard to determine where pricing would have been last year, largely non-owner occupied building. Financing is difficult. Very unique product (pre-war, outdoor space). Multiple bids including two cash offers. Internet field.

Murray Hill studio, $400K price range. Last year's comps suggest a 10% price reduction. Even though this wasn't a huge discount to last year's pricing, there were multiple offers. As a lover of pre-war buildings, I think the apt held its value because of the charm factor, which is what attracted my buyers. Pied a terre buyers.

It seems that lots of the "creative types" are getting into the market now. Lots of first time buyers who have been renting and waiting for some type of relief after years of price appreciation. Some of these buyers have been looking for months and painstakingly looking for the "perfect" apartment. Buyers really have been picky & patient, as Noah wrote about a while ago! Others have had lifestyle changes or have rental leases expiring and figure that this is the right time for them to buy.

Naturally, I've got my fingers crossed that this trend continues, but if rates increase further...or stocks turn around...or this crisis proves to have a 2nd wave, well, we may have to deal with some slower pockets again.

IMN Real Estate Private Equity Conference Tidbits

Posted by jeff

Tue Jun 16th, 2009 09:01 AM

A rolling loan gathers no loss.

Unnamed Banker....as retold by Joe Sitt

I was fortunate enough to attend IMN's recent US Real Estate Opportunity & Private Fund Investing Forum held last Thursday and Friday. The conference was well attended, I don't have an actual count, but it was as big as the Wall Street equity conferences I used to attend at the Sheraton years ago in the bull market boom days and there were so many Masters of the Universe present it was hard to get a seat in the main ballroom. The mood was grim but energized. What does that mean? Attendees seemed every bit as pessimistic about the commercial real estate market as I could have expected, although there was a range of views extending from "it's bad" to "fuggedaboutit." But nearly everyone was excited about the opportunity to eventually find bargains in the market for the first time in years.

The following is a collection of quotes from the conference, which I hope will give Urban Digs some flavor for what professional money managers in the commercial real estate business are thinking about the banking system and New York City, without going into a lot of details on specific sectors or subjects, which would not serve Urban Digs readers' purposes.

The quote featured above by an unnamed banker was to my mind the most pithy of the conference. The length of this commercial real estate downturn and the "time to opportunity" is in part controlled by the banks and their regulators....as one could say it is for the economy as a whole. The fact is that banks are still pushing off the inevitable and hoping that the days of cap rates below financing rates will return and bail them out of loans made at the top of the cycle, that were clearly for overpriced transactions/projects and structured with way too much leverage.

One manager, Sush Torgalkar of Westbrook Partners, described the kinds of deals he is looking for going forward. "Good IRR on an unlevered basis, discount to construction cost less land and located in major markets." (For future reference, I don't write that fast, so quotes may not be verbatim, but generally capture what was said). I saw a lot of head nodding when Sush talked about deals that would get his attention and conclude that banks trying to peddle bad loans in secondary and tertiary markets for a premium to construction cost at small discounts to par may not be too successful.

One of the panels focused exclusively on the New York City market. It was averred that prior ideas that somehow the City would sidestep the problems in the rest of the country were not the case, with New York clearly suffering like everywhere else. However, Brad Klatt of property developer Roseland Property Company made the very good point that "Capital infusions and recovering equity markets with the ability to raise capital are an artificial catalyst to the New York market, keeping job attrition less than expected and less than in other geographies because the institutions being saved are either headquartered in New York or have substantial employment here." (Wall Street employment and its impact on the future of the New York City residential market will be featured in a piece on Urban Digs soon, as I previously promised - anyone with good stats send 'em in). That said, it was agreed that in office and hospitality markets, New York was doing its damndest to catch down to the rest of the country. It is said that retail in the City is being buffered by global retailers looking to enter the U.S. major metro areas with New York City being first choice - something we talked about here at Urban Digs a couple of months back in a piece on retail. There was even a mention of Chinese investor interest in New York City real estate....Ah, hope springs eternal! Investors agreed, though, that the recent benchmark set by the sale of Worldwide Plaza on Eighth Avenue for a reported 60% discount to its 2007 sale to Harry Macklowe was a good example of just how ugly the New York City commercial real estate market has become.

Besides his banker quote, Joe Sitt mentioned that land could be purchased in New York City for $30 - $50 per FAR (roughly buildable square foot for the uninitiated). I have to believe he was referring to the boroughs, though as at the peak asking prices in Manhattan's secondary markets like downtown and Harlem were as high as $500 to $600 per FAR (although I don't no how many unlucky souls actually paid them.) I am as bearish on New York City land prices as anyone, because in some cases partially built structures are not worth completing and fully constructed buildings are worth only a percentage of construction cost, both implying a theoretical negative value to the land, currently. Theory aside, a decent piece of land on Manhattan Island should still go for several hundred dollars per FAR even if it is going to be land banked for five years, as there was wide agreement that longer term New York City was underserved in a variety of asset classes (retail and housing come to mind). I have made note many times in the past that New York City is a demand-driven market, it can still get hit because of waning demand (particularly if property is over-priced and over-levered), but for the most part barriers to building and the City's huge scale make over-building very difficult.

Interestingly, one panelist asserted that you can make the numbers work on construction of a new rental building today in New York City, based on significantly lower land prices and lower construction costs, but you will be able to buy an 85% finished job for 30 cents on the dollar, so why take all the development risk?

Other interesting quotes:

"I have seen a big increase in activity in the last 2 months, workout teams are taking over the bad loan portfolios." - Jay Neveloff of Kramer Levin

"It takes time for the workout teams to be hired and ramped up, forebearance was mandated because the infrastructure to execute dispositions wasn't there." - Nick Bienstock of Savanna Funds

Other Voices:

"At some point the government will approach the banks to clear out their bad loans and take the hit, maybe before year-end."

"Regulators will facilitate write-offs through the annual examination process."

"The amount of equity ready to invest is small versus the amount of bad debt."

"The only assets the banks will sell are headed to foreclosure."

Reuters Talks Hit To Manhattan RE

Posted by urbandigs

Mon Jun 15th, 2009 10:23 AM

A: Manhattan's bullet proof armor is starting to show some weaknesses as the main stream media starts to pick up on the lagging nature of our adjustment! That's one big thing with real estate, its very lagging! So, stay tuned to sites like UD for real time reports, but be prepared that what you read here may not show up in reports for a good one to two quarters! Plus, the media may pounce on lagging data and Armageddon discovery giving a misleading picture of the current health of our markets. As I noted before, we need to get through the Armageddon price discovery first before we see just how much of a stabilization occurred with the 40% equity rally and the media induced 'green shoots' reflation mentality for buyers. Just as the media enhanced the move up, it may have the same effect during the correction process.

Reuters discusses, "Is the housing bust about to take Manhattan?":

New York City real estate prices are looking increasingly shaky as instability in two of the city's sexier submarkets -- second homes in the Hamptons, and new condos in Manhattan -- register the latest signs of a housing downturn.

Back in town, the number of sales in new developments dropped a whopping 71 percent in April from a year earlier as condo developers enmeshed in complicated financing arrangements have been slow to slash prices even as the market corrected all around them, Kim said.

When the rest of the country was watching new neighborhoods begin to disintegrate into foreclosure ghost towns in 2007-2008, Manhattan landlords would still publicize new buildings by hosting parties featuring pop stars, sushi and girls twirling hula hoops in a bid to convert still-airborne Wall Street bonuses into down payments.

Today, that bonus pool has dried up amid job and compensation cuts in the financial services sector that drives the city's economy. The elite in the real estate industry had once hoped Manhattan could escape relatively unhurt as other housing markets suffered. But the collapses of financial powerhouses such as Lehman and Bear Stearns destroyed such thinking.
Oh, it was much more than just the elite that argued why Manhattan was immune to any slowdown, how the foreigners would always save us, how the weak dollar would always make us attractive to outsiders, and how supply could never grow for this market limited to a measly island! Amazing how things change when people realize that markets will do what markets want to do, and they usually follow the macro fundamentals. It gets tricky and ugly when you start dealing with unsustainable gains due to temporary credit bubbles that are blown up by the lovely engineers at the federal reserve! Of course, this crisis went much deeper than just the fed and every bank wanted in on the credit bubble that earned billions in fees from an originate-package-sell securitization model - giving a loan to anybody with a pulse. Well the party was fun until everyone was drunk and the music stopped! It always does.

Back to Manhattan. Whether you believe it or not, this market started to trend down in Spring 2008 or so as the first signs of how bad this credit crisis finally sunk in - even though at the time, many still believed the fed rescue of Bear Stearns avoided all systemic risk and that the worst was over. Boy were they wrong. I wrote about the change in psychology on the buy side in detail in my July 7th piece, "Low Ball Bids & Cold Feet". I couldn't get more specific than that folks! Putting yourself back into time & place, most brokers assumed that if it didn't happen in Manhattan by that time, well, it just wouldn't happen! Hopefully many learned a lesson that nobody is bigger than the markets and that nothing goes up in straight line forever!

So what has happened? Well, the first wave down occurred after Lehman failed and sales volume plummeted for about 5-6 months - say from mid SEPT to early MARCH. That was when bids were hit and people began to realize something has changed in this local marketplace. Inventory rose, sales volume dove, and to move property you had to offer quite a discount from peak trades to entice a buyer to put their hard earned money to work at a time that was far from certain! Its all about the buyers and buyer confidence, always has, and always will be. If you focus on the sell side or supply only, you may be missing something. For example, if you looked at inventory levels 7 weeks ago you would have noticed that we were near our highs and assumed that the market was dead. But that was not the case at all and in fact buyers started to sign deals in droves as the equity rally, reflation trade, and first wave down complete combined forces to add certainty to buy side psychology in the asset. In short, buyers got way more confident putting their money to work. Today, you see the net result of this action as the lagging nature of contracts signed finally made their way into inventory numbers - giving us a drop of about 6-7% or so in the past 30 days. This is a combination of sellers removing unsold inventory for the summer + the accelerated pace of activity following the first wave down to a comfort zone.

Before we get excited, know that we have to go through the discovery period of those difficult months + we need to go through the 'taking out' of the new dev effect on Manhattan price data. The latter is something I will discuss in more detail later - but dont forget, what comes in will ultimately come out and we already went through the positive effects of all those new dev closings, now we will get to see pure existing resale reports without the uumph that defined most of 2007 and 2008 data. That is why I wrote, "Why Manhattan Price DATA Will Stay Strong in 2008", last April:
How could prices rise as sales volume slows and inventory rises? The reason is because the prices component is NOT registered until after the deal closes; some 1-3 months generally from contract signing! For new development deals, a contract can be signed over a year in advance of the closing. Which leads me to tell everyone that 2008 will see the closings of thousands of new development units that were signed into contract in 2007!

: How will the prices paid, especially the price per square foot paid, ultimately affect future quarterly price reports for Manhattan?

ANSWER: Positively! As new dev deals close, it will help to offset any weakness that may be occurring in the current existing resale marketplace causing a misleading and mysterious report that probably will not be in line with the sales volume & inventory trends at the time!
Soon we will get Q2 data and I expect a solid uptick from Q1, which the brokers, streeteasy commenters, and media will of course base new bullish arguments around that the bottom is in and that all is well moving forward. But the real juicy analysis will be to compare Q2 of 2009 to past Q2's, on a year-over-year basis. Real estate is seasonal, and as such the data must be seasonally adjusted OR compared y-o-y to cancel out month to month noise that may be misleading. But, people will no doubt take advantage, which is fine and part of the natural order of markets. In the end, the markets will still do what they want regardless of anybody's banter.

There will be a time to discuss a sustainable recovery both for our local economy and our local real estate marketplace; for now, I am less bearish now that the process has started but I think we still have some issues we must face and I discussed them plenty on UD - including unintended consequences from actions taken to stem this nasty crisis. When things do improve, we will see a big time exit strategy from the fed and regulation both on wall street and on the banking system to make sure a parabolic credit boom never happens again; at least for a decade or two until we forget and need a way to make more money. For now, there will be deals at every price during the adjustment and nothing goes in a straight line. Real estate tends to be like a tanker, taking time to stabilize and turn around. So, focus on the things that make for good decision making and don't buy just because you think prices will surge 20% in a year! A home is becoming just that again, a place to live and not a ATM machine that can be speculated on for 100% appreciation in 3 years time - although you will ultimately see nice returns for vulture investors that are gobbling up foreclosed properties in very hard hit markets for 30 cents on the dollar. Markets working as they should.

Where are rates going? Forecast: Volatility

Posted by jeff

Thu Jun 11th, 2009 09:27 AM

After the stunning swoon in treasuries - the 30 year has plunged over 20% year-to-date - it's only natural to ask, where the heck are bond yields going from here? Even more fundamental, what about the availability of credit? Just for a little historical perspective, let's take a look at where we have been.


Here is a long-term chart of the 3-month treasury yield. Now I know it's no intellectual leap to say WE HAVE TOUCHED ABSOLUTE BOTTOM DRIVEN BY A NEAR DEATH EXPERIENCE AND THERE AIN"T NOWHERE TO GO BUT UP! But let me layer a bit more of the completely intuitive on top of the transparently obvious.

1) Government issuance of new debt is expanding to historically high levels to cover the bank bailouts, stimulus plan(s) and continued pork barrel spending. You can find a great visual for the relative size of the bank bailout program, versus past major U.S. spending initiatives here(View image).

According to a recent Forbes article, the U.S. government has said it will need to borrow $2 trillion, or 14 percent of the country's total economic output, in 2009 alone. Some have been reminding those of us who care that we should not forget that additional borrowing from mortgage giants Fannie Mae and Freddie Mac will contribute to overall U.S. government borrowing being much higher.

2) Bond market "vigilantes" now more likely foreigners than U.S. investors (when Ed Yardeni coined the term back in the early 90s) are worried not just about return on their money (vs. domestic and other alternatives), they also worry about return of their money. Their cooperation in funding our debt will only be bought with higher rates of return. Let me quote one of the larger buyers of our main export:

"Whether to buy more US Treasury bonds, and if so by how much, that should be based on China's need, and based on our requirement to keep the safety of our foreign reserves and their value". Chinese Premier Wen Jiabao

Of course, others are more sanguine about the chance of a buyers' strike in bond land.

"The reserves are so large that they have little alternative but to hold a substantial fraction in U.S. Treasuries and guaranteed paper," said Harvard economist Richard Cooper, referring to the People's Bank of China.

My guess is that, at the margin, the Chinese do anything they can to soak up their FX reserves with something else rather than U.S. bonds. Of course, Urban Digs readers know it's a second derivative world, where change at the margin drives everything (because markets drive economies today and they respond largely to incremental data).

3) With the massive stimulation of the U.S. economy, and little opportunity to deploy that capital into value added investments (those which offer a fundamental competitive advantage in efficiency/productivity or provide for a true unmet need), money will quickly seep into financial and or raw material asset speculation and producer price inflation.

But wait. Why are some very smart investors like Mohamed El-Erian suggesting that inflation will come, but it will come later in the cycle rather than immediately.


As you can see from the chart above, Pimco has some fancy ways of saying that U.S. and global growth will be slower going forward due to damage from the recent downturn, but also from exposure by the downturn of unsustainable trends in industries and economies, which will begin to normalize, in some cases rapidly (restructuring of the U.S. auto industry) and in other cases slowly (deleveraging of the U.S. consumer balance sheet).

I agree with El-Erian that these factors suggest slower growth and less inflation pressure, suggesting that the bond market behaves in a manner befitting a non-inflationary environment. However, this doesn't take into account the risk premium being built into U.S. bonds for credit quality deterioration as impacted by both increased default fear/desire to diversify and massive issuance.

In his most recent commentary El-Erian points out that the bond market implosion that has taken place since his piece on lower inflation pressure is reinforcing deflationary trends:

"The Treasury bond sell-off is now putting pressures on other markets in the economy. We should worry most about housing where borrowing rates are rising notwithstanding the Federal Reserve purchase program. Indeed, according to data released on Thursday, already 12% of U.S. households are facing difficulties meeting their mortgage payments."

My forecast? Volatility. I think that whenever the economy gets weak, China will rush in and buy commodities - which props up emerging markets where they would like to sell more of their widgets - and gets them a supply of cheap materials for making infrastructure they need as well as exports. It also allows them to recycle FX reserves into a productive and in their mind relatively safer use. This will keep commodity prices volatile, but trending higher. To the U.S. consumer this will be felt as pain in food and energy prices.....not measured in the headline inflation numbers. When energy prices get too high....as they are now.....you will see the U.S. economy downshift, pushing the commodity complex back down.

As the U.S. economy slows we will see a flight to the dollar and U.S. bonds, which will tend to feather back the inevitable trend towards higher rates. This may give temporary help to the mortgage market, but at this point the housing recovery may become stymied by generally higher mortgage rates. Without a housing recovery I can't see how general credit availability can improve. Banks will be stuck in the recovery room and the recent round of capital raising will be their easiest. My guess is they horde that capital. Not a prescription for a booming economy and CPI inflation. In my mind the misery of inflation is going to be felt in higher food and energy costs to the consumer and investments in commodities will be relatively safe, as should many emerging markets (suppliers of commodities) largely due to the closed loop of China investment demand.

Hold on to your hat!


Dow Breakout or Market Fake Out?

Posted by jeff

Wed Jun 10th, 2009 08:59 AM

Here's the Dow Jones Industrial average, which one would have thought would have confirmed the breakouts in the NASDAQ composite (View image) and S&P 500 (View image), the former having also been bolstered by a golden cross (50 day moving average breaking through the 200 day moving average).


Notice that volume in the Dow has been plunging (I penciled in a trend line poorly at the bottom there) even as the index has fought to overcome it's 200 day moving average which has been in a downtrend for at least a year. Ordinarily one would like to see volume picking up and a pop in volume as the index "busts out". We are definitely not seeing that with the Dow today. Notice the indicator at the bottom of the chart, it is a Moving Average Convergence Divergence indicator and it is pinned in "overbought" territory. Generally this would be looked at as a negative factor, meaning a stock or index has run too far too fast. In the case of the current market however, as much as this holds true, it is also a longer-term positive, that after being virtually unable to even become overbought for the last year, that the index could get and stay so overbought. So when I wrote about a potential breakout in the Dow last week heralding a new "bull market", I looked at this negative indicator as a more minor factor.

The fact that the Dow was poised to go "topside" and confirm the breakouts in the other indexes, but has barely been able to claw out a close above the 200 day moving average, is a warning that this rally, which has already been one of the most powerful in history, is quite long in the tooth. If it fails to regain its legs soon, it could be a long and painful summer. It could also be technically described as a bear market rally, perhaps the mother of all bear market rallies.

'Armageddon' Price Discovery To Come First

Posted by urbandigs

Tue Jun 9th, 2009 05:27 PM

A: Folks, I'm still not 100% here and off for next few days but wanted to discuss an important topic. The first two quarters have been nothing short of intense as we seemed to experience a shift in psychology from 'Armageddon' to 'Green Shoots / Reflation' over the course of just a few months. Isn't it amazing how quickly confidence can change? The nature of our markets is that there is a 2-3 month time lag between contract signing and closing, sometimes longer if financing is hard to line up. Which puts us in a very interesting spot right now. For the most part, the closings that we will see now will reflect contracts that have been signed in February and March - that period of time when Armageddon was on the table and stocks were on their way down to the Haines' bottom. If you go back into time & place, and then compare it today, there has been quite a shift in general psychology that has affected both buyers, sellers, and brokers. Lets discuss briefly.

You may have noticed many of your listings on Streeteasy go into contract the past 5-7 weeks, as this fierce rally continues and green shoots are discussed everywhere. I have reported on this pickup a number of times and the reasons I think for it. Many seem to think there is a reflation trade going on right now with the massive stimulus (both fiscal and monetary) taken to stem this crisis - clearly the worst bout of debt deflation since the great depression. Combine the first wave down, with low rates that many feel are going higher, and a 40% surge in equity prices and you have the makings of a nice tick up in action. Sustainability is another equation that is not for this discussion.

Now, for a moment, put yourself back into time & place to February and March - what do you see? Here is what you see...

a) first wave of illiquidity hits Manhattan real estate after Lehman, seeing real estate activity stop for 5 months

b) first wave down in price adjustment

c) banks are still in serious trouble and failure isn't off the table of a major bank - bank stocks are trading at depressed levels

d) stocks in general are in a plunge on their way to the most recent lows, hit March 9th, 2009

e) fear level was HIGH

Combine those forces and put yourself back into time & place and this market was still quite sluggish, after 5 months of being frozen. There were signs of deals starting to happen and the high end was getting hurt the most. Sellers that had to sell, for whatever reason, had few bids to hit. Those that did get bids, strongly considered hitting them - and in fact, many did. Lets call the months of OCT - FEB, the fear factor months that defined the first wave down - an adjustment that almost every broker previously denied as even possible. Lets take a look at how the equity market selloff to the lows, the fear factor, the bank recapitalization, and then the equity surge looked over the first two quarters of 2009:


Now, what you need to understand is that the deals that were signed into contract at the tail end of the fear factor months will close first! So, the second wave of price discovery that trickles in AFTER the first wave down in prices will reflect the deals that occurred in the fear months! So don't be surprised to see some crazy prints get recorded, because they will reflect a much different period of time than when the numbers are discovered at today.

490-wea.jpgCase in point. Take a look at 490 West End Avenue, 9B. This is a classic 7 (3BR/3BTH + DR + MAIDS) that needed some work and whose price was reduced from 2.45M to 1.975M over the course of a 9 month listing history. The listing entered contract on March 12th, 2009, 3 days from the stock market lows and right at the end of the fear factor months! Then we get price discovery as the sale gets recorded for $1.5M! This is a prime example of how the Armageddon price discovery will occur first.

Now, what remains to be seen is whether these types of sales are considered outliers from a temporary blip in the market when fear was at an extreme. Or, will buyers use this as a new baseline to submit bids too? I'm thinking somewhere in the middle for at least as long as this equity rally sustains itself. Certainly, the world today is not facing Armageddon and a systemic bank failure seems all but off the table. That is quite a change from 3-4 months ago when nobody could say for sure what may happen next - so, it must properly be priced out of deals, for now. Not only that, but today's world is witnessing a stimulus induced equity rally around the globe that is boosting confidence in a reflation trade and perhaps a V-shaped economic recovery. Time will tell whether this is sustainable or not. For me, you never know what might issue in another wave or two of illiquidity similar to the months after Lehman's failure - and I don't buy into a V-shaped recovery.

The shift in psychology was not only dramatic, it was amazing to be honest with you. It is affecting buyers, sellers and brokers alike. Buyer activity has picked up big time from the fear factor months, as buyers get more willing to submit a bit in the lower end of the pyramid range of where deals seem to be happening at based on price point - certainly, prices aren't rising nor are deals happening at peak levels. Traffic is picking up, brokers are reporting on it, and sellers are learning of it. As a result, sellers may not be as motivated to hit a bid that otherwise might have been hit during the fear factor months. It's so individual and by no means are things flying off the shelves! Deals still seem to be occurring in the range I provided months ago, yet at the lower end of that range due to the shift in psychology.

This means that in a few months from now, we will likely see deals closing at levels above the fear factor months - but we will have to go through the Armageddon discovery phase first! Interesting times indeed! Expect to see the biggest surprises in the Classic 6, 7, and 8 market as deals start to close from contracts that were signed when the fear level was much higher than it is today! This is due to the higher end nature of this crisis.

Thoughts? Examples of others? Would love some reader insight here!!

Can Bull Market Bail Out The Beav?

Posted by jeff

Mon Jun 8th, 2009 09:39 AM

I was grinding through my zombie condo data when I arrived at the numbers for 15 William Street. It took me a little while before I realized that the data I was looking at was for Andre Balazs' William Beaver House. My recent article on the potential for a new bull market ("Bull Market Break Out On Tap?") got me thinking that it might be worth kicking around some data on The Beav in the context of new expectations for Wall Street and by extension the downtown real estate market in light of a definite warming trend in financial markets. Is the romance with Wall Street over? or can rekindled markets bring the downtown real estate market back. What better development than William Beaver House to test the notion that Wall Street is still sexy. After all in November of 2006, a time many yearn to re-live renumeratively speaking, the New York Times described the Billie Beaver House and it's cartoon mascot thusly:

Andre Balazs, the club maestro turned hotelier turned developer created the chracter to promote William Beaver House, a 330 apartment building under construction at William and Beaver Streets.

In the race to attract high-end condo buyers, the martini sipping mascot is aimed straight at the downtown singles market, Anyone arriving at the building's entrance will pass under a glass-bottomed Jacuzzi on the sun terrace of the health club on the floor above. the lobby includes a conversation pit with a fireplace, left, a billiards table and a bar.

So here are the numbahs according to ACRIS, New York's online city register. The William Beaver house has 320 residential units available (at least that's how many lots the original parcel of land was initially sub-divided into - recent media reports suggest there are 330 units for sale). As of June 7, 2009, ACRIS showed 65 units sold - I define sold as a deed having been recorded. Not only do I not have access to any data on contracts signed, but these days contracts signed are, shall we say, of less predictive value in assessing future sales than in the past. So in this case 20.3% of the units available have been closed, this is nowhere near the 71% threshold level for units sold or in contract needed to get most mortgage providers to extend financing to a new development ("Coming Soon ! The Zombie Condos that Ate New York".) But again, we don't know how many units are in contract. The Real Deal recently had an article covering a lawsuit by one of the brokerage firms that had previously handled sales in the building for alleged non-payment of sales commissions owed. In the article, brokerage firm Prodigy, who continues to handle sales at the property, asserts that 208 units have been sold (contracted for) or 65%, but they expect that 15% of these won't close. That figure reportedly includes 31 units sold in a $40 million bulk deal to some foreign investors. The 31 units is in itself an interesting number, because from what I hear Fannie & Freddie's guildelines for lending within a new development include a prohibition on lending to a development with 10% or more of the units sold to bulk investors - so they are staying under that threshold so far.

To me the more interesting figures are those on sales proceeds, which tote up to $76,454,021 from the units for which deeds have been filed, versus the outstanding first lien debt on the building. According to the mortgage release documents filed as these units have been sold, it looks like the property has $247,000,000 of debt owed to REIT iStar (I believe the loans were originally made by the now defunct Fremont Mortgage, which iStar acquired....can you say buyers' remorse). Now I don't know if there is any mezz debt outstanding on the property and to be honest I have not figured out how to find mezz debt in public records if it is recorded anywhere (help anyone with expertise). But even sans mezz debt which was commonly used, and without deducting the 5% in sales commissions for the units sold (insert your favorite joke about unpaid commissions here) and not tacking on say $25 million in interest on the loans, there is still a long row to hoe for The Beav to get it's head above water. So let's take a look at the rate of unit closings in 2009 (defined as a deed being filed and showing up in ACRIS).


As you can see, the rate of closings recently has been less than inspiring. June is still young and there has been 1 deed recorded so far this month, but let's face it, they're gonna have to pick up the pace. I'll report back periodically to update on any changes here. But it may take a whole lotta bull to pull The Beav through.

Just as an aside as i look through this type of data for many developments around Manhattan, I often see media quotes of much higher rates of contract signings than I see deeds filed in ACRIS. There is definitely a lag between contract signings and closing, which has probably been increasing due to the difficulties in getting financing deals done. There is also probably a lag between closings and data showing up in ACRIS. But the spreads are often very wide and my guess is that behind the scenes there are tons of folks trying to get out of contracts signed pre-Lehman.

Rogers: Currency Crisis Ahead

Posted by urbandigs

Thu Jun 4th, 2009 05:44 PM

A: This was so entertaining to watch today. Lets try to have an intelligent discussion on this topic, a topic that I have touched on here a few times already - including my thoughts on the excessive printing and the gold trade. Jim Rogers on CNBC late this afternoon battled it out with Cantor Fitzgerald CEO Howard Lutnick, and it was great. Watch both videos as this is uber important for endgame to this crisis and involves all of us and can ultimately affect Manhattan real estate!

"They are printing so much money, I have no shorts on...stocks can go to 20,000 or 30,000, but of course it would be worthless money...commodities will be the best place to be. The US dollar is a terribly flawed currency." - Jim Rogers


The above video is the beginning of the fun. The real action started when Larry Kudlow and Howard Lutnick chimed in about the treasury bond outlook. It was awesome! Basically Kudlow agreed with Rogers that treasuries are a great short, and will rollover causing higher rates for all of us as a result of fed actions, policy, and government borrowings to stem this crisis. Lutnick argued that Rogers is about '4 years early' on that trade and that the commercial real estate problem and the leveraged buyout problem (2006 deals) is far worse than anyone right now is willing to admit. Lutnick believes this to be a 2011 and 2012 problem, causing major problems for banks and the economy - as a result the flight to safety will CONSTRAIN the treasury market from rolling over as the 'fear factor' kicks in again. When Rogers asked why investors would buy trillions of government bonds over the next few years, Lutnick responded...'because you get your money back'. Kudlow responded by saying.."why anyone would want to buy treasury bonds right now is utterly beyond me!"

It was awesome. Here is the real action:


Lutnick's argument about treasury bonds being constrained by what I described as WAVE 2 of this crisis, is very interesting. I'm not sure I buy it, but its interesting. Lutnick says this will hit us in 2-3 years, I thought it would be earlier.

Your thoughts? Who is right - Kudlow/Rogers or Lutnick?

Keeping It Real - Less Bearish

Posted by urbandigs

Thu Jun 4th, 2009 10:17 AM

A: People seem to forget that about 8 months ago I started to change my tone a bit now that the adjustment process started. It was back in November that I made my first statement about being "less bearish", and wrote..."This might surprise many, but I am a bit less bearish than I was 12 months ago when we were near peak levels...Today, a noticeable adjustment has occurred and the pendulum has clearly swung in favor of buyers". Recall that when I made that statement, this market was still frozen from the shock of the Lehman bankruptcy and government rescue of AIG. What took us so long to roll over still confuses me, but markets have a tendency of surprising us sometimes. Longtime UD readers know how bearish I was in late 2007 when equities were near record levels and trades in Manhattan were at peak levels. So to hear me start to talk about being "less bearish", should tell you something. I will always strive to keep it real, even if the market behaves in a way that is inconsistent with my general feelings about macro fundamentals and the new, less sexy world we are in. Ultimately, the markets are bigger than any of us!

That wasn't the only time I talked about being less bearish OR that a pickup in activity has occurred in our local marketplace. Here, take a look:

FEB 3rd - "I'm less bearish today because the process is happening, as a year and half ago I was way more more bearish than I am today. And as time goes on, I will probably become even less bearish."

April 2nd - "I'm way less bearish today than I was 12 months ago now that the process has started and equities have adjusted. All I know is that the process is taking place at great speeds, and I would not be surprised to see the bulk of the adjustment complete by this time next year."

April 16th - "Its hard to argue these forces although I am way less bearish today than I was only a year ago on Manhattan real estate because the process is happening. It must happen. It will happen. And we will get through it! This leads me to believe that at some point in the next few quarters you will see a bunch of quality Classic 6s, 7s, and 8s, looking mighty attractive!"

May 19th - "I was quite bearish for very real reasons 18 months ago, and now I am way less bearish than I was because the process started; but we still have a ways to go before a solid foundation can be built to sustain a recovery. Right now, I would update my 'muddled L' recovery to look more like a muted 'W' recovery with the final growth spurt a big question mark and more of a muddled stabilization for a while. It seems Keynesian stimulus will have its moment, although it will be temporary."

Enough of that, as you should get the point. But I took it further. I started to discuss the pickup in action from the frozen 4th quarter as early as late January, but was too unsure to call it anything other than a relative anecdotal pickup from a very frozen 4th quarter. Real estate is seasonal, and when we compare the first half of 2009 to previous first halves you will likely see the number of sales on the sluggish side. Month to month pickups can be misleading.

Moving on. As buyer interest gathered steam, I decided to call it a 'countertrend pickup in activity embedded in a longer term correction process', and I will stand by that call even today. I even went as far to devote a post to the surge in contracts being signed about two weeks ago, asking people whether they are noticing their Streeteasy saved searches going into contract.

But there is a big difference between a countertrend pickup in activity embedded in a longer term correction and a new, sustainable recovery for Manhattan home prices. This is where you will see me differ from others. Deals still seem to be happening in the comfort zone reached after the first wave down - a move down almost all brokers and executives either didnt see coming or thought impossible (my E 87th property went into contract over ask after being priced about 30% below peak levels - proof that markets dictate price, not brokers)! If anything, accuse me of being extremely bearish on Manhattan real estate in late 2007 and being less bearish starting in late 2008 when the adjustment occurred.

Fact is, there are many bids coming in and there are plenty of deals being signed. The pace of deals happening seems to be accelerating with the ongoing rally in equities - in other words, most of the action has occurred in the last 6-8 weeks or so. Inventory is coming in as a result right as we enter a time when new listings tend to decline with sales volume for the slower summer months - except sales volume isn't declining, its accelerating. Take a look at a chart comparing new listings to a weekly average of contracts signed and you can see what I mean (courtesy of UD charts):


In my opinion, the boost in buy side confidence is due to a few factors that I will list in order of what I feel is priority:

1) first wave down to comfort zone - definitely the most important. Tiered structure of correction due to nature of this recession with sharpest adjustment in high end and slightest adjustment in studio market

2) equity rally - the S&P is up about 40% in the past 12 weeks and that is boosting confidence; remember, the stock market is the stars and the most widely used gauge as to the overall health of our economy. The banks raised a ton of money, and the fed engineered the system to make banks profits soar. But a) will it last and b) what about higher quality debt classes still on and off balance sheets?

3) reflation trade - rates, stocks, commodities are all rising at the same time as a reflation trade is in place from massive fiscal/monetary stimulus. Many like to be in real estate to protect them from massive inflation and a devaluation of our currency. Time will tell if wage inflation and job growth occurs as onset of inflation hits.

4) rates - the combination of lower prices, confidence boost from equity rally, reflation trade, and possibility of higher rates is making many feel more comfortable to pull trigger to lock in price and low borrowing costs. Its very possible the next wave down is a result of another round of severe illiquidity because lending rates are significantly higher than what we got used to over the past 5-6 years.

Know that markets do not move in a straight line and there will be deals at every price. Real estate in general is very illiquid and even with the big uptick in action, some units are having trouble selling. And the most important thing people need to realize, is that deals are happening in the range that I discussed previously! It's not like you are seeing a sudden surge in the aggressiveness of bids with deals happening closer to peak levels. So don't mis-interpret this piece. We reached a comfort zone, prices came down, and because of the 4 forces I just discussed, confidence is up and bids are coming in! Its as if the wall street bonus season that is supposed to be active (we forget that this time of year is the busiest time of year for us), is on a 2 month delay. Rather than being JAN - MAY, its like the action really was from MARCH - present, and ongoing. I would not be surprised to see this action last a bit longer than normal, and continue until the end of June.

But make no mistake about it, this economy is still hurting big time, macro fundamentals are still pressured, and if the stock market decides to sell off again you will see the recent boost in buyer confidence slip away for a while until equilibrium is once again achieved by natural market forces. No one can predict exact bottoms and real estate is a very individual decision. There will be a time to talk about a sustainable recovery based on positive fundamentals, but for now, the best I can get myself to do is be less bearish than I was at peak. Whether or not another wave down comes is something I cant conclusively answer, but my gut is telling me we will have one. Plus, we are about to get some price discovery about where high end deals are happening at, and I think that will surprise many! Given the surge in activity from the dead 4th quarter, perhaps some deals are happening at the lower end of the pyramid range I discussed here before for each price point. Time will tell. For now, I still worry about higher rates, higher taxes, rising unemployment and other unintended consequences that come from a major earthquake like the crisis we just went through. Its hard not to expect a few aftershocks!

Bull Market Break Out On Tap?

Posted by jeff

Wed Jun 3rd, 2009 09:21 AM

Before I even get started, I will come clean and remind Urban Digs readers that a year ago I suggested that a new bull market could be born out of conditions just getting less worse (Introducing the Less Worse Bull Market). The suggestion was at best ill timed at worst a major flub and total boneheaded call as the market imploded 4 months later. The somewhat improving technicals were merely a head fake that kept complacent investors from bailing before the really heavy stuff came down. So how do I feel about the current stock market action?....conflicted! I hate the economic outlook, both short and long-term, I hate what the government has been doing to capitalism, risk and reward and all that is fair about our flawed but egalitarian system by not letting banks fail. I believe that smaller banks are in for a world of pain along with the commercial real estate market, while large banks have been incented to sit on their festering stinky old loans and "kick the can" forward for as long as possible instead of recognizing losses. This suggests to me that debt capital for worthwhile new investments, at rational prices will be stymied......not what our system needs right now to re-invent itself. Need I mention that the states are bust, the government is bust and there is no next big thing for the U.S. economy to leverage off of....carbon credit trading anyone??

Now that emotions are out of the way. Let's go to the tape. Stock charts are made by real investors with real money, crazy, deluded, smart as a fox or not. The equity market is an incredibly powerful capital raising machine when it is in gear and there is no doubt that that is in fact the case today. This morning the Wall Street Journal carried a quote from a bank executive saying "It's easy to raise capital now." We are seeing where all the TARP (and other liquidity programs worldwide) is starting to flow out of the banking system, into stocks and commodities. We must not ignore the power of "reflexivity", George Soros' concept, that markets often drive economic trends as opposed to the normally expected course of events.


The chart above is the Dow Jones Industrial Average getting ready to "go topside" in the immortal words of my friend Stan Weinstein. I have waxed poetic before about the importance of the 200 day moving average to markets and stocks (Where is The Stock Market Headed? 200 Day SMA). So suffice it to say, that when a stock or index is able to surmount it's 200 day moving average in convincing fashion, particularly if that moving average is no longer trending down strongly it is an important signal of future trading activity and for many students of technical analysis it is the only sign of the birth of a bull market. The logic being that if a market can sustain an upward bias for 200 days, it has had time to fully digest whatever news was making it go down, and vice versa. In other words time heals all wounds.

Now most technicians also want to see confirmation of a bull market turn in more than just one major market index. Dow Theory actually requires that the Dow Transports be in a bull market along with the Dow Jones Industrials. The idea here being that goods being manufactured should be improving, along with increases in goods being transported to market. Today many technicians look at the NASDAQ composite (COMP) and S&P 500 (SPX) confirming a move in the narrower Dow Jones Industrial Average. You can see that both the COMP and SPX here (View image) and here (View image) have already broken out. FYI the COMP is about to also get a technical afterburner signal called a golden cross, when the 50 day (shorter term) moving average powers above the 200 day moving average, potentially signaling that the NASDAQ is the way to play for upside at least short-term.

Last time I was premature to suggest that maybe things were not going to get much worse and the stock market could start to recover. Of course the stock market has already had a huge move off the bottom and frankly with the extensive damage to the economy that has taken place and dangerous changes to the capitalist system my outlook is pretty bleak. In fact I am going to work on a piece about the Misery index soon, a subject that is relevant when jobs are scarce and inflation is booming. But the stock market doesn't care about my outlook and contrary to my son's belief I am not all knowing and all seeing. I'm not telling anyone to go long stocks here, or suggesting that the best returns off the bottom have not already been earned. I am just saying that if the Dow Jones breaks out above its 200 day moving average on volume and doesn't immediately roll over and crash a couple hundred points, it's a new bull market. Like it or not, don't try to fight it. How long it lasts and how much of a return it produces I will leave up to the professionals. However, it will take a lot of unexpected bad news to turn it back into a bear. I still think there is lots of potential for unexpected bad news further out into the future, so I am a scale seller looking to redeploy capital into cheap, well positioned income producing property that others will be forced to liquidate because they paid too much for it and used too much leverage. I am much less bullish on residential property that will not pay you income while you wait, but a bull market is good for New York City residential real estate. You can quote me on that. Does it mean prices are going up? not necessarily anytime soon. Real estate cycles are notoriously slower than stock market cycles. Does it cushion remaining downside....yes. I will also be working on a piece on the employment outlook for Wall Street, which is another critical factor for New York City residential real estate which should be re-visited in light of the improving financial markets.

Insights from the NY City Bar

Posted by jeff

Tue Jun 2nd, 2009 02:20 PM

As Urban Digs readers may know, last night my partner Jim Gannon and I gave a course entitled Real Estate Valuation Basics for Legal Professionals at the New York City Bar. I was crass enough to advertise it on Urban Digs, because our initial sign up count was embarrassingly small. Whether it was the ever increasing reach of Urban Digs, or the efforts of the City Bar, we managed to coral over 50 attendees, with the mere attraction of continuing education credits and some coffee and snacks.

Fortunately neither Jim nor I tripped on a banana peel and fell off the stage. The very comfortable, one might even say posh new auditorium at the City Bar (no more miniature desks with fold up arms) was, for all its multi-media splendor (we were taped and webcast live, had the benefit of flat panel monitors throughout the room displaying our powerpoint and a remote control with laser pointer that worked) way too hot. The fact that no audience members were snoring discernibly during the three hour program, we take not only as testament to the compelling subject matter of our presentation, but more so the talents of our distinguished guest panelists. Color and life was brought to our somewhat dry class materials, by the presence on two discussion panels of:

Martin Levine MAI - Chairman of Metropolitan Valuation Associates
Marc Shapiro - attorney with Orrick, Herrington & Sutcliffe LLP
Roger Roisman - attorney with Tannenbaum Helpern Syracuse & Hirschtritt LLP
Lee Spiegelman - Split Rock Group, New York real estate financier, investor and manager.

Our first panel discussion was Characteristics of the Current New York City Real Estate Market. Marty Levine discussed the commercial appraisers' role as a reporter of market trends and the extreme difficulty in valuing properties when there are hardly any data points to report on. What data points there are may not be reflective of "normally motivated" sales or may not have had sufficient "market exposure" because in all likelihood someone selling a commercial property in this environment needs to rather than chooses to do so. Not a lot of new news came out in terms of market data. Commercial office rents and retail rents are believed to be down as much as 30%, with occupancy down significantly. However, one important observation was Marty Levine's comment that over-supply was not at all the issue in New York in the residential and multi-family rental market. The issue driving price declines is affordability (Marty felt that this was an issue for retail as well).


Due to the bubble in land prices in New York (that I have commented on numerous times in the past - NY City Land: Will High Prices Cure High Prices? ) and the high cost of building anything in the city, affordability was sacrificed. New York is still a supply constrained market with fairly high occupancy, despite occupancy having recently taken a hit from the economic downturn. Levine's conclusion was that New York City multi-family would inevitably bounce back, but from lower pricing levels. When asked what the hardest areas to appraise in New York City were, he pointed to frontier areas like the far west side where prices had run-up during the upturn, for neighborhoods that may not have really "made it" yet. The most difficult asset class to appraise these days, in Marty's opinion mixed use residential with retail. Another interesting note for commercial real estate aficionado's, industrial/manufacturing space seems to be holding up best of all asset classes due to the relative dearth of remaining space in and around Manhattan.

Marc Shapiro confided that the bulk of his business now relates to restructuring of distressed loans. While his experience has been primarily assisting lenders, he has also been working with some owners and sponsors. He revealed that owners in some cases are still in denial about their predicaments, but less so about the reality that they have no equity in their properties at current market prices....whatever current market really is. As an example of the odd congruence of both these positions he noted a project sponsor for whom he helped negotiate one of the best restructurings for a client he can remember. Marc had insisted on the client being totally transparent with all of the financial and construction/construction management information the sponsor had, counter to his client's instincts. The bank had responded with the following (incredible) offer.

The client was actually released from all personal guarantees for the loan, the bank agreed to fund completion of the project, the sponsor was given flexibility to negotiate discounts on unit sales and was even given 6% of every sales dollar as an entrepreneurial incentive to stay on and finish out the project. Upon concluding the deal the client confided, "I think I got screwed."

The idea that the bigger the project's financial predicament the more likely that the bank will bargain, seems to be persuasive. Everyone thinks they're Donald Trump, but according to Shapiro the banks are nonplussed as the line of Donald Trumps is quickly stretching down the block and around the corner. Shapiro's advice to his bank clients, make a deal now or sell the loan. You don't want to own assets, you are going to own more than you know what to do with in due time.

Agreeing with the idea that the bottom has not yet been seen and cannot be predicted, Marty Levine commented, "until a more normal financing environment returns you can't even talk about seeing a bottom."

Our second panel was entitled Case Study: The Broken Condominium Development, during which Lee Spiegelman of Split Rock Group discussed his evaluation of a note purchase from a bank on a broken condo development, which I am proud to say my firm Guild Partners brought to his attention. Lee started off by talking about his family's position going into this downturn. His family's real estate construction, management and ownership business, PLP Companies, has been active in New York City for many years and learned a few things about downcycles managing properties for Freddie Mac in the late 80s and early 90s. At the time, Lee was working on Wall Street where he was taught "When the ducks are quacking feed them" and feed them he did, disposing of many of his family's properties in the city from 2005 to 2007, when he saw financial players buying at multiples he just couldn't rationalize.

Lee believes that the current cycle may play out like the prior one, with a long workout and then basing period before prices appreciate again (and a future peak coming around 2023). But he believes that it is time to start looking for opportunities selectively, with the best values to be found now, in messier situations. He ran through the evaluation of the partially built condo's economics as a rental, including assumptions on rents, rent up time, stabilized vacancy and collection loss and operating expense ratios. His conclusion; a reasonable bid to the bank on this note was about 50 - 60% of the value of the construction loan. This demonstrates the significant downside between value as a condo and value as a rental, a spread which most likely will converge towards the downside.

Spiegleman voiced some skepticism that TARP, TALF, PIPP TARPII, Son of TARP and TARP Wars: The Return of TARP would do much to aid the healing process in commercial real estate. Roger Roisman agreed, reporting that his advice to developers he deals with is to dispose of problem projects now, because things will get worse before they get better. He discussed some of the disconnects caused by the fee driven environment of the earlier part of the decade and the divorce of underwriting from ownership. Roger also discussed the many complications around the unwinding of complex capital stacks utilized, even in mid-sized deals in recent years. In the case of a simple disposition by a bank of a busted condo development, the acts of selling the note or foreclosing will in many cases trigger rights of rescission, which allow any buyers in the building to get out of their contracts, most likely relegating the project to rental status. Struggles between mezz lenders, preferred equity players and first lien lenders to preserve value and their potential equity in the deal follow. If a bank sells a note, which triggers the rights of rescission they may be wiping out the preferred equity or mezz lender's only hope for preserving value....that's what I call messy. Roger also noted that instituional real estate investors in many cases were using leverage, not just at the deal level, but at the partnership level as well, creating some serious balance sheet issues. He noted that other institutions like REITs, which have access to the capital markets have greater flexibility to deal in these uncertain times. He expected Simon Properties for one to be on the prowl for retail center cast offs from other REITs and investors. Roger also touched on the idea that quality of location would be coming back into vogue. In the prior decade the rule book was thrown out with regard to where new condominium projects could be successful, like Marty Levine, he believes that prime neighborhoods will endure the downturn and attract new development better than frontier areas.

It was muggy affair temperature wise, but we received a warm reception from members of the bar, to whom we are grateful, and especially so to our panel members who provided the most interesting material of the evening.

Sick As A Dog

Posted by urbandigs

Tue Jun 2nd, 2009 12:41 PM

Sorry for lack of posting. Im sick as a dog over here, fever and all, and feel like sh*t. I was going to work on a piece describing the tick up in deals and the relation to equity market rally that seemed to boost confidence for buyers. Combine the first wave down to the comfort zone with a 12 week 40% rally in stocks, and buyers feel more comfortable pulling the trigger. I can't do the piece today because frankly, my head is all cloudy and Im not thinking straight. Anyway, I asked Toes to discuss her big time pickup in deals and where transactions seem to be taking place. She confirmed the high end nature of this slowdown with varying price adjustments based on price point. I am seeing the tick up too, in line with the pyramid range of adjustments I discussed before. When Q2 data is released, YES, expect a solid tick up from the frozen and very slow Q1. I just advise to use caution when using this tick up to declare a bottom or recovery for reasons I discussed here in detail in past weeks. You know brokers and media will see this report and go nutz with it! Will get back to writing when I feel better.