Fed Treasury Purchases Over / Carry Trade On

Posted by urbandigs

Fri Oct 30th, 2009 10:14 AM

A: The fed's debt monetization experiment was a two pronged monster: buying tons of agency debt + $300bln of treasury securities. So far the huge supply of treasury auctions is not affecting the market at all. In fact, bid to cover ratios for the most recent 5-yr auction was 2.63 compared to the average of 2.35 for the prior 4 auctions. With $123Bln in auctions this week so far, more than $370Bln in bids were submitted; big time oversubscribed. Now the fed is no longer buying treasury securities, but will continue to buy agency debt albeit at a slower pace heading into the first half of 2010. One aspect of the quantitative easing program is now done with, for now. In the meantime, a big time positive carry trade continues as the fed stands behind everything.

Don't be surprised to see the fed revive the treasury purchase program in 2010 or later should the bond market have a disruption or future auctions don't go as well as they have been recently.

Via Bloomberg, "Fed Ends Treasury Buys That Capped Rates, Stabilized Housing":

The Federal Reserve completed its $300 billion Treasury purchase program today amid signs the seven-month buying spree helped stabilize the housing market and limited increases in borrowing costs.

Yields on the benchmark 10-year note, which help determine rates on everything from mortgages to corporate bonds, never rose above 4 percent after the central bank began acquiring the debt.

The purchases were the first of U.S. Treasuries by the central bank to keep borrowing costs low since the 1960s. The Fed joined its counterparts in the U.K. and Japan in extraordinary debt-buying programs, broadening efforts to unlock credit and end the worst recession since the 1930s after cutting the benchmark U.S. interest rate to a range of zero to 0.25 percent.

“The Fed also happens to be exiting the Treasury market at a good time,” Goncalves added. “Other markets, such as equities, which performed well due to the expansion of the Fed’s balance sheet are retreating and that will provide a backstop for the Treasury market.”

Fed purchases have helped buttress demand as the U.S. sells record amounts of debt to finance a budget deficit that exceeds $1 trillion for the first time. Total sales of Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20.
So, lets think this out. Right as equities extend their rally into the 8th month now, their could be a nice setup to transfer gains out of stocks and into treasuries right when another $2Trln in supply is set to come on. Time will of course will tell.

The credit crisis seems to be over. Almost every indicator there is that would show a distress in creditville if there were one, is looking good. Credit the fed's intense emergency programs, rate cuts and liquidity facilities for that. Armageddon certainly seems to be completely off the table. I wonder where the next hiccup might come from? It may not be from credit. We are entering what may be the next phase of this cycle and the markets could react next to the massive government spending/deficits that have taken place to stem the worst recession since the 30s.

With the fed guaranteeing everything and engineering such a low interest rate environment (basically to recapitalize our banks), almost all assets got a strong bid; yes, the crappy ones too. AN EXTREMELY POSITIVE CARRY TRADE IS ON!! Stocks have been a proxy for everything. Remember I discussed how even with all the commercial real estate fears, the "CMBS AAAs, series 1, can't rally much more because the bids are close to par right now - around 93/94". There was a recent stumble in CMBS AAAs, Series 5 in the past week or so but I wonder how much of that was a result of the Stuy-town ruling against Tishman-Speyer.

What happens when the fed is no longer there as a backstop? What happens to the carry trade? Things that make you go hmmmmmmmmmm. I'll get into this topic in more detail later. No good party lasts forever.

Once a puzzle, always a puzzle: Reading Housing Data

Posted by anamaria

Fri Oct 30th, 2009 08:40 AM

We couldn't help but take note of today's article in the Real Deal that notes the downside of giving too much credence to national housing data.

"With the glut of housing data and statistics available, it's difficult to know which figures give the most accurate representation of home sales and prices. In Manhattan, the disparity between national housing figures, such as average home price and sales, and city numbers can be particularly noticeable. Rather than one national market, there are, in reality, many mini-markets to evaluate, according to broker Douglas Heddings, president of the Manhattan-based Heddings Property Group at Charles Rutenberg Realty. Heddings told Fox Business News that it's unwise for both homebuyers and mortgage lenders to rely on monthly national data to determine housing trends. The data "can be incredibly confusing to the buying and selling public," Heddings said."

Let's take a peek at the various aspects of reading data, and ways to avoid the pitfalls in trying to digest it.

Seasonality: It's not news that real estate is highly seasonal. This means buyers buy in the spring and fall, renters lease in the summer and most activity is dead in peak winter months, each and every year for the most part. To adequately analyze housing data, you need to compare numbers to those of the same "season" last year. This is why month to month comparisons fail to see the big picture. Rather than waiting a whole year to compare data as it is generated, researchers "seasonally adjust" data to make it more useful and relevant, smoothing it out over the course of the year. Pay attention to the numbers quoted: seasonally adjusted data is reported as "SA", and not seasonally adjusted data is reported as "NSA". The trick is knowing which is which and how to read it. In a period of high seasonal volume, the adjusted numbers will be lower than the not adjusted, and vice versa, precisely due to this smoothing out process. Reading that SA housing starts are up by 20%, for example, doesn't mean that starts themselves are up by that much; rather that they beat the expectations of the smoothed out numbers we would have seen had we ignored seasonal influences. Understsand the nature of the numbers you are reading, SA or NSA, and read analyses through those respective lens.

Margin of error: New home sales data comes out monthly, only to be revised up or down a some time later (same goes for unemployment figures, jobless claims, home prices, etc.). Needless to say, when the margin of error % is greater than the actual reported change in sales, the released figure becomes meaningless. Since the markets are forward looking, few people actually look back to see the revised numbers, relying purely on the first-reported estimates. Compare the margin of error with the degree of change being reported to gauge how meaningful the data really is, and don't neglect revisions.

Trend numbers are so last year: Trend numbers imply a linearity of sorts. One could look at prices in February versus May, for example, draw a straight line and conclude the degree of movement (falsely assuming the data reflects the same 1-bed that sold for in February for $600k is now selling for $550k). What such trends neglect is the actual shift in inventory from month to month or quarter to quarter. The key question is: Is there a seasonal difference in actual market inventory, what does it look like and how significant is it? Observe the changing inventory of what you are comparing as a backdrop against which to analyze the data.

Beware of sequential reporting: Take month-on-month and quarter-on-quarter data analysis with a grain of salt, as it neglects the very seasonality we've been discussing. Of course Q2 will be busier than Q1, for example; this happens every year. This is why researchers primarily use seasonally adjusted numbers versus not seasonally adjusted data. Year on year comparisons (y-o-y) provide a more accurate perspective on market activity. Do not make decisions or enter negotiations relying solely on quarter-on-quarter data.

Year on year imperfections: While Y-o-Y data is the gold standard, even it is imperfect. Great examples can be found on the Lower East Side and Midtown East, where a plethora of new condo developments have significantly skewed year-on-year sales numbers upwards based on luxury inventory which previously did not exist. Neighborhoods have evolved significantly over the last few years and will continue to change over time. Analyze year on year data with an understanding of neighborhood-specific developments.

To tidy up all of these points and wrap'em with a ribbon, not so long ago, we came across a WSJ article mentioning that NYC housing prices were flat, only to add in a small caption that the NY data did not include co-ops and condos. Reader beware. Don't take headlines at face value, particularly national headlines. While there are nation-wide, macro dynamics at work, real estate has and always will be a local game, with all the pros and cons that come with that.

So, while Noah and company at UrbanDigs will still provide real time analysis on changing trends in the Manhattan residential marketplace ("Expect Significant Quarter-to-Quarter Improvements"), their will always be a caution tag attached.

Discounted Sublease Rates Pressuring Landlords

Posted by urbandigs

Wed Oct 28th, 2009 10:00 AM

A: This is part of the deflationary pressures that I discuss here often, all part of the healing process. Its painful, but it's healthy and corrective.

Half off sales, foreclosure sales, Bulk REO deals all lead to new owners with a more efficient operating environment with less debt overhang with which to manage the properties. This allows the investor/purchaser to offer lower rates to consumers; assuming an income producing property of course. This in turn pressures existing inventory. The deflationary cycle is a cycle like any other, feeding on itself until the excess is purged.

Add in the sublease element and the companies that are tied in to longer term leases but are no longer using the space, and you get one more pressure. The chart below for 2009 Manhattan Office Market Vacancies is from OptimalSpaces.com.

manhattan-office-class-a.jpgThe NY Times reports, "Bargains Abound in New York’s Sublease Market":

Financial companies are trying to sublet space that they are no longer using in some of the most desirable office buildings in Midtown Manhattan, and the rents they are asking are heavily discounted compared with what landlords are seeking for similar space across the street — or even in the same buildings.

Many large financial companies dumped hundreds of thousands of square feet on the sublet market, with much of that space in prime Midtown locales near Grand Central Terminal, Rockefeller Center and the Plaza Hotel. Now, the sublet space that is still on the market is being offered at rents much lower than rents for space that can be leased directly from landlords in the same submarkets.

“This is going to have an impact on the rest of the market” for office space in New York, said Joseph Harbert, the chief operating officer of the New York metropolitan region for Cushman & Wakefield, a provider of commercial real estate services. “If I am a tenant, and I can get sublet space on Park Avenue at a discount, why would I go elsewhere and pay more?”

He said that the gap between the asking rents for direct space and sublet space in the most desirable Midtown office buildings — what brokers generally refer to as Class A space — was the largest he could remember.

On average, the owners of Class A buildings in Midtown Manhattan are now asking $72.03 a square foot, compared with $55.68 for comparable sublet space, according to Cushman & Wakefield. So tenants willing to sublet can get a 22.7 percent discount in Midtown. The discount was 12.6 percent a year ago.
A 22.7% discount between sublease space and Class A space from landlords? Ouch. That is a bargain worth discussing and one that should spark the attention of would be tenants. Now, the only concern is whether the current distress in the sublease market is a true indicator of the actual marketplace for Class A space. While sublease rates are a good measure as to where the real market is, we do not know the terms of the sublease or the desperation of the corporation that is seeking to re-rent out their space; perhaps at a loss.

Enter Robert Knakal, Chairman & Founding Partner of Massey Knakal, who writes on NYC's investment markets in his StreetWise blog:
"Sublease space is very indicative of what the real market is, because the sub lessor is willing to get whatever the market will currently bear. They do not have artificial constraints on what the lender is requiring or what the debt service payments require rent levels to be. The key area is the term of the sublease. In order for the sublet rent to have integrity as an indicator though, the sublease term has to be substantial enough to be a truer indicator of the market. A minimum of five years and ideally as close to ten years as possible would help gain credibility as a true indicator of the market. Clearly short term sublets for 3 years or less are not indicative of what market rents are."
Mr. Knakal makes a very solid point. What are the terms of the subleases that are being signed at a 23% discount to comparable Class A office space in the same area? If its very short term, it loses some luster as a true indicator of where the office market seems to be. So lets just use a bit of caution and try to dig up more details about the sublease market before coming to any concrete conclusions on how off the Class A market may be from its ultimate bottom and if it really is following the sublease path.

One thing is certain, the phenomenon is a deflationary one.

Co-ops Should Ease Up A Bit & Shore Up Balance Sheets

Posted by urbandigs

Tue Oct 27th, 2009 10:59 AM

A: Before you mis-interpret the headline, please read on. Did you ever wonder what percentage of buildings out there may be financially mismanaged? I am of the belief that when things get euphoric, regulation of some kind should tighten to constrain risk taking and speculation. On the flip side, when things get too slow or facing a fierce downturn regulation of some kind could loosen a bit and encourage a more stable marketplace. All within limits and never incentivizing too much risk taking or buying something you can't afford. This is not the kind of market that co-ops should be tightening up in; yet today I am both hearing and seeing more talk of board turndowns without a reason provided. Lets assume for a moment that the main purpose of a co-op board is to efficiently and properly manage their building and to maximize value for the shareholders of the corporation. Lets also assume that the value of the shares owned in this corporation goes into a multi-year recession; and are worth less than it was at peak, trending lower, and seeking stabilization. Sounds like what we just went through. What is a co-op board to do? Well, one quick way is to use your powers to loosen up policy a bit without sacrificing future shareholder value? In a phrase, expand the target audience that is both willing & able to buy into your corporation!

Its funny, without naming building addresses I can tell you that I just experienced my 2nd board turndown in a co-op that was low on cash in reserves and set to make a huge chunk of change via a flip tax from an original shareholder from the 70s. I can also tell you the buyers were more than qualified to purchase this unit and secured a loan commitment. No reason provided. Make much sense? Not at all. I know that the building reserve fund would have surged 55% if they approved the deal. Yet it was not to be. Now future buyers in the building may adjust their bids or walk away after discovering a large building with such low reserves - how is that for maximizing shareholder value.

Some reasons I am hearing for recent board rejections include:

a) price being too low
b) buyers debt/income ratio being over 25%
c) aggressive accounting on tax returns shows a much lower Adjusted Gross Income
d) inconsistencies in the board package & financial statements provided
e) lack of liquid assets after closing
f) uncertain employment situation
g) inter-building conflicts

Co-op boards will always be protective of their shareholders and their building; as they should be. But often in crazy times the line gets crossed and decisions come down that makes even the most experienced brokers or managing agents scratch their heads. Co-ops that have a history of being tight & nitpicky should consider loosening up a bit; especially if the building just finished multiple assessments for major capital improvements and is facing a depleted reserve fund.

You see, I find that many buyer's generally want it all and who can blame them. They want low monthly expenses, but they want every amenity possible. They want the building to operate at a profit, but they don't want any flip tax. They want recent capital improvements but no assessments. You can't have it both ways and in the end every building must be managed properly to handle the work that needs to be done down the road. Every building will have leaks, need a roof repair, need a boiler, need a replacement of elevator relay switches, local law 10/11 facade inspection and pointing, and have to upgrade their hallways, elevators, lobby, etc.. at some point in time. No building is exempt from the effects of time so they should financially prepare for it today - call it the building's retirement account.

Start basic. This is the time where co-ops can loosen up a bit on house rules within reason. If the building has a high owner/occupancy rate because of a very strict subletting policy, perhaps the time has come to loosen that rule a bit and widen the target audience interested in your products. Add a fee for the owner or other revenue generator that goes directly to the building reserve fund for a 2 & 2 subletting policy - keeping in mind that you can't let the owner/occ rate decline to a level that adversely affects the entire corporation. If the building does not allow pied-a-terres, maybe now is the time to overturn that rule and reach out to a slightly wider audience? Other areas to loosen include allowing guarantors, co-purchaser's, or parents buying for their children; all within reason and board pre-determined guidelines.

Maybe the building has a loan tied to a very high interest rate? Perhaps a simple refinance at a lower rate and take out a bit more equity to the point where the interest payments are still the same, or only slightly lower - then deposit that extra money into reserves for future capital improvements limiting the need for more aggressive assessments? Buyers love reserve funds! Minimizing red flags may maximize transaction volume; especially for building's that utilize a flip tax as a revenue generator,

Shore up your balance sheet, add more revenue generating services to your business, expand your target audience, and increase demand to your product. Increased shareholder value + increased confidence in the product being purchased = stock goes up. At least in theory. Building's whose reliance for revenue is on flip tax only may see problems if the market goes into another freeze or sales volume dries up because of a lack of transactions in the building. Co-ops should try to spread out their revenue streams rather than rely only one main source! The goal is to minimize consistent rises in monthly maintenance that will constrain affordability for future sellers in the open market.

You can't change the market or the markets way of valuing your product due to general confidence, macro factors, and affordability. But you can enhance demand and increase the size of the buyer pool that views your building/unit as 'meeting their needs'! And that can go far in cushioning this downturn. Call it 'maximizing shareholder value'.

Where you don't ease up is financial qualifications for prospective purchasers. However, you can certainly loosen up on the "% DOWN" requirement if your building has enacted more stringent policy over the course of the past boom. I mean, do you really need to require 40%+ down right now to protect shareholder's interest against the likelihood of default? No, you don't. Rather that policy was intended to target a different end result; targeting a certain kind of buyer to 'join the club'. Lower it and ask the buyer to put 12 months of maintenance in escrow if they are borderline to meet pre-determined financial guidelines.

If your building has a 40% or more requirement for down payments and you are noticing a big dry up in prospective buyers given the nature of this slowdown, what will happen if you lower that restriction to 35% or 30% down? Does this really put the co-op at serious risk in regards to a buyer that can't afford the property? The key is maintaining tight requirements for employment situation, salary, debt/income ratio and liquid assets leftover after closing. By tweaking the percent down rule slightly, I don't think you risk a whole lot but your rewards could be a wider buyer pool that can now afford to purchase a unit in the building & pass your board! Today, I find banks to be more lenient than co-op boards; even with the tightening of underwriting standards.

Court Rules Against Tishman Speyer in Stuy Town Case

Posted by urbandigs

Thu Oct 22nd, 2009 10:07 AM

A: Breaking news. This is going to be a thorn in the side of the Stuy Town owners who bought the complex in 2006 for $5.4Bln. The complex..."now has a market value of about $1.99 billion, meaning New York-based Tishman and BlackRock owe more to bondholders than the apartment complex is worth, according to Steve Kuritz, senior vice president at credit rating company Realpoint LLC." Ouch!

Via Bloomberg's "Tishman’s Stuyvesant Town Rent Rise Voided by Court":

Tishman Speyer Properties LP, owner of Stuyvesant Town-Peter Cooper Village, Manhattan’s largest apartment complex, lost a tenants’ lawsuit in New York state’s highest court accusing the company of improperly raising rents.

The New York Court of Appeals in Albany said today the increase in rents on about 4,350 apartments in the massive complex on Manhattan’s east side violated the law because it was built with city assistance and the building’s owners received tax breaks.

The court noted today’s ruling wasn’t unanimous, adding “the dissent predicts that our decision will cause ‘years of litigation over many novel questions to deal with the fallout from today’s decision.’

Tishman and its partner BlackRock Realty LP bought the 80- acre, 11,200-unit developments for $5.4 billion in 2006 with plans to remodel and raise the cost of rent-regulated units to market rates. A $3 billion loan to finance the acquisition was bundled with commercial mortgages and sold as bonds.

The property now has a market value of about $1.99 billion, meaning New York-based Tishman and BlackRock owe more to bondholders than the apartment complex is worth, according to Steve Kuritz, senior vice president at credit rating company Realpoint LLC. He said a default “is probably inevitable.”

A default “could be the triggering event for the collapse of the commercial real estate market,” said Stuart Saft, a partner at law firm Dewey & LeBoeuf LLP in New York who specializes in real estate. “The losses the lenders are going to take on Stuy Town could force them to call some of their other loans on commercial property.”

A $400 million reserve set up by Tishman and BlackRock to pay debt service will be depleted by December, according to RealPoint. About $24.4 million remained in the fund as of Oct. 19, Kuritz said, citing a report from the loan’s master servicer.
Crazy, but I really didn't think the hit was that large? I'm off to appointments most of the day and will have to sit down and digest this for a day or two before offering further ripple effect opinions from this court decision. It seems a bankruptcy filing is near to protect Tishman from creditors.

Fed Beige Book: Manhattan Apt Sales Remain 'Weak'

Posted by urbandigs

Wed Oct 21st, 2009 02:45 PM

A: Well, I'm in no position to argue the almighty fed and their Beige Book observations, but I certainly would not describe the recent pace of sales 'weak' by any means; especially considering the shock this market went through. It is what it is and sales activity has increased significantly during the months of May, June, July & August, while slowing a bit over the past 8 weeks or so. The reason for the rise in activity continued to be lower prices, low lending rates, increased confidence in the asset class, and a delayed seasonality effect as our most active months was pushed back while the adjustment cycle ran its course. Keep in mind the Beige Book offers anecdotal snapshots of economic and financial activity nationwide; not precise figures.

fed-beige-book-ny.jpgFed Beige Book Highlights for the 2nd District -- New York:

The Second District's economy has shown scattered signs of a pickup since the last report. The labor market has given mixed signals, with some signs of strengthening in manufacturing, but ongoing weakness in hiring in other sectors. Manufacturing sector contacts report increased activity and remain optimistic about the near-term outlook. Auto dealers indicate that sales declined sharply in September, as expected, reflecting the end of the cash-for-clunkers program, as well as depleted inventories. However, general merchandise retailers report that sales improved in September and were ahead of plan and roughly on par with a year earlier. Consumer confidence, though still low, has moved up moderately since the last report. Tourism activity in New York City has been sluggish but relatively steady, with leisure visitors partly offsetting an ongoing pronounced slump in business travel.

Commercial real estate markets--in both the office and industrial categories--have been steady to moderately weaker since the last report. Residential real estate markets have been mixed since the last report, but generally weaker, especially at the high end of the market. Home sales activity reportedly rebounded a bit from depressed second quarter levels, but prices, as well as rents, have continued to decline. Finally, bankers report rising delinquency rates--particularly on consumer and commercial mortgage loans--along with ongoing tightening in credit standards; loan demand continued to decline, except for residential mortgages, where bankers report some pickup in demand.

Construction and Real Estate

Commercial real estate markets in the District were steady to softer since the last report. Manhattan's office vacancy rate continued to climb in September and for the third quarter overall, while asking rents continued to drop and were again down about 20 percent from a year earlier (not counting increased concessions by landlords). In the rest of the New York City metropolitan region, however, office markets have slackened only marginally. Industrial vacancy rates are up slightly in northern New Jersey, Long Island and Westchester, while asking rents have fallen moderately in all these areas except Westchester, where they have held steady.

Housing markets remain sluggish across the District, though sales activity has picked up in certain areas. A New Jersey contact indicates that resale activity is inching upward, though prices continue to be depressed due to a substantial volume of foreclosures and short sales. New home sales remain flat in northern New Jersey, though the inventory is gradually diminishing, due to a lack of new development. In western New York State, home sales activity reportedly slowed in August and remained relatively sluggish in September, while prices generally remained steady; contacts express concern that the upcoming expiration of the $8,000 tax credit for first-time homebuyers will adversely affect sales and prices. Manhattan's apartment sales market remained weak in the third quarter. Sales activity rebounded moderately from the prior quarter but remained lower than a year earlier; prices continued to decline and were estimated to be down 18 percent from a year earlier on a per-square-foot basis. The inventory of listings declined modestly, but the average number of days on the market continued to climb. Manhattan's rental market slackened further in September, with average asking rents continuing to run about 10 percent below a year earlier; in addition, landlords are reported to be offering increasingly generous concessions--waiving fees and offering one or more months of free rent. Vacancy rates are reported to have edged down seasonally, but this is expected to reverse in the upcoming (typically slower) winter season.
As I discussed with the Q3 report, yes, sales were down from the year ago period but only slightly. I think there is a good chance sales will meet or beat the year ago period for Q4 when its released, and a very good chance we will beat Q1 + Q2 sales activity from 2009 when those reports come out next year! Its easy to beat the reports that ultimately defined the downturn with sales volume plunging!

We still have pipeline action to come through from the surge in action over the past 4-6 months. To me, the market still seems active for this time of year although deals continue to take place at the stronger end of the trading zone reached after the correction played out.

Residential Construction Expected to Plummet 81%

Posted by urbandigs

Wed Oct 21st, 2009 09:40 AM

A: The numbers just do not make sense to start new projects, especially with the recent changes in the abatement grants from the city. This is a healthy consequence after a boom and is part of the purging of excess process. Over time, the markets will heal themselves and the numbers will start to make sense again. Don't mis-interpret the headline to think the cleansing process didn't start yet - it did! This is evidence of it and a good sign.

Crain's reports that, "NYC construction spending to drop 20% this year":

Led by a sharp decline in private-sector building, overall construction spending is expected to plunge 20% this year to $25.8 billion, according to a study released Wednesday by the New York Building Congress.

The recession has strangled demand for new residential buildings while the credit crunch has severed traditional lines of financing. The number of residential units constructed this year is expected to plummet 81% to just 6,300 units, while the amount spent is projected to sink 44% to $3.5 billion.

Meanwhile, spending on non-residential private construction, which includes buildings such as office towers and institutional projects such as museums, is predicted to slump 38% to $6.9 billion. It is expected to tumble further in the next two years.
With rents down, unemployment still on the rise, and prices in the process of finding a comfort zone to trade in, new construction plans are falling. Add in that financing for major projects is not anywhere as easy and cheap as it used to be, and the numbers just don't work. This is prudent decision making in a recessionary environment. Banks are hesitant to lend and developers are hesitant to build.

In regards to the 421-A and other tax abatement/exemption programs, the city utilized such tools to incentivize developers to build vacant or underutilized lots across the city. It became a subsidy to the developers of luxury new developments. In the boom years, especially in 2006 & 2007, the abatement became the focal point of justifying ever increasing asking prices. All of a sudden, paying $1,500, $1,700, or $2,000/sft was not only OK but buyers rationalized that it made sense with the lower carrying costs. It got so dangerous that I publicly warned would be buyers out there of the potential pitfalls back in June of 2006 - "Don't Be Fooled: 421A Tax Exemption" and again in a NY Post article in April 2007 (man, did I get shit for that from the brokerage community):
Don't get me wrong, new developments are a great product and perfect for those who can afford them. But for those seeking an investment play, its hard to rationalize the price per square foot + higher closing costs on some of these developments considering they will get more expensive to carry every two years for the next 10 or 15 years.

The monthly expenses (maintenance + real estate taxes) of a particular property are directly correlated with the affordability of the apartment at re-sale. Therefore, a property with higher monthly expenses must lower their ultimate asking price to compensate for affordability or else it will never sell. On the flip side, a property with very low monthly expenses can get away with a higher asking price on the open market.
When the price is right, the abatement is a wonderful bonus for the new owner. Its when the price gets out of whack and the abatement used to justify the higher price, that I called into question.

While the temporarily low monthly expenses were used to justify the surging price per square foot during the boom years, over time the cost to carry the unit would systematically increase. The 421-A is a 10 year abatement where every two years 20% of the untaxed portion becomes taxed. There are 5 adjustments until mature taxes are implemented. When the market was in the euphoria stage in 2006 and 2007, buyers were too focused on the ever increasing prices and willing to ignore this risk to get on board the asset boom. The thinking was the party would never end. Nothing you can do about it now. It is what it is. Sure, the new development should trade at a premium and the lower costs to carry should warrant a slight effect on the transaction price. But in the height of the boom, this was taken to the extreme and the markets, as they always do, ultimately corrected itself. What began as a program to stave off the tough times in the 70s and the need for more affordable housing in the 80s, became a tool for developers to make record breaking transactions. There is no shortage of luxury condos in Manhattan today, that is for sure. Maybe a shortage of affordable luxury condos, but that is a different story.

Credit Suisse Pay Plan Altered

Posted by urbandigs

Tue Oct 20th, 2009 02:56 PM

A: Good thing we covered this topic yesterday! People hear numbers like $140Bln and they immediately think of all the cold, hard cash that will pour into our markets - so bid up. What gets overlooked is the structure of these handouts and the fact that the cash portion is likely to shrink and be deferred. How does this affect the existing homeowner that is counting on a huge cash bonus to settle rising debts or continue to fund their lifestyle? There are two sides to the bonus coin: the affect on buyers and the affect on sellers.

According to the NY Times Dealbook, "Credit Suisse Alters Pay Plan for Top Executives":

Under the new plan, top executives will receive a proportionately higher base salary in cash. But the bonuses they receive on top of this will be deferred for a longer period and tied more closely to the bank’s performance and the performance of employees’ individual business units.

The bonuses will be split evenly between deferred stock and deferred cash. The stock portion of the bonuses will vest after four years — a year longer than has been the practice at Credit Suisse in the past — and will be adjusted according to the average share price and return on equity.

The cash aspect of the bonuses, which Credit Suisse says is new, will be deferred for three years and will be based on return on equity and the performance of business units.

The compensation changes cover salaries and bonuses for the firm’s 7,200 managing directors and directors worldwide. They take effect in January and apply to pay for 2009.
More details at the Credit Suisse website showing the press release. In yesterday's piece, "Euphoria or Reality Over Upcoming Bonuses?", I wondered...:
"What I don't hear are terms like: distribution of cash component vs stock options, deferred stock compensation, clawbacks, ROE shares deferred, toxic asset bonus fund (credit suisse in 2008), other government tax policy on future bonuses, etc.."
Exactly. Reality. Lets keep it real!

Knakal: Resurgence of Institutional Capital

Posted by urbandigs

Tue Oct 20th, 2009 01:52 PM

A: I need to plug Robert Knakal's Streetwise blog because the content has been a breath of fresh air for the past nine months or so. In his latest piece, he discusses the "resurgence" of institutional capital interested in buying distressed Manhattan property, to which their is limited supply (office, multi-family, mixed-use, etc..). With transactional volume down "60% from 2008 and 75% from 2007", average property values fell about 32% from peak levels. Sounds about right with office properties seeing the most pressure. But with sales volume down so sharply, why the limited supply?

There are three main pressures on commercial properties:

a) rising unemployment
b) declining rents
c) tight financing in the mid to high end

Strange to see inventory levels so tight given the plunge in sales volume. To hear Knakal describe it, "...discretionary sellers are seeing these pricing trends as a tangible reason not to place properties on the market at the present time". According to "Low Volume of Investment Sales Caused by Supply Constraint; Demand Still Strong":

The volume of investment sales recently has been extraordinarily weak whether you look at aggregate sales price or number of transactions. In fact, we are on pace to see sales volume hit the lowest level we have seen in the 26 years we have been tracking these statistics.

Average property value has fallen in New York by 32% from its peak levels. Multi-family properties have been performing best, having lost only 16% of value while office buildings with significant exposure to the marketplace have been the most negatively affected, seeing a reduction in value of about 70%.

These reduced values have peaked the interest from the buying community as investors are looking for core assets at greatly reduced prices. Conversely, discretionary sellers are seeing these pricing trends as a tangible reason not to place properties on the market at the present time. At the height of the market in the first half of 2007, we had, at one point, 836 exclusive listings. Today, we have just 513 and have been below 600 for the entire year.

We remain hopeful that the supply side of the equation will get better as distressed assets appear to be coming to the market in slightly better numbers than we have seen thus far in the cycle.
Mr. Knakal goes on to discuss..."on the demand side, we have seen resurgence, within the past month or two, of institutional capital. As I mentioned earlier, this capital all but evaporated from the marketplace in the summer of 2007 and many of these institutional real estate players have formed distressed asset funds looking to buy properties. These funds are now in the market actively bidding on opportunities."

I too know of a few funds that were recently set up to take advantage of distress opportunities in that sector. Leads me to believe that a disconnect may exist in the most distressed commercial sectors as bids, while out there, just are not at levels that non pressured sellers would consider trading at - but then again, what the heck is non pressured sellers anyway. How do we quantify who needs to raise cash fast and close within a few months or else default? And how do you add in to that the human reaction to dealing with a financially stressed situation? Maybe a seller is in denial and ignores what in hindsight turns out to be a solid bid?

With declining rents, rising unemployment, and a tight financing market, the price has to be right; as the new owner will ultimately have a much better environment with which to operate the property. This is a highly deflationary phenomenon and tends to have a ripple effect on competing properties. This also may be one reason why bids have improved in the sense that Armageddon is now off the table, but not to a level that would jive with the current reflation trade mentality. The numbers still have to work!

For now, it's likely a good time to get into some distressed properties in office and mixed use marketplace if you have the cash and the numbers work! The chances of a natural overshoot to downside are high with such a fierce move; especially in office markets. For residential, the fear trades window was about 2-3 months (Feb, March, into early April) before the market saw a re-emergence of buyers and bids started to price out systemic risk. We found out later which months ultimately saw the sharpest deals.

Last check saw Manhattan office vacancy rates at 11.1%, a five year high, with rents falling 5.2% from the 2nd quarter and down 22% from the year ago period; via Bloomberg.

Calculated Risk adds some thoughts from NY Fed President William Dudley:
"First, the capitalization rate—the ratio of income to valuation—has climbed sharply. At the peak, capitalization rates for prime properties were in the range of 5 percent. That means that investors were willing to pay $20 for a $1 of income. Today, the capitalization rate appears to have risen to about 8 percent. That means that the same dollar of income is now capitalized as worth only $12.50. In other words, if income were stable, the value of the properties would have fallen by 37.5 percent. Second, the income generated by commercial real estate has generally been falling."
Not sure where cap rates are today, as my business is entirely focused on the residential sector. But it is clear that we are experiencing a deflationary adjustment, no matter what reflation trade seems to be going on in more liquid markets. Its healthy, it has to happen, it is happening, and markets will continue to purge the excesses from a credit fueled housing boom.

Net effective rents are more clearly showing the furious adjustment; these are rents after deductions and landlord concessions are factored in. Crain's reports net effective rents for commercial sector "hit levels that are 45% below their pre-recession peaks".

While I just renewed my residential lease 2 weeks ago, I'll share the outcome:
I rent a 891 sft, JR4, with 1 bathroom in full service upper east side building. E 80s location, west of 3rd avenue. My starting rent in 2006 was $2,900. It was raised to $3,100 in 2007 and raised again to $3,300 in 2008 (they asked for $3,450, but only offered $3,300) as there was no inventory in building even though markets seemed to be trending down this time last year already.

Landlord offered me $3,150 + 1 month free rent for a 13 month lease renewal. I asked for $2,900 plus the same concession. They came to $3,000/mth + 1 month free on a 13 month lease. I took it. So, that brings the net effective rent to about $2,750/month, or a 17% reduction from last year's levels.
Anyone out there care to share what they are seeing in the commercial or rental leasing markets?

Euphoria or Reality Over Upcoming Bonuses?

Posted by urbandigs

Mon Oct 19th, 2009 12:00 PM

A: So, the largest bailout of wall street in the history of this country is likely to lead to another record year of bonuses as trading revenues soar from a massive liquidity driven rally across many asset classes. Naturally, brokers in Manhattan are quick to pick up on the media opportunities that key words like 'record bonuses' can produce. Positive spin usually means higher sales volume. Higher sales volume means higher profits. It's a mantra that is embedded into the culture of this complex and always interesting housing marketplace. While some buyers employed in the financial services industry plan a future home purchase around their bonus, in no way do I see the same euphoria from wall streeters that existed in 2007. Expect a normal wall street bonus season, nothing more. Lets keep it real.

I'm tempted to write about these topics when I go out in the field and see a listing broker justify a wildly overpriced property with talk of the current economic boom and upcoming massive bonus handouts. Puuuuhlease! So should we throw recent comps completely out the window now?

Do people still fall for this crap, or do they internally laugh at the agent that dishes out the gold plated poo? Do we honestly think the idea of expected bonuses alone will move markets significantly higher to the point that we start to see higher end trades closer to peak levels? To hear that one broker talk, that is exactly what should happen. Here are two recent bonus headlines:

NY Times: "Bonuses Put Goldman in Public Relations Bind":

For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.

Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.
WSJ.com: "Bonus Pools On Wall Street Continue To Fatten":
While bonuses were down across the industry last year, this year bonuses are starting to soar, with some companies set for a record compensation year. U.S. banks and securities firms are on track to pay employees roughly $140 billion this year, a record high, according to analysis from The Wall Street Journal.

JPMorgan's CFO, Michael Cavanagh, talked about bonuses Wednesday during the company's earnings call. The investment bank professionals' bonus pool is $8.78 billion for the three quarters of the year, compared with $6.5 billion last year. Asset management compensation set aside for the three quarters is $2.4 billion.

This year, bankers will certainly be paid better, as JPMorgan generated investment banking income of $10 billion in the first three quarters this year, up from $1.5 billion a year earlier. Cavanagh declined to say how much more the bankers will be paid. "We'll await final guidance from regulators" on compensation, he said, but "ultimately performance will determine compensation" at the end of the year.

My thoughts for the 2009 bonus season are that yes, bonuses will be handed out as trading revenues and investment banking revenues were solid for 2009. But how will it affect our most active time of the year, typically late January to late April or so? The key is to know where we came from and where we been. This market has already priced out fear and bids have stabilized and slightly improved across all price points. So what now? Do bids need to continue to surge higher to satisfy newly adjusted sell side expectations? Surely, I hope not as that will usher in another disconnect; but if it seems to happen out there I'll write about it. We should be excited at how well this market came out of the mess we were in only one year ago. Why do we have to complicate it with babble that bonuses will power prices higher to peak levels!

As usual, the industry focus will be on terms like 'record bonuses' or '$140 billion' - those key words that can change a buyer or sellers' decision making process instantly. Could it be that bonuses that are not even handed out yet can make one's property increase in value in the months leading up to the handouts? Silly when you think about it this way isn't it.

What I don't hear are terms like: distribution of cash component vs stock options, deferred stock compensation, clawbacks, ROE shares deferred, toxic asset bonus fund (credit suisse in 2008), other government tax policy on future bonuses, etc.. By last check, the Credit Suisse Toxic Asset Compensation fund was up 17% for 2009.

Thankfully, Andrew Ross Sorkin enters the argument with his "Don’t Fail, or Reward Success" column:
Goldman’s executives are paid mostly in stock, which vests over three years starting at the end of the next year, so it is more like a four-year period. Excluding the eye-popping bonus numbers, no Goldman Sachs executive made more than $225,000 in cash last year. Mr. Blankfein and the rest of his management team, in deference to popular opinion at the time, waived their compensation completely.

So even though many of Goldman’s executives may make tens of millions of dollars, it is only on paper so far. And Goldman may impose a clawback provision that would require employees to give up some of their compensation if trades go the wrong way, similar to ones that Morgan Stanley and several others have already proposed. That’s the good news.

The bad news is the absolute number. It is far greater than any other bonus figure on Wall Street. Goldman says that its compensation program is based on pay for performance, and it is hard to argue that it has not performed well.
Of course you will get your typical retention of talent and structured employment contract compensation handouts too. This behavior tends to spread across the industry as firms make efforts to get outside talent and retain their top performers.

So what will buyers do with this cash? Move up? Move in? Pay down debt? Save?

Let us not forget that the ones getting the big bonuses are also the ones that study the fundamentals, trends, and economic data all day long. Most of the guys I talk to credit the reflation trade for stabilizing our market, but not for being strong enough to lead to a new series of year-after-year-after-year upward movement in prices! Pay market value, sure. Pay a steep premium over recent trades for future profit potential in a market that is appreciating? Umm, not so much.

You can't make life decisions based on one good year and I certainly don't expect masses of wall streeters to willy nilly throw money around. With that said, this bonus season will be healthy and big payouts are coming; but how this money is taxed, distributed, allotted in cash or deferred stock options, clawed back, or regulated are big unknowns that don't jive with the typical real estate broker whose job it is to transact Manhattan property. The anger by the American people is likely to grow louder and the headlines will call for changes in compensation rules as regulatory reform is drafted. Will lawmakers get tough on wall street? Doubtful at least not this year and especially as a full recovery is yet to take place; but time will tell. The difficulty will continue to lie in how compensation packages are structured and how that ultimately affects risk taking. What will Mr. Ken Feinberg do!

Back to our local markets, expect the typical broker babble and a fairly normal wall street bonus season as if it was 2005 or 2006 - not the euphoria that came with the 2007 bonus season as trades later deemed as outliers started to take place. If sellers tweak pricing strategy and expect bids to significantly improve, the active 'wall street bonus' months can turn out to be, well, not so active! Last year was a different story with a delayed seasonality effect occurring as our market's downturn was ultimately defined in the months from October of 2008 - March of 2009. The normally active JAN-APRIL was pushed back to MAY-AUG or so as the correction completed itself. The upcoming bonus season should be 'business as usual'. Let's just not over hype it.

Sentiment Extremes - Thinking Ahead

Posted by urbandigs

Wed Oct 14th, 2009 10:15 AM

A:I see that I didnt miss much while I was away when it comes to the outside world. Sentiment remains aggressively optimistic, the fed engineered bank recapitalization environment is powering bank earnings, gold is inching higher and just seems on a much higher path, uber liquidity is powering equities and other asset classes, and there is little action by the fed to pull away the punch bowl - Ben is clearly thinking inflate, inflate, inflate our way out of this debt deflationary episode. Can't fight the momentum and this move can last a lot longer than many believe. In my humble opinion, with a few quarters of great data ahead the biggest risk to the markets now is a suprise move by the fed to remove liquidity from the marketplace. When China announced they may constrain bank lending a few months ago, it was good for a 23% correction in just over 3 weeks. That right there is a glimpse of how markets can react when talk of removing the punch hits the headlines. For now, it remains Miller Time!

Jeff's piece in early August, "Here Comes the Long Hangover..But First a Few More Drinks", still seems especially relevant some 10 weeks later:

That attitude unfortunately seems to embody a relentless optimism that still lurks in the American psyche - one that I am not sure is justified, given the financial pickle we're in. I see this optimism in banks that are routinely reporting much higher non-performing assets, but raising their charge-offs much less than those increases. It seems that they think that when they get the properties back and sell them, they will end up being made whole. This thinking rests on the idea of a durable recovery that boosts rents and convinces buyers to lower the risk premium they are currently demanding to provide liquidity of any kind in this environment. It also embodies a belief that debt to bolster purchases of assets will be made available, by someone whose balance sheet hasn't blown up.

As I have discussed here recently ("Every Upturn Starts with Restocking") it's going to take quite a restocking effort to get back to a reasonable rate of economic activity despite the actual decline in consumer purchasing power. Not only that, as Greenspan pointed out in the interview, consumer purchasing power is highly variable, as the stock market has just re-instated some $3 trillion of consumer wealth that was previously taken away.

It is for this reason that I believe that we will see at least a couple of more quarters of strong economic rebound and one to two quarters of public companies surprising to the upside on earnings estimates. My guess is that the stock market will begin to figure out that the opposing forces at work in the economy will result in very slow GDP growth and a modest future outlook, sometime before year-end and markets will begin to adjust. I don't think it will look anything like the bear market we have just been through, but it could be the beginning of a multi-year period of ups and downs, like the 1970s or the last Japanese decade. But first let's party like it's 1998, just one more time.
We are in that period of time where earnings estimates are reflecting the uber stimulus (both fiscal & monetary), uber liquidity facilities, inventory restocking, and increase in confidence that comes with an increase in asset prices across the board. Stocks are a proxy for everything and fears of a second hit to the economy, whether it be CRE or Option Arm recasts or FHA bailouts, are not even getting a worthy glance right now. It seems to me that complacency is starting to set in and the upcoming data will likely reinforce these emotions further that its party time forever!

It was the punch bowl that contributed to getting us into this mess, it was the punch bowl that helped to get us out of the mess
(eliminating systemic banking failure risks and fears of 2008 and early 2009), and I believe it will be the removal of the punch bowl that will trigger the unintended consequences to the mess we got into. First the fed will rein in the emergency credit facilities and lifelines, then the markets will force their hand and they will raise rates (with talk of it being premature of course compared to unemployment situation), then they may have to drain liquidity through permanent open market operations (years out) so that now idle excess reserves don't pour into the economic system, and finally, they may have to raise reserve requirements as part of regulatory reform so that this doesn't happen again.

None of this has happened yet, and rather, world markets are reacting to the most opposite environment today. I guess that is why they call them, unintended consequences. I really wonder when the markets may start to force the feds hand to remove liquidity from the system?

You see, the fed thinks they are king of the hill, lord of the manor right now. Markets are reacting and emotions/expectations have shifted. But that is when something unexpected happens. Maybe decreasing maturity debts will may make the treasury market get hairy:
"...the maturity of Treasury debts is decreasing, from 6 years in 2000 to 4 years today, and dropping towards 2 years. As Karl Denninger comments, this places Treasury in an untenable position: it has to roll over the whole deficit every four years PLUS tack on new debt to cover the deficit. Why would the maturities decrease? Maybe that is all our trading partners will take, since they are rolling out of the Dollar into the YE$ basket. By reducing their exposure to long-term Treasuries they better prepare to get out if the US Peso continues to fall.

When something cannot go on, it doesn’t."
We know higher rates are coming, what we don't know is when and how fierce the initial adjustment to yet another new world might be. You can't time these things. Perhaps it will be if/when commodities get silly again? How quickly we forget how we all felt in early to mid 2008 when commodities went berserk.

14 Karat Facts About Gold

Posted by jeff

Sat Oct 10th, 2009 02:14 PM

Considering the big breakout in gold, I thought I would share some of the tidbits I gleaned from a meeting with UBS's gold commodity strategist and gold stock analyst, both of whom I had the pleasure of meeting with recently.


1) Commodity gold futures open interest is at record highs, with speculative (non-commercial) positions likewise at all-time peaks. This would normally be considered bearish.

2) The current gold rally has been narrower than the spring run up. Gold coin buying is well off the speculative highs of last year, when UBS's gold coin supplies were sold out. Many "macro" hedge funds were not particularly long gold when it ran away to the upside in recent months. They are potentially "waiting for a chance to get in."

3) Gold is no longer a risk mitigation trade as it was during the financial meltdown, but rather a risk-taking asset, which rallies when the stock market rises.

4) Gold is historically a very poor investment....except when inflation is rising.

5) Gold has performed less well in non-dollar terms during the current rally vs. the run up in the face of a strong dollar which took place in the spring.

6) Gold has become a weak dollar trade. UBS sees a pullback in gold coming unless the dollar gets materially weaker from here. The dollar is not too far off its pre-Lehman failure bottom.

7) Commodity futures traders appear to be taking positions in gold ahead of expected CFTC rule-making relative to speculative position sizes in energy commodities, believing that there is unlikely to be a political backlash against gold speculation (a victimless crime), thus leaving gold as the sole alternative for inflation hedgers and trend following commodity trading advisors (CTAs).

8) Gold stocks have been trading at a premium to the value of the gold they have in the ground (NAV). This has motivated gold company managements to sell shares to pay the cost of closing out hedge books (which limit the upside to their NAVs from higher prices, but cap their downside) in order to get that NAV multiplier on a bigger un-hedged asset. They are essentially selling the value of their gold at a premium in stock markets, to buy back hedging contracts in the futures market.

9) Contrary to "gold bug" rumors, China is not promoting gold ownership to its populace. However, they have liberalized gold ownership rules in the last decade. There is a government-owned enterprise that fabricates gold bars and they are running consumer directed advertising, though they are independently operated.

10) John Paulson's hedge fund has been offering a "gold share" option, where investors' returns are indexed to gold (hedge funds return + or - the return on gold vs. a basket of currencies). This option is being offered due to investor requests.

11) Gold prices peaked a couple of years after oil prices during the last great commodity bull market of the late 70s and early 80s.

12) Gold production of 2,500 tons/yr. is only a drop in the ocean of existing gold supply. It compares to 30,000 tons of gold held by investors, 30,000 tons held by central banks and 90,000 tons of gold jewelry owned by consumers. New jewelry demand equates to about 2,000 tons per annum. Increased investment demand for gold is generally satisfied by gold scrappage as owners of old jewelry "cash in" their gains.

13) The IMF is offering to sell 240,000 tons of gold. If China were to buy it, it would be considered a slap at the U.S. Treasury and the U.S. government's profligacy.

14) A proliferation of gold share classes offered by hedge funds would be a huge boost to investment demand, if it became a big trend.

The author has recently sold about 25% of his gold position, which should be taken as an all clear sign for the commodity to go much much higher.

Quick Manhattan Check - Out of NYC Until Next WED

Posted by urbandigs

Fri Oct 9th, 2009 08:43 AM

A: A quick check for you guys into some of the inventory and activity trends for Manhattan real estate. We also are now working on the blueprints of the next version of UrbanDigs with the focus almost entirely on how the analytic system will operate and giving you guys access to the most extensive real time information on what is going on out there, as it happens. The goal will be to keep you ahead of the curve. I would say we need another 2-3 months to finish mapping out the new site, functionality, etc.., and to build it. Hang in there. I'm also leaving the city for some R&R and will be back next Wednesday. Enjoy the weekend all!



Now, to put that into perspective here is the inventory trends dating back to Oct of 2007 (sorry, I dont have time to update the last 5 weeks of data into this longer dated chart - please use the above 6-month recent trend chart for what has happened recently):



Its useful to take a look at the spread between the weekly average of new listings hitting our marketplace and the number of contracts that are being signed. With a wider gap, we know the market is slowing as new listing trends increase as fewer contracts are signed. When the gap narrows, we know this market is more active as fewer listings are hitting our marketplace and more contracts are being signed. Both of these are a weekly moving average to smooth out the data. When I relaunch UrbanDigs I will enhance the functionality of all these trends to make it much easier to interpret - in addition, the data should be more real time as our source will be directly from the internal Manhattan broker sharing system:


I discussed the interesting signs this section of the chart system was telling us back in August, as it showed the wide gap between new listings and contracts signed activity when the market was frozen in February & March. As the market experienced falling prices, we can see the adjustment in the data and at what time buyers re-entered the market as a result of lower prices and higher confidence in the asset class. As we got to May/June/July/Aug, it was easy to see how contract signed activity picked up big time.

For now, it still seems active out there but not nearly as it was during May-August, the four months following the trough of the fast and fierce correction in price levels. Its a new world, and this market adjusted. The concern now is that perhaps there is a disconnect growing once again as seller optimism outpaces buy side confidence after 4-5 months of improving bids.

Listen to what the market is saying. If any seller believes they are priced right and has been on the market for 4+ months with no accepted bids, seeing the action that has occurred you must question whether your expectations are a bit off given current market conditions and the adjustment this market experienced. As much as you may have a number in mind, want to minimize a loss on the deal or are anchored to near peak sale level, your property is worth only what someone is both willing & able to pay for it at any given period in time. Real estate will always be an illiquid asset class and emotions sometimes cloud decision making.

Manhattan Rents Fall / Office Vacancies Rise

Posted by urbandigs

Tue Oct 6th, 2009 04:08 PM

A: Just passing along the latest. This is all not new and the process is a healthy one. I wouldn't be surprised if stabilization shows up in one of the next two quarterly reports.

Bloomberg reports, "Manhattan Rents Fall More Than 8% on Unemployment":

Manhattan apartment rents fell as much as 8.9 percent in the third quarter from a year earlier as rising unemployment cut demand, Citi-Habitats Inc. said.

Average rents declined for all apartment sizes as landlords offered concessions to tenants, the New York-based property broker said in a report issued today.

“The only way you can create demand is to make the market and the way you make the market is adjust the prices accordingly,” Gary Malin, president of Citi-Habitats, said in an interview.

Rents for studio apartments fell 8.2 percent to an average of $1,760. One-bedroom units dropped 8.8 percent $2,423. The cost of renting two-bedroom apartments declined 8.9 percent to $3,381 and three-bedrooms fell 7.9 percent to $4,591.

The rates reflect some, but not all, of the concessions offered by landlords, including a month of free rent, Malin said.
Its the concessions that are key. These reports don't accurately reflect the full concessions being offered by landlords to fill vacancies and get leases renewed. The most common of course is offering 1-2 Months Free Rent and then asking the tenant to sign a 13 or 14 month lease. For those using brokers, it may be a free month rent and a reduced or eliminated broker fee; or other combination of the two. Either way, this process is a very healthy one and I'm sure we will see some signs of stabilization in one of the next two quarterly reports. Our adjustment was fast and fierce and lower prices will revive demand over time. Here is a snapshot of neighborhood vacancy rates and then the average vacancy rate trend provided by Citi-Habitats September 2009 Rental Market Report:


Wow, check out the vacancy rate of the Upper East Side jumping to 2.49%! Bloomberg then gets into how "Manhattan Office Vacancies Reach Five-Year High":
Manhattan’s third-quarter office vacancy rate hit a five-year high as unemployment rose and companies gave up space in the recession.

The rate rose to 11.1 percent, the highest since the third quarter of 2004, New York-based broker Cushman & Wakefield Inc. said in a statement today. Rents fell 5.2 percent from the second quarter to $57.08 a square foot and were down 22 percent from a year earlier.

Sublease space declined to 11.1 million square feet from 11.4 million at mid-year, the first drop since the end of 2007, Cushman said.

“This is probably an indicator that you’re starting to see a market starting to bottom out,” said Joseph Harbert, chief operating officer for Cushman’s New York metropolitan region. “I would look at that as a harbinger of what’s to come. We’ve got a ways to go.”
Falling rents, rising vacancy rates: these are two more reasons why inflationary worries right now are misguided.

The consumer is still repairing their balance sheets and dealing with a tough labor market. The Fed is continuing to engineer a bank recapitalization environment even as some asset values feel like they are getting a bit frothy. The idea is to cushion the deflationary blow, cushion the hit to the economy and allow banks to re-organize themselves and try to earn their way back to health. Do we really want banks to go crazy lending to consumers in a deteriorating credit and rising unemployment environment? No, we dont. The system needs to purge itself of the excess that came with credit binge over many many years. In the meantime, each half off sale that we hear about (i.e. California Hotel Foreclosures Triple in first 9 months of 2009) will result in its own deflationary whiplash as the new owner has a much more efficient operating environment with way less debt in which to run the existing business.

3rd Annual Real Estate Panel at the Yale Club Wednesday

Posted by Toes

Tue Oct 6th, 2009 10:46 AM

(Toes here) Thought I would pass this along to anyone who might be interested in attending. All are welcome!

"The State of the NYC Residential Real Estate Market"
Wednesday, October 7th, 6:30pm
Yale Club Library
50 Vanderbilt Avenue @ 44th Street (across from Grand Central Station)

6:30pm - Networking
7:00pm - Panel
8:00pm - Q&A

The panel will explore the current state of the New York City real estate market and where it might be heading. Advance tickets are $10 for members and $20 for non-members. Walk-ins will be accommodated for $5 more. The evening will begin with networking at 6:30pm and the panel will start at 7:00pm.

Michael Stoler, the host and executive producer of "The Stoler Report-Real Estate Trends in the Tri-State Region," will serve as the panel's moderator.

Panelists include:

- Steven Knobel, co-founder and President/CEO of appraisal firm, Mitchell, Maxwell and Jackson, Inc.
- John Pasquarello, Mortgage Broker, Bank of America (Yale, c/o 1992)
- Stuart Elliot, Editor of The Real Deal Magazine
- Charles Summers, Vice President, Bellmarc

Register on-line or for more information, contact Alicia Jayo at the Virginia Club at 212-286-8744 or Christine Toes at the Corcoran Group.

Please note that the Yale Club has a business casual dress code (no jeans or sneakers). There will be crudite and cash bar. Complimentary glass of wine for UVa, Yale, Dartmouth & DKE clubhouse or chapter members.

A Rush Away From $$$? Gold Percolating...

Posted by urbandigs

Tue Oct 6th, 2009 08:27 AM

A: When I talked about gold as an anti-fiat currency trade, rather than a hyperinflation trade, it sparked a wide range of emotions from people. For some reason when you talk about gold it seems either you are a gold bug or a gold hater, and no matter what you argue people will hold on to their beliefs. But when you start hearing talk of Arab states switching to a basket of other major currencies for pricing oil trades, it kind of makes you wonder what is going on out there. Either way, it is making the gold markets percolate again as fears of a currency crisis may ultimately become a self fulfilling prophecy.

I first want to re-iterate my thoughts on the gold trade, going back to "How IN Is Gold":


My deep down opinion is that gold is performing how it should, at a time when general confidence in fiat currency is declining. In my humble opinion, the gold trade is not a hyper-inflation trade right now, but more of a lack of faith in paper money/fiat currency trade that ultimately could test its inflation adjusted high. Those in it now for the inflation hedge, are along for the ride as the world united battles deflationary forces.

For the next few years while global fiat currencies are systematically debased, via central bank printing to counteract local slowdowns, the future whiplash-inflation trade (maybe 2012-2013) will be slowly building as the Kondratieff Winter plays out. It seems logical that the gold trade is a multi-year trade; if it doesn't get parabolic too early.
By the time inflation does become an issue, perhaps in a few years, gold will already have made its move. It will power the next phase of the move. That is when you will hear talk of gold having been a leading indicator of inflation, so look at what gold is trying to tell all of us!

Now we start to hear about "The Demise of the Dollar" by Robert Fisk over at The Independent:
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
Sounds very conspiracy theory doesn't it and Mish is already beating it down is pure silliness:
Saudi Arabia, China, Japan, and any other country can hold whatever reserves they want in whatever currencies they want regardless of the pricing unit of oil. Reserves are based on trade relationships not pricing units!

Pricing oil in Euros (or even sillier - a basket of currencies) will not cause anything to happen. If pricing unit changes do happen, they will be a result of sentiment changes in regards to existing dollar hegemony and not the other way around. Dollar Armageddon is not coming over a pricing unit, nor did the US invade Iraq for that reason. The story is nothing meaningless hype.
Mish always makes a strong point, but stranger things have happened to cause a future domino effect.

Then Bloomberg picks up the piece, "Dollar Falls on Report Gulf States May Stop Using Greenback":
The dollar declined against 15 of its 16 most-traded counterparts as Asian stocks rallied and the Independent reported Persian Gulf states along with Japan and China are discussing dropping the greenback for oil trades, citing unnamed sources. The yen rose after Japan’s finance minister said he told Group of Seven leaders that weak-currency policies were undesirable.

Meetings to discuss the transition have already been held by finance ministers and central bank governors from Russia, China, Japan and Brazil, the newspaper reported.

“The very fact that such an idea is being entertained is undermining the dollar,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd. in Hong Kong.
This is when just talk can rattle markets and ultimately become a self-fulfilling prophecy. Maybe it doesn't happen, I dont know, in fact I have no clue what these guys are talking about. Seems like a red herring to me. But maybe that doesn't matter. Maybe the end result can happen anyway just by pure momentum sparking a chain reaction of events. Maybe Jim Rogers was right that there would be a currency crisis by the end of 2009.

I find it interesting how gold is performing well in almost all fiat currencies. I find this chart that plots gold's performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar:


"Relative to other currencies, gold continues to outperform. The red vertical line was the first positive reading from the indicator after about 10 months of being negative. This was 10 weeks ago and gold was trading at $960 an ounce."
So lets see, the dollar crashes, cost of imports go through the roof, we can't buy that much stuff anymore, and that works out how for the rest of the world? Things that make you go hmmmmmmmmmmmm. There is a reason I think that the first bout of inflation will be in the form of higher food, energy, raw commodities, metals, health care, etc..the stuff that squeezes profit margins and consumers wallets; right when unemployment is likely at or near its peak.

Crazy times.

Lower End Market Shift: Call It Broker Babble If You'd Like

Posted by Toes

Mon Oct 5th, 2009 12:29 PM

Toes Here! Just want to pass on what I am both seeing & hearing out there. I know you're all going to pounce on me if you aren't actively in the market right now, but so be it! This post mainly has to do with sub $1M properties that are PRICED WELL, i.e. below the most comparable active competition.

shift.jpgI have sensed a market shift in the last four-six weeks. One of my sales listings had a bidding war in the first 9 days on the market where there were three bidders very close to the asking price, one all cash. A fourth buyer came in 15% lower than ask and was flabbergasted that his offer was so much lower than others.

A buyer of mine offered full asking price on a $299K apartment only to be beaten out by someone putting more than 30% down (building only requires 20% down). The lower end market has been very active as of late.

Another buyer of mine offered full asking price (just reduced to $515K from $538K a month ago) on an apartment, but was two days late - a contract was going out and his offer wasn't high enough to disrupt the current deal.

I wanted to make sure this wasn't just something I was seeing in my own business, so I took a survey. Here was my question to my fellow brokers:

"Hi y'all,

I have 2 separate buyers who lost bidding wars this week ($299K and $515K downtown).
One listing where we had a bidding war (UES, $525K) between three great buyers.
And I have noticed a few brokers/sales offices RAISING prices on a few apartments. (Don't they know that everyone is on streeteasy & knows that they raised the price!?)

Is this happening everywhere? Do I need to tell my buyers that literally in the last few weeks this market has just shifted? I'm worried that they will think I am giving them "broker babble" or they'll think I am being "pushy broker girl." So I would like to get some more anecdotal evidence before I start making assumptions about the market based on my own business.
Thanks so much for your feedback! Christine"
Here are the responses I received:

1. Sales offices will do that especially if they've had listings on since 2007- they just assume that the apt has appreciated, but in reality, they will cut a good deal, especially if they wish to sell the last few remaining units- not the case for all sponsors, but for some.

2. For buyers, I would use inventory facts. Inventory is decreasing so there's less choice. Since there are a lot more serious buyers out there, the "freefall" in prices is over and realistic offers will need to be made, sometimes very close or at or even above ask price.

3. We discussed this in our meeting this week as well and I have been involved w/ one bidding war this past month. It is still a shaky market in my opinion and only the best priced apt is priced a bit lower are getting the bidding wars. That said you can only present the situation to the buyer and have them decide on best and final offers - that would save u criticism in future about your advice should the market take a tumble.

4. Christine, I assist 2 VPs, and I’ve been seeing it happen on deals for both of them. We’re seeing it on deals from the 600k range all the way up to $5mil on Park Avenue. I know what you mean about being accused of broker-spin, but it really is happening (on well-priced and otherwise awesome apartments). Even just had a bidding war on a $5,000 rental

5. Working with a studio buyer under 500k currently and it is shocking what is going on. Every good property has at least one offer on it. Just lost out on a bidding war for a property that was on the market since July and now all of a sudden got 3 offers on it. She lost out on another a couple of weeks ago. It's hard for first time buyers to deal with it.

6. Christine - I also get a sense that the lower end of the market is shifting since mid August and prices are tightening up in the $450,000 and below range. I too have seen a few price increases.

7. Hey pushy broker girl. I had 4 offers over ask on a townhouse in Bklyn last month. So it is happening when props are priced right.

8. I had 3 bidding wars in May/June. Each apartment went for below the asking price, but they were priced right for what they were in this market. I think its nuts to raise prices in this market.

There you have it! The buyers are out there and when something is priced right, apartments are selling and there are even bidding wars.

Toes says: Don't be surprised if you have to pay asking price or very close to asking price for an apartment. Whether its a real shift or just a temporary bubble, I don't know, but studios and one bedroom apartment in particular are selling if they're priced right.

Toes says: If you've been active in the market and are ready to pounce on something, be prepared with your financial statement filled out and ready to go, your Manhattan real estate attorney in your back pocket & a recent mortgage pre-qual letter. The most prepared birds get the worm:)

Manhattan Q3: Sales Surge 46% From Q2, Prices Fall

Posted by urbandigs

Fri Oct 2nd, 2009 09:03 AM

A: Not news for UD readers, but will certainly cover the main street media headlines today. Here is your Q3 data.

I must say I am a little surprised they focused on continuing pressure in price levels in the headline, rather than the surge in activity from the prior quarter. Good to see the headlines keeping it real!

Via Bloomberg's, "Manhattan Apartment Prices Decline for Second Straight Quarter":

Manhattan apartment prices fell for a second consecutive quarter, helping drive the biggest gain in sales in more than 13 years as buyers seized on discounts. The number of sales jumped 46 percent from the second quarter, the biggest third quarter increase since 1996.

The median price slid 8.4 percent to $850,000 in the third quarter from a year earlier, New York appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate said today. Values fell for cooperatives and condominiums of every size and price as New York City’s unemployment rate jumped to 10.3 percent in August.

Studio apartment prices fell 6 percent from a year earlier to a median of $399,000, Miller Samuel said. One-bedrooms dropped 11 percent to $645,000; two-bedrooms fell 23 percent to $1.18 million and three-bedrooms dropped 41 percent to $2.25 million.

Four bedroom apartments plunged 49 percent to a median of $5.18 million, reflecting, in part, a decline in luxury sales, Miller said. Those sales declined 16 percent. The luxury segment is defined as the top ten percent of co-op and condo sales.
According to NYMag, sales surged from 1532 in the 2nd quarter to 2,230 in the 3rd quarter, but prices were still pressured. Simple and expected. Sales volume surged on a quarter to quarter basis, but fell on a year over year basis. For seasonal markets like housing its best to either seasonally adjust or compare a quarter to the same period a year earlier. The pace of decline for prices slowed after the fierce move down defined by the Q2-2009 report. Here is an updated snapshot on Manhattan Co-op + Condo sales:


The above graph makes it clear to see the decline in sales in each quarter since the peak in 2007. With many deals still in the pipeline, we might be able to beat Q4 2008's number when that data is released January 2nd, 2010. Our active season was delayed as deals started to pick up in May with prices correcting to a new, lower level. It was this adjustment in prices that re-sparked interest in Manhattan residential property. As months went on and a reflation mentality took hold for all markets, activity surged. This is what today's report shows.

The biggest concern right now is if sellers get too euphoric with the improvement in bids since fear engulfed the markets earlier in the year. I am starting to see this happen over the last few weeks. For the period of May-Aug or so, many sellers came to the realization that bids for their property were coming in at this new, lower level. It took some time but the message got through and many deals were finally signed into contract. It wasn't because bids all of a sudden spiked higher, rather, sellers over time got more realistic about what the market was telling them their place was worth. After 4-5 months of this type of activity, I am getting the feeling that sellers are starting to take it a bit too far.

In early August I wrote about this future concern in, "It Takes Two To Tango: Are Buyers On Board?", which garnered a nice reaction in comments:
"I don't see a sustainable uptrend in bids just because stocks say so, as buyers don't seem to be fully on board the gravy train. But this fierce equity rally may just be enough to alter the psychology of sellers and slow this market down a bit. Unless buyers change too we will see a disconnect again leaving brokers and those same buyers wondering what the heck is going on."
For what its worth, I am starting to both see and hear about sellers getting too optimistic with the improvement in bids recently as our market stabilized from extreme distress. I am even hearing brokers tell me, "this property has been on the market for 8 months, we cut the price twice and the seller doesn't have much room to go from here - so we decided to take the listing off the market until buyers wake up". Yes, I was told this! I think its the seller that needs to wake up.

Sellers expect bids to continue to improve and to price in future profit potential that hasn't happened yet. As a result, they are a bit less motivated to move property until they get their number. This is a dangerous emotional element for any seller considering the foundation that this so called reflation rally is built on. It can change on a dime at any time! Sellers need to ignore the equity rally and continue to price their properties where deals are happening - at this new, lower level. If they don't, sales volume will dry up pretty quickly and a reversal of inventory trends can put a bit more competition on each listing. Take advantage of the action and understand where the bids are!

Streeteasy Meetup Tonight

Posted by urbandigs

Thu Oct 1st, 2009 09:17 AM

A: Its not an official streeteasy gathering, rather, just a meetup of those that utilize their discussion forums to talk markets. We did this earlier in the year and it was nice to meet other Manhattan real estate enthusiasts and talk about the markets in general. Just a reason to get out and have a drink I guess. Anyway, meeting tonight at 7:30PM at Galway Hooker on 7 East 36th between 5th and Madison Avenues!

If anyone wants to meet, talk markets, talk real estate, talk credit, talk bailouts, talk fed, talk inflation vs deflation, talk gold (hmmmmmmm, gold), whatever, feel free to stop by!! I'll also be more than happy to tell you what UrbanDigs 2.0 plans are and where we are at right now in development. Maybe you can tell me what you want to see to make Manhattan real estate more transparent?

I'll be the balding blogger drinking scotch. Picture of the venue below, I think it will be perfect for this type of gathering. Hope to see you tonight!