Condos More Clearly Showing Manhattan Real Estate Excess

Posted by urbandigs

Fri Jul 31st, 2009 12:22 PM

A: The condo market will more clearly show the pain/excess that this market experienced for obvious reasons. In a market like Manhattan where 70% of the housing stock is co-op, you don't expect there to be high levels of speculation that often marks the top of an asset bubble. After all, the island of Manhattan certainly didn't experience a development boom to the extent that say a Miami did. But we did see a development boom and we did see a credit and housing bubble deflate - in the end, no market was spared. So what is Manhattan in store for? Well for one, the basic structure of the majority of our housing stock will help to blanket the depth of pain that may be felt by those that purchased near peak and have lately become distressed sellers. Its impossible to quantify this real time so I really don't know how many sellers out there absolutely must move property, and fast. As you know, co-ops have a much more stringent process of approval that has since got even tougher. As a result, condominiums will likely show the sharper rate of decline as the first wave down fully reveals the excess this market experienced.

Co-ops differ from condos in legal structure, by-laws, and to whom the product may be right for. For example, an investor/speculator or even a buyer that intends to use leverage to buy as much house as they can afford is much better off buying a condo rather than shares in a corporation with a strict approval process and restrictive by-laws for use. In short, co-ops don't want too many investors in their building or buyers that don't meet financial guidelines set by the board. Coops can also reject without providing a reason. Condos do not have such restrictions and enjoy a 'waiver of right of first refusal' system that allows the board to either let the deal through or to be matched by the building and its reserve funds - usually that does not happen as the hit to the reserve fund will negatively impact the financial stability of the building.

These days, co-ops seem to be getting stricter in regards to:

a) the quality of the buyer that seeks to buy shares into the corporation
b) the quality of employment - all of a sudden working in the financial industry is a higher risk
c) quality of salary - too much reliance on past bonuses will be looked at negatively
d) price of the transaction - coop boards are beginning to monitor the price level of deals, especially deals done in the months of March and April that may have been influenced by fear or severe desperation. The building can reject a purchase application without providing a reason, so don't underestimate the boards willingness to 'act as the market' and attempt to set a price floor on deals they deem as too low that in their eyes would adversely affect shareholder value on future deals and refinances.

Back in March, at the height of the fear, I wrote about whether or not coop boards wold try to influence deals in my piece, "Price Flooring? Will Boards Try To Stop Price Discovery":

"I have been hearing stories lately about co-op boards rejecting purchase applications because they think the price is too low and may adversely affect future valuations for existing shareholders. I for one do not dismiss such rumors that quickly because of their source, past experience I have had with co-op boards, and colleagues of mine who I know and trust. Since the co-op board is comprised of, wait for it...., co-op shareholders, there is a vested interest in seeing price appreciation go through and avoiding what may be considered aggressive price deterioration because a shareholder must liquidate their shares.

My two cents? You can NOT place limitations on the open market - and that includes price flooring policies! If a seller is distressed, and must sell below a price floor, what will happen to shareholders' maintenance when the unit owner goes into default? It will rise, and that will negatively affect all shareholders and market value of all units with the now higher carrying charges. The co-op board has no business trying to control sales prices. The market will do what the market wants to do, and meddling with open market transactions to 'protect shareholder interests' will do more harm than good."
The very idea that coop boards 'act as the market' makes the hairs on my back stand up. Yet, you will see it happen and it is happening. The blanket of protection lies in the freedom of a private corporations elected board to reject without providing a reason. Your only recourse is if you can somehow prove that discrimination played a role in the rejection and that is a hard thing to achieve.

So, for condos the question is can the buyer secure a loan. For co-ops, the question(s) are can the buyer secure financing + will the buyer and the deal pass the board!

The reasons you will see sharper adjustments in the condo market, rather than the coop market, include:

1) Investor Friendly / Less Invasive / More Lenient Financing - condos trade at a premium to co-ops because of the investor friendly structure, less restrictive policies, ease of use, less invasive approval process, more lenient financing policies, and real property nature of the product. You own your apartment and not shares in a corporation with a proprietary lease to live in the unit. As a result there is a larger audience, what I refer to as 'buyer pool', that are interested in buying condos and can afford to buy condos with less money down and less money in the bank required. Condo transaction fees on the buy side are also quite higher than co-ops, especially when financing 80% or more. Higher values and higher transaction fees could mean what went up faster might also fall faster when buy side demand dries up as it did in Q42008 - Q12009.

When it comes to speculation, excess, use of leverage/debt to get in on the game, look no further than the condo market that was more exposed than restrictive co-ops at the height of the boom.

2) Development/Conversion Boom - the development/conversion boom is where you see the clearest signs of the euphoria reached at the height of the credit/housing bubble. The priciest deals in Manhattan, excluding prime existing co-op products on the best blocks, were for new developments and conversions that offered luxury products in a luxury setting. Paying $1,500/sft+ became normal in 2007 - especially for foreigners that just wanted IN on the party. It's hard to get that type of premium for a co-op unless it was on Madison/5th Avenue or Central Park West.

So, those who bought into new devs and conversions (especially investors/speculators looking for a quick buck as the market boomed) may have over-extended themselves and are seeing their equity deflate and their debts getting cumbersome. Combine individual distress with a pressured market and you will see sharp downward pressure on the final deal price if the market is allowed to act without outside interference. Because its a condo, the board can either let the deal through (assuming the buyer/pet is not a convicted felon) and waive the right of first refusal OR match the deal and dip into building funds to buy the property; and that usually will not happen! In short, condos offer buyers and sellers more freedom and flexibility and that in turn allows the product to be marketed to a wider buyer pool.

3) Nature of this Crisis - The excess was in the high end and the boom was marked by very expensive new developments and conversions. Peak buyers of these products that have to sell will find it hard not to take a significant hit as the buyer pool for $3M+ properties is no where near what it was 2 years ago.

4) No Outside Interference - Barring a very unusual situation, most condos deal will go through to closing as long as the buyer can secure financing as needed. The fact that there is no aggressive review by the board in terms of buyer quality and deal level means the data will more closely reflect the sharp wave down that we experienced

Look no further than some of the quarterly reports from our biggest brokerage firms to see this 'condo clarity' effect in action:





If I look at the Corcoran Luxury co-op data above, one may wonder if the market really is down only 8% compared to the same quarter in 2008; yet the 32% adjustment for condos more accurately reveals how the high end got hit. The Plaza unit that just sold for 40% below its original sponsor price (granted it was gifted to the New York-Presbyterian Fund and then resold) exemplifies the excess in the high end perfectly.

The high end / new dev boom artificially inflated the data on the upside and will likely artificially deflate the data on the downside as this cycle plays out. You will probably see another pressured report in Q3, only to tick up in Q4 when its released in JAN 2010 reflecting the lagging nature of our marketplace and the recent pricing OUT of fear that will ultimately show deals happening at 'less worse' levels than those earlier this year. Year over year analysis will continue to be pressured until we reach Q2 or Q3 2010 or so; which will be compared to reports that showed the biggest adjustments downward. Interesting times indeed.

Morning Shocker: So Ambac Really Wasn't AAA?

Posted by urbandigs

Wed Jul 29th, 2009 10:27 AM

A: Remember the days in early 2008 when Charlie Gasparino was on the air every day with the 'bond insurer' saga and whether or not they would get downgraded from their AAA rating! The insurers adamantly backed their AAA standing and the credit rating agencies were hesitant to downgrade them even though we all knew their portfolios were garbage and the claims made on them would be tremendous. MBIA Chief told us that insolvency risks were 'without merit'; MBIA trades at $4 today. UrbanDigs first discussed the bond insurers in 2007, why it was important if they were downgraded from AAA bullshit rating at that time, the saga that ensued in early 2008 and finally the affirmation of the AAA ratings for Ambac & MBIA in late February 2008 that was good for about 400 Dow points. Today we see Ambac get cut to Junk Status - out of sight, out of mind was in full force in early 2008 as we now see beyond the garbage that was dished out to all of us when the markets were on the verge of chaos.

The reason the bond insurer saga was so important was because if some of these guys failed and/or lost their AAA rating resulting in a big hit to capital raising plans and operations, the ripple effect in the financial system would have made the problem worse - at the time our banks were forced to take billions in write-downs and this would have made the problem worse. So what did we do? What we always do, affirm that all is OK at the time and then later reveal that it was all a bunch of crap. Since the markets are forward looking, it is easier to digest the news later when it no longer is the center of the media universe. Out of sight, out of mind, the way the markets like it.

Today's headline, "S&P Slashes Ambac to Junk on Expected Losses", no doubt is not news at all! Amazing isn't it:

"Bond insurer Ambac Financial Group (ABK: 0.78 -6.02%) this week estimated statutory impairment losses on credit derivatives for its Ambac Assurance segment rose by $1.6bn to a total $4.9bn in Q209. These losses, which the firm expects to report on August 5, are tied to collateralized debt obligations on asset-backed securities, the underlying collateral of which continues to decline in performance.

In light of its capital troubles and the declining quality of its insured books, Standard & Poor’s on late Tuesday slashed Ambac Assurance to double-C from triple-B, effectively lowering it to junk status.

“This rating action reflects our view of the significant deterioration in Ambac’s insured portfolio of nonprime residential mortgage-backed securities and related CDOs,” said S&P’s credit analyst David Veno in a statement. “This has required the company to strengthen reserves to account for higher projected claims.”
No shit! Folks, make no mistake about it, the ratings agencies played a crucial role in the credit boom gone bust wrapping AAA ratings on top of junk that was packaged and resold to investors around the world. Their ratings of the bond insurers was a complete farce, we all knew it, yet the truth would have rattled markets and put more pressure on the financials at a time when nobody wanted to admit how bad the problem really was. Its just one more example of how the old system worked and one more reason why it needs to be fixed.

The credit crisis we experienced developed from an amalgam of events, mainly:

a) deregulation - especially with regard to the use of leverage
b) fed mismanagement of interest rate policy
c) quantity vs quality securitization model that rewarded 'factory-like' behaviors with exorbitant fees - the 'originate + sell' model that didnt care about who got the junk MBS
d) a flawed ratings agency model that saw a conflict of interest and erroneous AAA ratings wrapped onto junk assets so they can be resold to the biggest investment pools
e) extreme loosening of lending standards / mortgage fraud - easy credit
f) explosion of exotic lending products designed with one thing in mind - allow the weakest buyer to be able to afford the most property possible
g) use of excess leverage up to 30:1 and at times 40:1; GSEs were levered even more
h) greed on a corporate and consumer level

...which all led to the disaster that we are now facing and the destruction of tremendous wealth both for the American people and our shadow banking system. Nobody wanted the party to end. This Ambac news today is not a shock and its not surprising. We knew it back in late 2007 and early 2008, yet nobody wanted to listen because of the negative ramifications that might have occurred.

This is why we must keep on asking questions and not just assume that what we are told is accurate and reliable. If we did, Countrywide would still be here today as the CEO told all of us in late 2007 that they would be profitable in Q1 of 2008. Instead, Mozilo is now being charged with fraud for failing to warn investors of the risks the company really faced. When will we learn that potential pressure on the markets should never compromise integrity, honesty, and the fiduciary responsibility of these executives to the shareholders of their company!

Valuing Manhattan Real Estate

Posted by urbandigs

Mon Jul 27th, 2009 09:24 AM

A: I often get asked how I approach my consulting for my buyer clients. I take it a bit differently than most brokers and like to take on the challenge of 'valuation/bidding strategy' over procurement of property - I find most of my buyers use me to find out what is really going on out there and where a particular product should trade if they are interested in bidding. Given the great strides in overcoming the lack of a MLS system here in Manhattan, consumers can now easily find the bulk of our inventory on their own using sites like or The Manhattan real estate market is a different animal than most markets outside our crazy little island here. It happens to be a very fast paced market with lots of variables affecting property value and a very diversified buyer pool. Because of the many variables that affect price, every broker has their own unique way of valuing Manhattan real estate. Here is my method.

First, you have to have an idea of where this market is trading right NOW as opposed to say 6-months ago. Keeping a mental history of where bids seem to be coming in as time goes on turns into a gut instinct on where the market seems to be today compared to say 3 months, 6 months, or 12 months ago. Believe it or not, most brokers I have dealt with seem to be behind the curve when it comes to what the markets are doing today. Its not their fault, its just that they focus more on conducting their business and servicing their clients than to have a macro and trading perspective on our marketplace; that is perfectly fine! For example, in mid 2008 a member of a top producing Elliman team once told me...'why would my client sell at a price that is below what he paid for it mid 2007, that wouldn't be smart of him?'. My client, who was a wall street veteran looked at me and gave me that familiar nod - as if to say, 'whatever, let your seller sit and wait for his price then'. The broker had no clue what was going on in the macro environment, wall street, the banking system, etc.. and probably could care less about anything other than conducting his business. You can't blame him for that, although the seller may have wanted to know what was likely brewing under the surface and advised accordingly.

Anyway, having an idea of where real time trades are occurring from peak levels is absolutely vital to consultations with my buyer clients. For me, its a constant challenge that I look forward to; I actually enjoy it! Knowing where you are in the grand scheme of things gives your clients a leg up to be ahead of the curve, not behind it.

Before you go further, it is important that I disclose that I look at when a contract has been signed and NOT when a listing closes. Its more important to me to see where the deal occurred when that contract was fully executed - closing may occur up to 2+ months later. The reasoning here is if you have a deal that was signed in AUG of 2008 yet closed in NOV 2008, analyzing based off the closing date may be misleading as this deal was signed BEFORE our market froze up in mid-September from Lehman's failure. So look at when the deal was signed, not closed, to determine how much down from peak the property should trade at! Thats another thing, this market has experienced a wave down in prices and understanding where your price point is trading down from peak, is kind of important!

Understanding that no formula is perfect and at any time a 'perfect' buyer may pop up with unlimited funds to bid with, here are the 3 main elements (changes in market conditions, renovation adjustments, light/view adjustments) that I focus on for valuating real estate in Manhattan:

1. MARKET CONDITIONS PREMIUM/DISCOUNT - How has the market changed today compared to past comparable sales and how does this affect valuation for a product my client wants to bid on? If you are bidding on APT 10A, chances are you will not have the luxury of a 9A sale a week ago to compare to. So, you must adjust and if you do, you must know what you are adjusting to.

Contrary to popular belief, I don't only look at the most recent sale to find a unit to use as a comparable for my analysis. Instead, I also like to find a SAME LINE sale or SAME ROOM sale that traded near peak to analyze and do a time adjustment. Some brokers will only look at sales in the past 4-6 months, not me. I have no problem looking at a very similar sale that traded near peak (say mid 2007) and then do an adjustment based on where this price point is trading down from peak today.

Since smaller units tend to trade at lower premiums than larger units, I like to compare apples to apples; for example, if a studio and 1BR were the last sales in the building and I need to analyze a Classic-6, Id rather go back a year or two and find a same line or another Classic-6 to use instead. I will just adjust for market conditions myself.

Breaking down by price point, I use the model range of discounts that I often quote here on UrbanDigs to consult for my clients. While finding a very recent same line sale is extremely useful, its usually not available to me. Lately I have been finding that deals signed before Lehman, say between MAR-AUG of 2008, were trading about 3-5% or so off of peak levels - it was only after Lehman that our market froze up and experienced that sharp move down.

I'll repeat the ranges based on price point that I currently use, now that Armageddon has seemed to be priced out of our market:

HIGH END ($5M+) - down aprox 25% - 40% from peak
HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
MID END ($1M - $2M) - down aprox 20% to 30% from peak
LOWER END (Under $1M) - down aprox 15% - 25% from peak

**While in the fear months, trades were occurring closer to the higher end of the above noted ranges, today it seems trades are occurring closer to the lower/middle end of these ranges. The markets way of pricing out fear.

- You cant just assume that every apartment is in the same condition. So, we need to determine the quality of the comparable sale and how that compares to the unit we are analyzing. In general, anything in the internal system listed at FAIR, GOOD, or EXCELLENT probably needs updating - with FAIR likely being a gut renovation needed. Only if it says MINT or NEW do I assume that the place was in fully renovated condition - pictures play a nice role here if they are available. I often find myself browsing to go back and check for myself the condition of the kitchens, bathrooms, floors, etc.. of units I determine useful for a comparable analysis. Since you cant just visit a past sold comparable that you are using, this is the next best thing.

Many people have different needs when it comes to renovations. Some buyers have no problem spending the bare minimum for a renovation, while others absolutely must have a kitchen that costs over $60,000 to update with high quality everything. For this analysis, you can't just make up numbers willingly to rationalize the property trading at a lower level. Instead, try to figure out how much money is needed to make the property in question comparable to a past sale worth analyzing.

3. LIGHT/VIEW PREMIUM/DISCOUNT (Per Floor Adjustment) - Tricky, and more art associated with this one. You must give a premium or a discount based on what floor the comparable being used was on in your analysis. If you are about to bid on 3A and you see that 22A sold a year ago, well then you have some adjustments to make.

The general rule of thumb that I use is about 10K-15K or so per floor for existing resales, but it gets a bit tricky because you need to use some art and the quality of the light/view for in this aspect of the valuation. You see, sometimes charming treetop views on the 3rd floor can be just as popular as open city views on the 10th floor that look over the mechanicals of neighboring rooftops - in which case a 105K premium for the 10th floor may not be warranted. Other times, the difference between the 6th floor and the 10th floor is the difference between looking at a building's rear fifteen feet away and having open city views. In this case, a 40K premium for the 10th floor may not be enough.

So you need to use some art here and figure out just how different is the light/view from one comparable to another. The bigger the difference, the higher the multiplier you should use. In Manhattan, buyers pay for flooded sunshine and park/river/city views. I would use a lower formula to compare the 3rd floor with say the 5th floor, in which both have similar views! When dealing with a property that has amazing views or is a dungeon, well you need to tweak the formula a bit to satisfy the demand of this picky yet willingly wealthy Manhattan buyer pool.

New developments tend to give a default 15K-25K premium per floor in asking prices, unless otherwise re-negotiated by the buyer prior to contract signing.

When using these 3 main elements, I usually come up with a nice range to anticipate where the unit being analyzed MAY trade at! I always provide ranges as nobody is perfect and markets are sometimes inefficient - after all, a perfect buyer with unlimited funds may show up at a sellers door anytime; although this happened more frequently in 2006 and 2007 then is happening now.

The items that play a lesser role include:

a) properly discounting first and second floor apartments that are generally harder to sell because buyers are concerned about security, noise, traffic walking by, etc..

b) layout; sometimes a layout can be a hard sell such as a railroad style apartment

c) monthly expenses; general range for f/t doorman building is $1.25/$170/sft or so given the additional same amenities offered from the building - anything above this range must be properly compromised for via a lower purchase price and anything above this range should get a slight premium due to affordability

You may wonder why LOCATION is not included. Well that is because I base my consulting on IN-BUILDING TRANSACTIONS where location is static! The key is to make the analysis as simple as possible without introducing more variables into the equation. In my opinion, using neighboring comps is one way of saying, 'I cant find any useful comps to support this purchase price in the same building that you are buying into'. In-building comps are the best, hands down, to use for a property analysis. I only use neighboring/similar comps if there is insufficient data on in-building comps to conduct an analysis - and when I do, you better find the closest property and the building with the most similar set of amenities offered. Once you start changing the variables your valuation technique will get more and more flawed. Even comparing one line of a building to another line of the same building can be argued as flawed because of the difference in layout, level of natural sunlight, and exposures/view that come from being in a different section of the building. I have seen buildings where the A-line trades at a significant discount to say the C-line simply because of the location of each line.

So there you have it, my summed up method for valuing Manhattan real estate. The part that can't be taught is the gut instinct that comes from viewing a property and seeing how it compares to hundreds of similar units I have seen over the past 5 years. That's the art of the valuation process.

A Record $115Bln Being Issued: Watch The Bond Markets

Posted by urbandigs

Sun Jul 26th, 2009 05:13 PM

A: Just talking out loud here. Now that the credit indicators have come in big time and it seems lending rates are once again following the bond markets, I would keep an eye on those markets this week; especially if you are considering a rate lock. The 10YR yield has quietly risen about 20 basis points in the past week, likely in response to two factors: anticipation of the upcoming record treasury issuance + a shift into stocks as the rally's momentum continues. As always, the markets have a way of equalizing themselves when one move gets a bit long in the tooth. We may have the makings of an interesting bond market week, similar to late May when fears over auction demand rattled the markets for a few weeks. Combine concerns over record supply with a strong move in equities recently, and you could see the setup that may lead to a repeat of that pattern.

Mortgage rates are tied to the price of mortgage bonds (read Dan Green's 'Where Do Mortgage Rates Come From?' for more on this) but more investors tend to look at the treasury market rather than what the FNMA 30-YR notes are doing intraday.

But when the treasury market sees a big move or intraday jolt from an auction gone bad, it could quickly affect the mortgage markets by sending rates higher and hurting consumers that are not locked and lenders that are committed but not hedged. It may also cause bottlenecks and slow the backlog of loan processing. On May 29th, The MortgageMan explained his wildly volatile week like this:

"This week might have been the most volatile period of time I've ever seen in the mortgage markets. Not only did I watch interest rates soar from 4.875% to roughly 6.25% in under 4 days, but I now find myself asking the billion dollar question: What's next?"

At that time, treasury issuance was enormous and the market overreacted on the concern. Next weeks $115Bln of planned auctions is even higher than that week! So yes, its worth keeping an eye on given the record treasury supply on tap.

Via Bloomberg, "U.S. 10-Year Note Falls Most in 7 Weeks as Record Supply Looms":
Treasuries declined, with 10-year notes falling the most in almost seven weeks, as stocks rose and the U.S. announced plans to sell a record $115 billion in notes in four auctions next week.

“The amount of supply needing to be sold still carries a lot of shock value,” said Eric Lascelles, chief economist and strategist at TD Securities Inc. in Toronto. “Throw the stock rally on top of that and you have a good argument for selling Treasuries.”

“Taking down supply hasn’t been an issue, but it is another $115 billion in paper,” said Charles Comiskey, head of U.S. Treasury trading in New York at primary dealer HSBC Securities USA Inc. “That’s a lot of paper, so the market will have to find the right yield.”
Watch how equities relate to the bond markets reaction to this supply. Will failed auctions rattle equities given the huge moves recently? Or, will the very short term trade/momentum remain intact as the play is to continue to sell treasuries + buy stocks until the market 'finds that right yield', as Charles Comiskey states. If that's the case, traders will be watching the bond market very closely to see when investors may flock back to the safety of now higher yielding government paper. Should equities be even higher at that point, you may see another shift out of stocks and into treasuries.

Harmonic how markets work sometimes as this was the exact case in late May to early June leading Mish to write about the "Mortgage Markets Locking Up": first sell treasuries and buy stocks and then when yield gets to where it needs to be, sell stocks and jump back into treasuries. This is not a prediction, just an observation that the setup may be there for this pattern to repeat itself.

On the flip side, should the auctions be oversubscribed you may easily see equities rally even further as a sign of confidence that the treasuries record need for money is resulting in no problem from the markets. Either way, its worth keeping your eyes pealed.

UD Charts Error

Posted by urbandigs

Sat Jul 25th, 2009 10:02 AM

The 1-MONTH Chart tool is not working properly. The 3-MTH & 6-MTH (the buttons for these time range chart options are right above the chart itself) are working. I apologize for the error.

At this point, it doesn't pay for me to re-fix my current system although I will try to get the 1-MTH tool working again by end of next week. Instead, an entirely new system will be designed. For now, please use the widget on the right side of UrbanDigs pages for real time information on the 4 datasets I carry: INVENTORY, CONTRACTS SIGNED, PRICE CUTS, & NEW LISTINGS for daily, weekly, and monthly updates.


I hate the design/usability of my current charting system as most people don't even know where the tabs are to switch the chart from say Total Inventory to Contracts Signed. Well, look at the image above and you will see where the tabs are on the Charts Webpage to switch what dataset you want to analyze; again, the default 1-MTH tool is not working and showing an 'undefined' error, so change the time range via the links directly above the chart itself. Change to this system is a coming!

Out of Sight - Out of Mind: The Way The Markets Like It

Posted by urbandigs

Fri Jul 24th, 2009 09:22 AM

A: Have you ever noticed that the markets sometimes act with the instincts of a 6-month old baby? For the longest time I have waited for the markets to reflect some sign of 'object permanence'. The stock markets are an irrational near term discounting mechanism that continuously prices 'in' and prices 'out' the perceived value of any one company's future growth prospects - that's one way I look at the markets, and a definition you probably won't see in any book. The key to this mechanism is the availability of information at hand regarding business conditions, earnings potential, clarity, confidence, and willingness to accept what is out of sight (i.e. takeover potential, hiding losses, accounting tactics, etc). The market generally is not very good at getting right this out of sight acceptance thing. Enron's offshore entities that hid losses and Worldcom's inflated accounting entries are two examples of companies that the markets first completely overlooked what was hiding out of sight - only to later find out and crush investors as the scandal is revealed. How does this happen over and over again? Because executives whose fiduciary responsibility is to the shareholders know all to well that it is easier for markets to accept the damaging information 'later', rather than 'sooner'. Maintain/increase confidence, and the stock will rise.

Here are the most common examples of how our 'out of sight, out of mind' system works:

object-perm.jpg1) Economic Data - ever notice how the BLS issues 'negative revisions' to nonfarm payroll unemployment statistics almost every month? How could this be? How could they tell us for 9 straight months, AUG 2008 - APRIL 2009, that the data is 'x' yet one month later announce that the previously reported data was really 'x minus y'. How do they get away with it? Well, if they announced the real bad data at first, the markets may not like that - as markets move based on analyst estimates! Its easier to report better data today, and revise it lower later on. The reason is because markets look AHEAD, not behind, and as a future discounting mechanism it is easier to accept negative data when it was revised lower for a date that has already came and went!

Via Floyd Norris at NY Times:

Robert Barbera, the chief economist of ITG, points out a more disturbing trend: The Labor Department keeps concluding that its initial estimates were too optimistic. Here are the total job losses reported for recent months, as originally reported and as shown in the latest revisions.

August 2008: Initially 84,000, revised to 175,000

September 2008: Initially 159,000, revised to 321,000

October 2008: Initially 240,000, revised to 380,000

November 2008: Initially 533,000, revised to 597,000

December 2008: Initially 524,000, revised to 681,000

January 2009: Initially 598,000, revised to 655,000

February 2009: Initially 651,000, as released today.

On average, from August through January, the first estimate was too optimistic by 112,000 jobs.
Ill update this further via the

JAN - revised again to -741,000
FEB - revised down to -681,000
MAR - revised down to -652,000
APR - revised down to -519,000

May/June are preliminary and yet to be revised. Out of sight, out of mind! Yet markets continue to move on BLS data releases, mostly in a positive way on signs of deceleration of job losses. As the truth comes out later, who cares what happened in the past because the markets are forward-looking! Don't even get me started on the birth/death model that has miraculously added 1,348,000 jobs to our nonfarm payroll stats since April of 2008; source here at!

Now, I hear what your saying: the agency doesn't have all the data yet and has every right to fine tune reports in the future when more information is collected. Fine, so why is the bias always to the positive side? Why don't we see a pattern of worse than expected data released today, that is later revised downward a month later? I think we all know the answer to this one!

2) Off-Balance Sheet Vehicles - when you hear terms like 'SPVs', 'QSPEs', 'VIEs' and 'SIVs', you get a bit cautious because you know the banks are using these vehicles to park deteriorating/mismarked assets off their balance sheet. The hope is that out of sight, out of mind will kick in and create the illusion that the company is strong. While Enron got caught setting up offshore entities with different tax codes and methods of hiding losses, the goal was the same - out of sight, out of mind and maybe the market wont care. Confidence is restored, the stock goes up.

Now we have a situation where banks are using special purpose vehicles (SPVs) and structured investment vehicles (SIVs, ironically invented by Citigroup in 1988 - Citi reportedly had over $1trln parked in off balance vehicles). Why would they do that? What would these assets do to their balance sheet if they were on the balance sheet? Would the bank capital ratios need to be recomputed? Would writedowns have to be taken? Would confidence in the company erode? Would the stock price fall?

John Carney reports:
"The SIVs were off-balance sheet entities that owned long term debt and were funded with short-term debt. It's very possible that instead of buying credit default swaps on its mortgage backed securities, Citi was just selling them to the SIVs it managed. Since these were off-balance sheet, Citi wouldn't have faced the capital requirement constraints that often prompted other banks to buy credit default swaps. Citi could lend and securitize, then sell off any extra inventory into its own SIVs, freeing up the capital it got from the SIV to make more loans. Lather, rinse, repeat."
Now FASB is growing a pair of cahones, as Karl Denninger points out:
Citi isn't the only one, as BAC is estimated to have $150Bln in off-balance sheet assets that will have to come on by Q1 2010. Now the FASB says it may expand the use of fair-market values on corporate income statements and balance sheets in ways it never has before. Even loans would have to be carried on the balance sheet at fair value, under a preliminary decision reached July 15. The board might decide whether to issue a formal proposal on the matter as soon as next month. The scope of the FASB’s initiative, which has received almost no attention in the press, is massive. All financial assets would have to be recorded at fair value on the balance sheet each quarter, under the board’s tentative plan.

This would mean an end to asset classifications such as held for investment, held to maturity and held for sale, along with their differing balance-sheet treatments. Most loans, for example, probably would be presented on the balance sheet at cost, with a line item below showing accumulated change in fair value, and then a net fair-value figure below that. For lenders, rule changes could mean faster recognition of loan losses, resulting in lower earnings and book values.
The accounting gimmickry used to compliment the fed's engineering of a bank recapitalization period may be near an end. Yet for the markets today and for the performance of bank stocks over the past 4 months, this reality is still out of sight and out of mind - they way shareholders like it until reality reveals itself later on.

3) Estimated Global Credit Losses - an easy one. Start out with low estimates, gradually increase them, and hold off for as long as possible on disclosing an estimate that may rattle markets. If you revise your loss estimates higher with time, the negative impact will be muted and the hope is that the markets completely overlook the most recent revisions because of a change in psychology on the short term nature of the markets.

IMF is the latest example here and the latest update was an upward revision to estimates for global credit losses from initially $1Trln, then to $2.2Trln, and finally the most recent update to a staggering $4.1Trln. If its raised again, Im sure nobody will care anymore unless object permanence is learned by the markets. But if they came out originally and said $4.1Trln, rest assured, markets would have reacted way more dramatically at that time.

Feel free to add more datasets or instances where we seem to kick the can down the road, to worry about the real data later on rather than today. The purpose of this post is not to scare, not to offer doom & gloom (in fact, Ive noted many times since NOV 2008 how less bearish I have been since this process started), but to keep it real and to be cognizant of what was done to keep us out of a much more severe situation - especially in regards to the banks and their M2M/Off-Balance sheet accounting tactics. Just because they are out of sight, doesn't necessarily mean they are out of mind. By the way, has anyone checked in on the GSEs lately? Since being put into conservatorship, we don't really hear much about them or the total losses they may accumulate for taxpayers. Yet, the 23% gain taxpayers received from GS warrants gets full attention! Kind of mis-represents the bigger picture if you ask me.

Every Upturn Starts With Restocking

Posted by jeff

Wed Jul 22nd, 2009 07:20 PM

Runway.jpgAs I survey the destruction that this downturn has wrought, I continue to wonder about the timing and shape of any upturn. I know many of our readers will say, get real! It's already under way, while many others would vociferously argue that we are merely seeing a dead cat bounce (Wall Street lingo for even a drowning man can bob his head above the water a couple of times before going to Davie Jones locker), with the truly cataclysmic impacts of our over-indebtedness and failed policies yet to come.

Earlier this week the Conference Board's leading economic indicators (LEI) were reported. The index rose 0.7 percent, vs. economists' expectations of 0.4 percent. Economist Josh Shapiro at research house MFR Inc. put it well when he was quoted on CBS Marketwatch saying "We're now getting data which points to stabilization, the overall signal they're sending is the slide in economic activity is poised to end. The jury is still very much out in terms of what happens after that."

Interestingly, as this corporate reporting season progresses I am seeing the impact of the reversal of the CNN effect that occurred last fall. Since the world has not ended, and some amount of consumption, maintenance, repairs, etc. is being done in the economy, supplies, parts and inventories that have been drawn down are having to be replaced. This is being evidenced by data points like:

  • Intel beating their expected earnings and raising their guidance

  • Nokia claiming they were constrained on their ability to deliver some of their high-end phones due to spot shortages of leading-edge chips

  • Steel supplier AK Steel reporting that they expect automakers to increase their build rates by 50 - 60% in the second half of this year

  • Nabors Industries calling a bottom to the U.S. oil/gas drilling slowdown

  • Now all of these "positive" data points or green shoots are really just evidence of a snap back from unsustainably low economic activity; however, every upturn starts with an inflection point and it usually involves inventory re-stocking. What is actually shocking to me is how many companies were able to absorb 15, 20 or 30 percent hits to their top lines and remain profitable during this collapse. This is a testament to the management prowess of U.S. companies and how well they have used information technology, lean principles, flexible manufacturing and supply chains to create resilient business models.

    The markets are finally showing resilience as well. So far the green shoots have not been mowed down by California moving to pay its obligations in IOUs, or CIT Group being allowed to go potentially belly up. I would contend that either of these scenarios would have caused a major bad hair day for the markets a few months back. Indeed, after a little fake out correction move, which was actually incredibly mild considering the historically large rally off the bottom, the market indices are all moving higher, exceeding their 50- and 200-day moving averages. In fact the 200-day moving average lines are now close to hooking up and turning outright bullish.

    Does this mean that it's onward and upward for the stock market? Does it mean that it's onward and upward for the economy? While there are no guarantees in life or the markets, I believe that the necessary, though possibly not sufficient factors are in place.

    So you say, Jeff, the banking system is still in tatters! To which I say, it is, but for now there are sufficient excess reserves to absorb the rather minor loss taking the regulators are in the mood to force. Meanwhile, the Fed is forcing a steep yield curve, while paying interest on reserves, thus giving mouth-to-mouth resuscitation to bank profits.

    What about the government? They're bust also! I can't argue this point either, but our primary lenders - Japan, China and now the American public - are apparently still willing to support our growing debt burden in hopes of saving their own economies and their savings, which have unfortunately been stashed in Govvies and other dollar-denominated assets.

    What kind of economic growth do you expect coming out of this anyway? This is perhaps the most important question to be pondered. Back in the day when I was a Wall Street analyst (I am back doing some consulting for an equities shop, which I will admit is definitely coloring my opinions some), I always believed that it was the areas that no one was looking at or where there wasn't very good data that caused the biggest upside and downside surprises. Exports%20to%20Asia.jpgUrban Digs readers know that it's a second derivative world and surprises drive everything.

    Way back then I remember being really interested in Japan's move off of DOS to Windows and the explosive growth in the Japanese PC market, which no one seemed to be noticing. Later, after the tech bubble burst, I was sure growth from China would eventually be the biggest "surprise" because it was so hard to get good numbers on. So today I wonder, where are the good sources of surprise in economic growth? I certainly think that growth in Africa and Latin America could be a surprise and that the agricultural complex is an area to watch closely, because incomes and diets are improving in the emerging markets and they have come through this storm better than the "old world," suggesting that their demand for food and ability to pay for it will continue to grow. As a result, economic growth in the U.S. bread basket is apt to surprise. So too the U.S. energy business, where new shale gas and oil plays are coming on and driving economic growth in out-of-the-way places like eastern Pennsylvania and central New York (Marcellus Shale). One of the sources of upside in the economy that folks may not be giving enough credit to are exports.

    As is visible from the chart above left, which I borrowed from last weekend's BusinessWeek, U.S. exports are already getting a lift from China and the Pac Rim's resurgence and the weaker dollar. I won't belabor the point, but Barron's did a great article last weekend about how slowing imports (due to Americans' declining consumption) and increasing exports would narrow the trade deficit with a salutory effect on GDP figures. Will 3% GDP growth driven by belt tightening and increased exports save us from a jobless funk? I'm not too confident about that, but we are going to get some runway at least to see whether American ingenuity can once again rise to a challenge and allow us to re-create ourselves for a new millenium.

    3-Month Reflections: Those That Wanted To Buy, Did....

    Posted by urbandigs

    Mon Jul 20th, 2009 09:37 AM

    A: I think its safe to say that the 'pent up' demand from the brutally slow Q4 2008 - Q1 2009, re-entered this market over the past 8-12 weeks and made their purchases. Many brokers I speak to are telling me that their most motivated clients already signed deals and now its feeling a bit more like summer again - as in, the change in the past few weeks that is typical of the transition to seasonally slower summer months. Make no mistake about it, I think the pent up demand for the most part pulled the trigger over the course of the past 12 weeks. This is very clear when looking at 'inventory' and 'contracts signed' trends since early May or so. In fact, the action over the past 2-3 months was more typical of the bubbly 2007 levels; as I'll get into below w/ contracts signed data. But for those that come here for real time conditions, combined with a little gut feeling, my opinion is that the wave of activity has peaked and that we are now slowing down the way it usually does for summers in Manhattan. Take the buy side motivation and general activity down a notch or two from where it was in May and June and adjust expectations on both sides of the market. This observation/opinion should not be a surprise to anybody and reflects the seasonal nature of this market.

    When I look at my internal systems, I see there were about 2,120 contracts signed in the past 8 weeks or so dating back to the last week in May for Manhattan co-ops and condos - two weeks ago I checked this same data trend and it was closer to 2,350 when comparing the last 4 weeks to the 4 weeks prior, so you can confidently say that the bulk of the activity was in May and that it is now being timed out of the recent data trends. If you look at my ticker for 30-DAY contracts signed, it is just under a thousand. However, I rely more heavily on the internal sharing systems when it comes to contracts signed data - as the source is direct with the agent that is maintaining the listing and when a contract is signed, usually the broker doesn't want to deal with 'other co-brokers' anymore!

    Looking back at the past 8 weeks (limited by data I have available to me), 2,120 contracts signed is quite a lot! Its as if we saw peak-type levels of activity in the past 8-12 weeks or so with the first wave down in prices for our market. Talk about buyers coming in! But I don't think the 'fierceness' of this action is sustainable and the past 2-3 weeks already seems to me to be more like summer - slower buy side requests and motivation to pull trigger down a notch or so. Lets just be real, if this pace of action were to sustain itself, that is an average of about 1,060 contracts signed per month putting us on pace for over 12,700 contracts to be signed for all of 2009 - a level that was achieved at the height of the credit boom in 2007 for Manhattan. Trust me that is not going to happen! The spurt was due to a combination of factors that I discussed before and is our markets way of equalizing itself after a sharp drop in prices and a subsequent shift from Armageddon to well, something brighter. We are at now now. The perma-bears expecting a one shot move down 50% were wrong and the perma-bulls that promised sideline buyers/foreigners would never let this market down were wrong.

    This dropoff in activity is a normal thing and these are observations that I, Noah, one man in a big industry, currently sees out there right now. Manhattan is a seasonal market and we are normally slow during the summer. Adjust accordingly if you are a seller that must sell and are noticing a tick down in traffic from say 6-8 weeks ago.

    Looking ahead at what this spurt of action will do to future reports, you should see a tick UP in sales activity (especially as the prior quarter saw the 50% plunge in activity so the future quarter will easily look way more positive in comparison), contracts signed, and perhaps even deal levels from quarter to quarter as this market seemed to price OUT Armageddon - so the bulls, brokers, and execs will likely have some supportive quarter-to-quarter data coming to build bottom call arguments in Q3 or Q4 in comparison to Q1's ugly discoveries. For me, I need to see fundamentals improve before jumping on that ship; so Ill remain considerably less bearish than I was only 18 months ago now that process has started, yet still cautious that the economy and likely our market may have another wave to deal with.

    Breaking down the activity, most of the deals were for 1BR and 2BR properties, with 3BR properties seeing a nice tick up in action as well. The biggest driving force? Cheaper prices, hands down.

    Like I said, I feel that most of the people that wanted to buy, did. So where does that leave us now looking ahead? Well, that's the story. You cant look ahead by peeking into the rear view mirror, which is what you would be doing if you look back at the past action to try to predict future activity. So, I think we have a period of normalcy ahead, seasonality if you will, where this market will naturally slow down a bit until after Labor Day or so. I would expect:

    a) contracts signed going forward to drop from past monthly levels - not quite as low as Q1 but not quite as high as Q2
    b) new listings hitting the market to slow down a bit as sellers wait for seasonally more active months to maximize profit potential
    c) properties to be taken off the market for various reasons if seller couldn't sell and doesn't have to
    d) listing inventory to muddle, if not, rise a bit with the slowdown in action that is typical for this time of year

    The wild card is equity markets affect on confidence and how that may make some view our markets - especially the higher end that got hit the most. This stock market is reflecting a stimulus induced recovery that who knows how long can last - the amount of stimulus is unprecedented. Its very likely we see the effects of stimulus on economic data in 2nd half - perhaps further boosting confidence. The loop can feed on itself and that may lead to higher stock prices and higher confidence for businesses. My fear is that stimulus induced economic recoveries are usually both not sustainable and not without its unintended consequences from financing them. For now, people just want the reflation party to roll on and stocks to rise making everyone feel a bit wealthier. After what we just went through, can you blame them? Party on Wayne, party on Garth!

    CIT Deteriorated Too Far / Fed Changes UE Forecast

    Posted by urbandigs

    Wed Jul 15th, 2009 06:09 PM

    A: Wild day today. On one hand you have INTEL beating estimates and giving upside guidance and on the other you have the fed upping growth and unemployment expectations. But then you have the CIT situation, that most people thought would be resolved via a government bailout - I mean, why would they do anything stupid enough like let this firm fail after all the work they did to get confidence and stocks up right? The latest news is that the situation may have deteriorated too far, making any government aid ineffective. CIT is a big lender to nearly a million small to medium sized businesses - especially retail outlets, so the exposure has a big concentration of commercial loans. Now that CIT's issue are front & center and government aid is being discussed, the question is can the company raise the capital it needs to continue operations? If the gov't says no, well, we may have another test for the markets to go through.

    Small and medium sized bussineses are feeling the crunch big time, as consumers buckle down, save more, and try to repair damaged balance sheets. Among other toxic holdings, CIT is dealing with heavy losses as a result of their loans to these businesses.

    Via Reuters, "US officials fear CIT situation has worsened":

    U.S. officials are still exploring providing government assistance to CIT Group, but are increasingly concerned that conditions at the lender have deteriorated too far, according to a source familiar with government talks.

    The source said Treasury Department officials are concerned that CIT's liquidity crunch has worsened over the past few days and that government aid would not effectively put the lender on a path to recovery. A resolution for the lender's liquidity problems is expected in the next 24 hours and could end in a bankruptcy filing, the source said, speaking anonymously because the situation is still fluid.

    CIT, a lender to thousands of small businesses, has said it is in round-the-clock talks with regulators about how to improve liquidity after billions of dollars in losses have severely limited its ability to raise money.
    This is quite an interesting test for the markets given the euphoria of late on better than expected earnings and positive fed remarks. Credit has come in big time, and most indicators are now at their best levels since before Lehman failed. How may this change if CIT fails? Will it have any type of domino effect on other medium size shops? How will it affect lending to small/medium businesses in the near future right as stocks start to price in recovery?

    Then you have the fed who only a few months ago, reassured all of us through their wonderful bank stress tests that included a baseline and an advserse scenario so we can prepare for the worst case situations! But what happens when the fed, who was so strongly relied upon for today's growth uppage and stock rally, ends up shooting down their own 'worst case' scenario for unemployment by years end only a few months later? Isn't that amazing, the fed comes out and raises guidance for growth yet no one looks at the fact that the fed basically dissed their own ADVERSE UNEMPLOYMENT EXPECTATIONS for 2009, that they released for the bank stress tests! Imagine that, the bank stress tests that had an adverse scenario where the fed predicted UE rate of around 9.6% by Q4 of 2009, is now upped to an expectation of over 10% by years end! The markets looked the other way.

    Via Yahoo, "US: unemployment will top 10 percent this year":
    The upgrade -- which helped major stock indicators jump about 3 percent and the Dow Jones industrial average to add 256 points -- comes from the expectation that the economy's downhill slide in the first half of 2009 wasn't as bad as previously thought.

    Against that backdrop, the Fed's forecast for unemployment this year worsened. The central bank predicted the jobless rate could rise as high as 10.1 percent, compared with the previous forecast of 9.6 percent.
    For a glimpse into the fed's stress test adverse scenarios, click here. I guess its great that you can install confidence in one report, and then later revise it higher with no negative ramifications. What a world! Back to CIT.

    I believe CIT has assets around $70Bln, so its not a too big to fail holding company that will cause a systemic banking failure if it goes down. They already tapped the TARP for about $2.3Bln. But, CITs failure could disrupt the credit markets a bit and put a damper on recovery hopes if competitors can't pick up the slack in the market that CIT lent to.

    Barry Ritholtz chimed in on Monday:
    “CIT Group Inc., the century-old lender that hasn’t been able to persuade the government to back its debt sales, says its demise would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers.

    A collapse would ripple across the “small and medium-sized businesses who rely on CIT to operate — to pay their vendors, ship goods to their customers and make their payroll,” the New York-based lender said in internal documents obtained by Bloomberg News that make the case for its importance to the U.S. economy. CIT spokesman Curt Ritter declined to comment on the documents.”

    BR: Bailing out CIT will make a mockery of “systemic risk” — as if it wasn’t already subjected to humiliating abuse as an economic concept.
    I kind of agree but got to the point where I dont see this administration letting any somewhat big company fail that may derail efforts taken so far. That would introduce an element of free markets that doesn't jive with the religion of rigging and market engineering - which it seems we are in right now to get out of this mess.

    Few Real-Time Thoughts / New Contact Info

    Posted by urbandigs

    Wed Jul 15th, 2009 11:31 AM

    A: For those trying to contact me, please email me at noah + '@' + I am no longer associated with Halstead Property. Posts will be light for a few weeks as I take care of some business on my end here for UrbanDigs Analytics & Consulting.

    For what its worth I will give you a few thoughts on Manhattan's current market before I focus my time on UD 2.0. Please know that you can not day trade Manhattan real estate - so buy for the right reasons, for the longer term, and with your happiness in mind. If you are an investor looking to rent out your unit for an immediate profit, don't get too excited. Even though Manhattan real estate just went through a sharp wave down in prices and hit the first comfort zone, rents have fallen as well. Unless you plan to put a significant amount of money down, I would not expect investors to be cash flow positive immediately after the purchase. For most of the credit boom, and for as long as I have been following this market (owned and rented out unit for 2003-2004), condos have demanded a premium over coops making it difficult to buy and rent for a profit right away. But deals are ALWAYS to be had so if you did buy and rent for a profit since Day 1, you did great!

    When I first rented out my unit I had a shortage spread adjustment in my monthly payment that was quite a shock - as a result the rental income for the first year covered about 85% of my now higher overall costs. I did raise the rental price when I got new tenants the following year. After that I knew I wanted to sell so I moved back into the unit to satisfy the 2/5 year primary residence tax qualification for capital gains exemption on resale. My last tenant paid a monthly rental price that was about 7% below my total cost of carrying the property. I figured if I continued to rent for another year, I would be at breakeven.

    For speculators looking to buy and rent, just understand the changes in the rental markets that occurred with this slowdown - I am no expert on Manhattan's rental markets. I believe rents to be down about 15-20% from peak levels across the board. But who knows what landlords are agreeing to real time these days - if you know, speak up!

    For those curious about Manhattan real time conditions, as in what is going on today and not a few weeks ago, from my own business and from talks with many colleagues I would say the following with a good degree of confidence:





    Zombie Hotels - Night Falls

    Posted by jeff

    Mon Jul 13th, 2009 06:27 PM recently published some quotes from a seminar they held in early June on the hospitality market. The outlook voiced was sobering to say the least. Richard Warnick of the eponymous Warnick + Co., a hospitality advisory company, said "Up until this point in time, most of the defaults have been technical defaults. We're now moving rapidly into significant monetary defaults on loans. The question is whether lenders take those properties back or try to work with borrowers."

    According to a article from yesterday, "Last month, 13 hotel loans totaling $596 million defaulted. These included the $190-million Pointe South Mountain Resort in Phoenix, the $117-million Loews Lake Las Vegas in Las Vegas, and the $100-million Dream Hotel located in New York City."

    Now, Urban Digs readers know that the New York City Hotel market is one of the strongest in the country, if not the world, in terms of occupancy (New York City Hotels Going From Foist to Woist). However, you also know that even very tight markets can suffer in a demand recession, and it doesn't help if a bunch of new supply is coming to market as it is in New York City (Hotel Hell - The Zombies Cometh). I thought I would give a little update on the New York City lodging market, since the last time we checked in (chuckle-inducing word play intended) back in March. At the time my outlook was negative and I believed that industry estimates for the New York City market would have to come down.

    Lest I give the impression that New York City languishes alone in its lodging lethargy (alliteration added for emphasis) business in the U.S. overall has fallen out of bed. Recently, Smith Travel (STR), which had been among the more optimistic seers in their predictions for lodging fundamentals, significantly cut their forecasts for the U.S. industry overall. STR now predicts that RevPAR (Revenue Per Available Room - a combination of rate and occupancy) will decline 17.1% in 2009, versus a previous estimate of a 9.8% decline.

    I recently checked in with John Fox at PKF Consulting, who follows the New York City lodging market for his firm. According to PKF's current forecast, New York City RevPAR will decline 30.8% in 2009 (versus a prior estimate of down 26% in March). Now let me walk you through the financial implications of such a decline in top line for the brand new hotels in New York City that have been delivered over the last couple of years. Hotels generate net operating income margins (Revenue less all operating expenses and FF&E reserves, but before financing costs) of 25% to 40% depending on the level of service they provide. Higher end hotels, with all their amenities and services, carry higher expenses and lower margins, although their sales per square foot can be phenomenal. New York City Hotels probably tended to the higher end of this spectrum, if not exceeding it, due to their very high occupancy rates. (New York hotels are running as much as 25 percentage points higher than the rest of the U.S., where hotels were achieving a pitiable 57.7% occupancy as of last week). I would note, however, that at the same time, due to the prior extreme tightness of the New York City market and hoteliers' success in pushing up rates, the decline in rates in New York has been much more severe than in other markets. According to PKF, in May 2009 (most recent data) rates were down about 30% year to year in New York City; in comparison STR reported the nationwide rate decline in May to be 9.8% year to year.

    Now hotel expenses have a considerable fixed cost element, despite the fact that some are literally shutting down floors so they don't have to clean them, while others simply bring forward normal maintenance or upgrade cycles to achieve the same reduction in capacity/expense. As a result of the lower revenue applied over an only slightly reduced expense base, a 30% decline in revenue can easily translate into a 50% decline in operating income (used to service debt). There is one saving grace, however, hotels, due to their reputation for volatility in operating results, were not financed at nearly the egregious leverage levels at which other real estate assets were in the past cycle. Lodging properties were more often leveraged at the merely imprudent 65% to 70% level as opposed to any higher. So let's take a not so fictional 100- room hotel financed with $44 million from a European bank (name witheld to protect depositors), or $442,000 per room. (Please note that despite the small number of iconic hotel sales in New York City at over $800,000 per key, very few hotels have ever sold in the market for more than $500,000 per key). The debt service by my reckoning would be almost $4 million annually on a 30-year perm loan issued at a great rate. If said hotel ran at an average $350 per night room rate and 90% occupancy (peak New York City type numbers) the hotel would generate $11.5 million or so in annual revenue and potentially $5 million in annual operating income. Cut to 2009, and room rates down 20% plus, with occupancy off 7 points or so. Revenue declines to around $8 million and with margins being cut from 45% to say 30%, net operating income declines to around $2.5 million per year, give or take. You can see where I'm going with regard to servicing the $44 million in debt......fogeddaboutit!

    According to Fox of PKF, they see RevPAR in New York City declining 1.2% again in 2010, with the first increase in RevPar not coming until Q2 2011. Because although demand should start to rise in mid-2010, there are still 10,000 rooms expected to come on in New York in 2009 and 2010. Yup, that train has already left the station. Fox reminds that Q3 is seasonally weak for the New York City market and may be the time when we start to see the recent default by The Dream joined by some additional nightmares. Will bankers work with borrowers? I don't know, but it would be quite comical to see a few carrying bags out to taxis.....Oh Bellhop!

    Data Widget Error

    Posted by urbandigs

    Mon Jul 13th, 2009 09:53 AM

    Sorry for the error guys, I am on this and waiting to find out what the error is so we can fix. We will get information from missed days and re-enter so charting system ultimately is corrected with the right data.

    Breaking Down The Manhattan Tiered Price Adjustment

    Posted by urbandigs

    Fri Jul 10th, 2009 12:47 PM

    A: This market really is the fastest, and most enjoyable market to work in; so lets have some fun with today's look back on what we just went through. Over the past 10 years, Manhattan has been averaging about 7,500 - 8,500 transactions a year or so; excluding the 13,000+ transactions in 2007 which marked the peak of the credit bubble. But over the past 3 quarters, this market has seen some extraordinary moves that is worth reflecting on for a moment. In short, the market went from sustaining near-peak trades all the way up to the Fall of 2008 --> to, freezing up completely with a huge plunge in sales activity --> to, a fear based market with sellers hitting low bids --> to a market that saw increased activity and priced out fear and Armageddon. All of this happened in the past 9 months or so and it was crazy, frustrating, and exhausting all at the same time. Lets break down how it happened.

    It's all about buy side confidence and sell side motivation/desperation. Combine the two and you have a market, or lack thereof with a disconnect between the two parties needed to do a transaction. The buyer-seller disconnect was in full force in 4th quarter of 2008 after Lehman failed, and continued until about the end of March - then something happened. As the equity rally continued from the March lows, contracts started to be signed and activity accelerated as the rally continued - boosting confidence amongst buyers who were more than comfortable to put money to work at significant discounts from only 18 months earlier. This is an observation of our marketplace since April or so.

    But the nature of this recession hit our market's varying price points much differently! The best way for me to give you real time range approximations on where product was trading at the height of the fear, was by price point (stated March 9th, 2009, so put yourself back into time & place when the DOW closed at 6,547 and S&P closed at 676):

    HIGH END ($5M+) - down aprox 25% - 40% from peak
    HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
    MID END ($1M - $2M) - down aprox 20% to 30% from peak
    LOWER END (Under $1M) - down aprox 15% - 25% from peak
    It might be best to reflect on what happened by price point, starting from the fall of Lehman. To do so, I created a made up index using approximate discounts from peak that I thought each price point was trading at during each month after Lehman. The data for Q2 that was released July 2nd, pretty much confirmed these trading ranges discussed first in early March; so I feel comfortable talking about this and playing around with a play chart to help visualize what happened.

    Lets create a chart that looks at discounts from peak kind of like how we discuss where a mortgage backed security is trading at from par - "i.e., 60 cents on the dollar". So we will use '100' to denote the peak to see where each price point seemed to trade DOWN FROM PEAK as this market adjusted to the reality of the credit crisis (so if you see a drop from 100 to 70 on the vertical axis, that would represent the price point was trading down approximately 30% from peak levels - best I can do on such short notice to get point across):

    *unofficial, rough mock up of what I saw happening to each price point since Lehman's failure - simply for sake of this discussion! You must use a general range due to the many variables that affect an individual product's market value here in Manhattan

    It's as if you can summarize this wave down by three periods:

    Period 1: THE FREEZE UP - the sharpest of the adjustment occurred in this period, as the world changed after Lehman failed and AIG had to be rescued. This is the period from mid-SEPT to about late JAN that basically defined the initial snap down from peak levels. Although the market seemed to be trending slightly lower by the time Lehman failed, this was really when bids disappeared and brokers/sellers were scratching their heads on how difficult it was to get a deal done - the markets work in mysterious ways even though the writing was on the wall for many many months before the fall of 2008. As the freeze up continued into January, fear levels started to rise as equities adjusted downward in response to what turned out to be quite a failure in the financial system. A negative feedback loop hit buy side confidence, causing many to just sit back and wait. Sales volume was low.

    Period 2: THE FEAR TRADES - ahhh, the very small period that I would argue lasted between mid-FEB and mid-MARCH or so, as equity indexes approached lows. This was when the DOW JONES index hit 6,576 and blood was on the streets. Sales volume here was still very light and those that did occur, were sellers hitting low ball bids out of fear; hence the phrase, 'fear trades'. This period marked the final move down in the first wave, defined by the low ball bids demanded by buyers that were asking for 'additional downside risk' due to the uncertainty of the near term at the time. Since traffic was so light and bids nowhere to be found for 5-6 months straight, sellers feared that time may cost them more money and hit bids. We are seeing the last of these trades clear now due to the lag from contract signing to closing.

    Period 3: THE PRICING OUT FEAR: you can't deny that this market saw an acceleration of contracts signed and a decline of inventory as the first wave down finished itself off. I discussed reasons for this confidence boost a few times, so now I will just point out that this market did indeed PRICE OUT ARMAGEDDON in regards to the 'additional downside risk' demanded by buyers during the prior period just discussed. As activity accelerated with the equity rally, confidence rose, buyers were out shopping for discounts and felt more comfortable submitting bids - the natural market forces at work as perceived clarity increased! Many buyers missed out on a few places, saw saved listings go into contract, and noticed sellers not as pressured to entertain or hit low ball bids as they were only a few months earlier when fear levels' were much higher. The market has a way of equalizing itself and this is exactly what happened for each price point. The first comfort zone was reached and deals started to happen again!

    Now the interesting thing is we will have to wait to see where the deals that occurred in PERIOD 3 happened at, as lagging reports will catch the beginning of this period first - the real action was from mid-APRIL to end of JUNE which will be registered in Q3's or Q4's data depending on the time lag to closing. So, when we look back at the end of this year, we may see some quarter-over-quarter increases in prices that no doubt many will build bottom calls out of! Lets check back here in JAN 2010 or so to see if this turns out to be the case! Real time market conditions likely will continue to be different than the picture painted by these quarterly reports - so stay ahead of the curve!

    And there you have it, my unofficial, official interpretation of the past 9 months! Will discuss some exciting news and thoughts on where we may go from here over the next few weeks. Enjoy the weekend all!

    G-8 Summit Tagged As 'Stimulating'

    Posted by urbandigs

    Fri Jul 10th, 2009 10:44 AM

    A: Well, I dont know about you, but I'm comforted that our leaders focus is so targeted...Thank god its Friday! Enjoy everyone - Noah.

    Via NY Post, 'Tail to the Chief':


    Working With Sellers In A Changing Market

    Posted by Toes

    Wed Jul 8th, 2009 09:54 AM

    (Christine Toes here)

    Many buyers think that when an apartment is not priced correctly, it's always the broker's fault. Check out this example of a situation where the price has nothing to do with the broker:

    Apt is on Madison in the 30s - originally priced at $459K on 2/23/09:
    On 5/1 - price reduced to $399K, resulting in multiple offers, but after five open houses my buyers "won" at approx $400K. Within about 10 days, the buyer's attorney received the offering plan, financials, read the board minutes & negotiated the contract. The buyers signed the contracts and sent a check to the seller's attorney, who received them on 7/2.

    Morning, 7/6/09: seller decided not to sell and to put the apartment back onto the market at $429K. The seller's broker spent an hour trying to talk the seller out of his decision (discussing the market conditions, how qualified the buyers are, that it was already on the market at $459K and if someone was going to pay $420K for it, they would have already gotten those kinds of offers, there's another apartment in the building for $385K that's not selling, sent the seller comps, etc).

    Afternoon, 7/6/09: My customers didn't really want to go through the process all over again and hadn't seen anything they really liked for that price. They don't live in NYC so they'd have to fly back here to start their search again. They increased their offer by $10K to approx $410K.

    7/7/09: seller decided that he really wants $469K for the apartment and is putting it back onto the market for $469K!

    What do you do when you're the broker in this kind of situation? This would be the point where, if it were my listing, I would say "thank you for the opportunity, I'm sorry we don't see eye to eye on this situation, please keep me in mind for the future if you change your mind." And then I would walk away. (By the way, this is an estate sale).

    All I can say to the buyers is... "It wasn't meant to be, don't worry, we will find something better." I will also send a letter to everyone in that line or similar lines in the building to see if anyone is thinking of selling their apartment - just in case, you never know!

    Moral of the story is - if you see a listing with:

    a. Price decreases and increases; or
    b. That has been on and off of the market for several months/years; or
    c. There have been several brokers

    You might want to steer clear because the seller may be flaky or not that serious about selling under a certain price.

    The nice thing about sites like Streeteasy is that the price history for every apartment is more transparent. Keep in mind that streeteasy is not always 100% accurate - I have heard several brokers panic because their brand new listing shows up on streeteasy as having been on the market for a few hundred days, so while transparency is improving, perfection is very hard to achieve for this industry with no standardized MLS system.

    It never hurts to ask the seller's broker how long the apartment has been on the market when you're in the apartment. Also ask your own broker what the price history of the apartment is. It is always good to compare notes and you can get a sense of how honest brokers are by their responses. In the end, nobody can force a seller to execute a contract and you do what you can with your client's best interests in mind.

    Holes in The Dike

    Posted by jeff

    Mon Jul 6th, 2009 02:48 PM

    Holes%20in%20the%20Dyke.jpgI have noted several times in the past that the commercial real estate market decline is a continuing major challenge to the banking industry (especially regional and local banks) and, as a result, a continuing stumbling block for the economy as a whole. I have laughed along with you at the new industry maxim that "a rolling loan gathers no loss" and averred that pushing the problems out further in time is not a recovery strategy. I just read about a recent big metropolitan area distressed sale that got me thinking about how the constipation of the commercial real estate market may be beginning to ease...I won't take the analogy to it's logical conclusion, but suffice it to say that I think the market clearing adjustment to the downside is under way, and I believe I can put some logic behind my intuition that trying to hold onto properties that are marginally servicing debt and/or have no equity value in a refinancing scenario is a doomed strategy, even if the economy doesn't get a lot worse.

    According to Globe Street, Realty Finance Corp. has sold an original $47 million loan on a Class A office building at 250 Montgomery Street in San Francisco for approximately $25MM. The building was reportedly only 55% occupied, so obviously debt service by the borrower, Lincoln Property Co., was an issue. What was really interesting was the reason given for why the lender, Realty Finance Corp. (who received the property back through a deed in lieu of foreclosure) turned around and sold the loan so quickly at a huge haircut. The article reports that according to SEC filings, Realty Finance's $1.2 billion investment portfolio, which has lost 26% of its value since the start of 2008, is encumbered by non-recourse long-term financing through two CDOs. It also noted that in February the company was notified that it failed the overcollateralization test for one of the CDOs and that payments were being diverted from the firm to pay down principal of senior bondholders. The firm also expected a similar result for the second CDO some time in 2009, resulting in minimal incoming cash flows to its primary business. So here we see a distressed property, being handed over by an owner to a leveraged lender, who immediately must sell the asset at a market clearing price. As I heard at the IMN Conference, fund level leverage exists up and down the real estate finance and investment business. This will be a significant catalyst of distressed sales as property owners start to default on their loans.

    Okay you say, but this is only an example of a building that is distressed being puked up at a big discount, it's not just a property someone overpaid so many out there. Why should banks cough up the latter if they are not absolutely forced to? Why is their first sale likely to be their best sale?

    What we have to do is look ahead at how the new owner of 250 Montgomery Street is likely to act. The new owner has not been disclosed in this case, but is said to have been another real estate private equity firm. This firm now has a great new basis cost in the building and lots of incentive to be aggressive in getting it leased up. This is the transmission mechanism whereby lower rents are enabled in a market due to distressed properties being turned over at a much lower prices. It just doesn't take a lot of this kind of activity in a soft market with high vacancy rates to crush rents.

    So not only does the "new mark" caused by the transaction, in this case about $200 per square foot, versus a late 2006 purchase price of approximately $405 per square foot, hurt the valuation of banks' interests in loans on similar properties, it will eventually end up hurting cash flows across all their properties as the general rent level declines.

    According to another Globe Street article, across the country in Florida, Ashkenazy & Agus Ventures recently foreclosed on a mortgage note they were said to have acquired on Downtown at the Gardens, a high-end mall in Palm Beach Gardens. Institutional Mall Investors, a joint venture between Miller Capital Advisory and Calpers, was said to have defaulted on the mortgage on the property, which they reportedly acquired in 2007 for $200 million. The mortgage note was said to have been acquired for $48 million, or about 35% of the original principal amount from TIAA CREF. It is speculated that Institutional Mall Investors will lose $60 to $90 million on the deal. With the mall, which has suffered the loss of several tenants, eventually landing in new hands at a lower basis cost, my guess is that rents will be lowered to get some tenants into the open space.

    This situation certainly underscores the idea that your first sale may be your best sale, since Downtown at the Gardens is the second Palm Beach County mall to be foreclosed on recently after JP MorganChase foreclosed on the 1.2 million square foot Palm Beach Mall, suggesting yet another player in the market with a new lower basis cost and ability to discount to fill space.

    The real estate financial market, like other financial markets, is like a permeable membrane: when the concentration of debt on one side gets too high, diffusion restores equilibrium. Fighting the restoration of equilibrium is a losing game, and it looks like the membrane is becoming quite porous in a few places.

    Here in Manhattan we are seeing "distressed on distressed competition," but we may soon see (low basis cost) "blessed on distressed competition." In my recent piece I noted that the William Beaver House was doing some creative things to catalyze sales of units to investors. Nearby, 45 John Street, a project that has suffered from significant construction delays, is said to be facing foreclosure by lender BayernLB. According to The Real Deal, because units in the building wouldn't start closing by July 1, 2009, buyers in contract would have rescission rights. I wonder how the already fragile downtown condominium and rental markets will react if any of the troubled projects there eventually fall into the hands of someone with a really low basis cost?

    Manhattan's Slowdown Defined By Sluggish First Half Sales

    Posted by urbandigs

    Mon Jul 6th, 2009 10:48 AM

    A: There was a reason I used the statement...'the first two quarters of 2009 will prove to be the most sluggish in the past 10 years' in Mid May. It takes 2-3 months, sometimes more if there are bottlenecks with underwriting of the loan or processing of the board package by the management company or board, to close on a co-op or condo; this is more the case with co-op sales as condo transactions can usually go from contract signing to closing within 2 months. So, there is a lag between what we brokers see out there in the field, in real time, and the quarterly reports that are released to the public. This lag usually paints a misleading picture of a market that reflects what the report states; this go around is a great example as the headlines certainly didn't exemplify the activity going on for the past few months. Take a look at the graph I composed comparing Manhattan Co-op + Condo Sales by quarter, over the past 10 years - clearly showing the parabolic boom in 2007 which marked the euphoria stage of the credit/housing bubble for Manhattan! In doing so, the wave down in prices for Manhattan is visualized by the first half total number of sales - which really reflects the marketplace 2-3 months prior!

    Here is the chart showing you the parabolic boom in 2007 sales volume and the sluggish aftermath of a market that saw bids disappear starting in the 4th quarter of 2008 after Lehman's collapse! The real time market took 2-3 months to show up in this closed sales data - reflecting the lagging nature of our marketplace from contract signing (which brokers use to gauge activity) and closings (which these reports reflect)!

    *data courtesy of MillerSamuel

    Quite telling isn't it. It basically defines the wave down in prices to the latest comfort zone that we all experienced since late 2008. This is what happens when bids disappear, proving once and for all, that its all about the buyers!

    What this chart does NOT reflect is the month by month acceleration in action that took place starting around mid April, and lasting until end of June or so! Time will tell if the action continues! The reasons for the pickup in activity were discussed in my less bearish piece on June 4th:

    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.

    The question is, what happens next. I'll delve into thoughts on this when I have time. For now, I have to r-u-n-n-o-f-t on appointments!

    Manhattan Q2 Report Thoughts

    Posted by urbandigs

    Thu Jul 2nd, 2009 10:54 AM

    A: Due to the lagging nature of these quarterly reports, nothing disclosed here is a surprise; at least not if your reading! The biggest mistake one can do is to read one of these quarterly reports, and just assume this is exactly what is going on right now! The thing is, the market today is significantly more active than what this report suggests because Armageddon has been priced OUT of this marketplace over the past 7-9 weeks or so - something not reflected in this report. When you hear, 'sales volume plunges 50% from year earlier', you may immediately assume today's market is completely dead - not so. So, make sure you understand this lag and acknowledge that this market did equalize from the frozen months of OCT - MARCH. The bulk of the pickup in activity occurred between mid-April to end of June - as confidence rose with the equity rally and a wave down in prices. The telling aspect of this report lies in the y-o-y price declines reported by price point - something that I reported to you as early as March 9th, ironically the day the stock market hit its most recent lows. At least I feel good that my reporting to you guys is both accurate and timely. I will do my best to continue this front line reporting mixed with macro economic thoughts going forward as there is always something to talk about when it comes to Manhattan real estate.

    Lets discuss price first, and then move onto sales volume. In early March, right at the height of the fear and the top of the severe illiquidity since Lehman's collapse, I wrote a piece called "Understanding 'Liquidity', or Lack Thereof For Manhattan" to describe what I was seeing out in our marketplace - note, this is before the equity rally and shift in psychology from Armageddon to Reflation that occurred (whether you like it or not or buy into the sustainability of it or not):

    Right now the market seems illiquid because the bid-ask spread is too wide creating a disconnect; meaning that either sellers are still in denial about the price drop of their asset (current market value) OR buyers are too cautious to bid more aggressively for the asset.

    This is really a high end recession in the Manhattan real estate market, that is rippling through to the lower price points. That is the best I can describe it. If I were to divide Manhattan into a few categories and where deals seem to be happening now, it would be something like:

    HIGH END ($5M+) - down aprox 25% - 40% from peak
    HIGH/MIDDLE ($2M - $5M) - down aprox 25% - 30% from peak
    MID END ($1M - $2M) - down aprox 20% to 30% from peak
    LOWER END (Under $1M) - down aprox 15% - 25% from peak
    Remember, we will have to go through Armageddon price discovery first, before we see the slightly higher deals that took place over the course of the 7-9 week confidence/reflation shift. We are seeing the beginning of this now, but expect it to last a few more quarters on the pricing side.

    Fast forward to today and Bloomberg reports on Manhattan's Q2 Report, "Manhattan Apartment Prices Drop as Lehman Effect Hits Home":
    Manhattan apartment prices dropped for the first time since 2002 in the second quarter as the collapse of Lehman Brothers Holdings Inc. and Bear Stearns Cos. caught up to property owners in the nation’s most expensive urban market.

    The median price fell 18.5 percent from a year earlier to $835,700, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. The number of sales plunged by half, the most since Miller Samuel began keeping data in 1989.

    The price of studio apartments declined 16 percent from a year ago to a median of $405,000, according to Miller Samuel. One-bedrooms dropped 17 percent to $650,000 and two-bedrooms fell 23 percent to $1.27 million. Three-bedroom units fell 37 percent to $2.35 million and four-bedrooms plummeted 47 percent to a median of $3.92 million.
    Notice that last paragraph that discusses the structured effect of this slowdown on each price point and compare that to what I reported to you guys in early March! You want to keep it real, keep it here!

    Now, lets move on to sales volume. As most brokers used this latest equity rally and countertrend pickup in activity to call for a bottom or recovery, you must use caution when analyzing month-to-month trend changes in a seasonal market. Instead, you should compare data on a year-over-year basis or seasonally adjust the data.

    In May, I did a piece discussing this exact topic and showed you a graph going back 10 years that looked at NUMBER OF SALES by quarter - in an attempt to analyze how the first half of 2009 would compare to previous first halves of the year over the last 10 years. While brokers discuss the pickup in action on a month to month basis, which is true, the bigger picture tells a different story and todays Q2 report confirms this. I estimated that number of sales for Q2 would come in around 1,700 - 1,800 or so, which would put the first half of 2009 as 'the most sluggish in the past 10 years'. The report notes that y-o-y sales volume plunged 50% - and Q2 2008 sales totaled about 3100. That would mean Q2 sales came in lower than my estimate and closer to 1,550 or so. I cant find an exact number in the report, but will do a separate piece on this in a few days - clarifying the bigger picture.

    Now, what this report doesn't reflect is the last 7-9 weeks of action that occurred. Whether you like it or not, whether you are a perma bear or perma bull, we must be able to accurately discuss what is happening out there, without bias or agenda, BUT take into account what we just went through and how the macro economy may or may not affect our market in near term. I expect the countertrend pickup in activity to level off soon, and this market to slow down a bit as we enter the normally slower summer months - seasonality at play, nothing more.

    So Your Dog Wants to Live in a Co-Op?

    Posted by Toes

    Wed Jul 1st, 2009 09:42 AM

    (Christine Toes here)

    About 15% of Manhattan co-ops don't allow pets. I think by now everyone knows that if you have one dog, two dogs, or (god forbid) three dogs, your chances of finding a Manhattan apartment decreases dramatically. Finding a co-op building that will accept your dog is charted below in order of difficulty:

    ugliest-dog.jpg1. Dobermans, Rottweilers, Pit Bulls, or any other "aggressive breed" dogs - you're pretty much screwed. Maybe 10% of Manhattan co-ops will take you. Tip: Focus on new condo buildings that haven't already established their pet rules yet. Try to get grandfathered in somewhere! If your budget/tastes are more "co-op" in nature, take your dog(s) to the best trainers in Manhattan and make sure they have a very nicely written reference letter from obedience school.

    2. More than one "large" dog. Generally this is defined by "over 40 pounds." Tip: look at condos or try to buy when your dog is a puppy. The vast majority of co-op applications ask for the breed and weight of your dog. Hope that no one notices that you listed in the co-op application that it was a 40 lb golden retriever, in which case the board is likely to suspect that your dog is going to one day exceed 40 lbs. I would wager that about 40% of co-ops will not take two or more dogs over 40 lbs. (Some buildings will take one dog over 40 lbs but not two).

    3. More than two pets. Some buildings restrict owners to having only one or two pets per apartment. This is one of those situations where having a real estate broker who will call every single listing agent for you to confirm that having more than two pets is ok will save you a LOT of time.

    4. Some co-ops don't provide a weight restriction but you have to be able to carry your dogs through the lobby. There are other buildings that only take dogs under 25-35 lbs. Some buildings don't take dogs at all. Some buildings will make you take the service elevator with your dog. Some buildings will want to interview your dog. More on that to follow.

    Tip: Do not trust statements like "pet friendly!" in listing descriptions. Sometimes "pet friendly" means the building allows CATS (birds, etc), allows ONE pet, allows SMALL dogs, etc. Your real estate agent will likely need to confirm with every listing that your situation is ok.

    The next step once you find an apartment that you love in a building that will take your dog(s) is to find out if the building interviews pets. This is becoming more and more common. All it takes is one yappy dog that won't stop barking when the owner leaves, a dog that "goes" in the hallways, elevator, lobby, Rhodedenrum just outside of the building, or dogs that growl at other dogs, people, or kids, and the board has to start interviewing everyone's dogs.

    Interviews, really?
    What happens at a doggie interview? I asked other brokers and buyers to share their stories and here is what I found... Someone on the board may bring their own dog to the interview to see how your dog interacts with their dog. A board member may go in and out of the apartment door to see if your dog barks when someone gets off of the elevator or passes by the apartment. They may speak in a really loud tone and clap their hands to see how your dog reacts. One board-member swears that a buyer must have sedated their dog for an interview! The dog was really sweet and quiet at the interview but was a non-stop barker from day one.

    What if I'm buying a pied a terre? Do I really have to fly my dogs up for an interview?
    Sometimes, yes. It depends on the board. If they waive the interview for you, are they going to have to make exceptions for everyone else? Sometimes these issues are more about whether you are going to be a team player and respect the board's rules. However, if the dogs really aren't going to be there for more than a few weeks a year and they meet the board requirements, some brokers say to not mention them. You can always say you've inherited them or adopted them at a later date. As long as dogs are allowed, your dogs are "regulation" size and breed, and they're well-trained, chances are that no one will care. It's usually only when someone's pets are a problem that it matters.

    Getting Your Pooches Approved:
    It never hurts to put a reference letter for your dog into the co-op package. Include reference letters from a trainer, dog walker, boarder or neighbor regarding how well behaved Rover is (doesn't bark, is potty trained, loves kids, plays well with others, etc). Have your dog groomed, make sure he or she is well rested, has been fed, and has gone to the potty before the interview and you'll be just fine!

    Out of Town Buyers & Getting Dogs to the Interview
    Dogs under 20 lbs can usually go on an airplane with their owners. Over that, they have to fly as cargo and dog lovers really don't trust their dogs to the airlines. If they can't always get your luggage where it needs to go safely... Are your dogs going to be safe? If there are dog owners on the co-op board, they should hopefully understand that you don't want to drive your dogs from California or wherever just for a co-op interview. Add a cover letter to the package explaining the situation. Or video tape the dogs interacting with kids and other dogs and include a dvd in the board package. IF the board has no sympathetic dog owners, you might have to get the dogs there for the interview. Perhaps try a service like

    Best of luck, happy hunting, and woof, woof!