The FDIC banking profile for the fourth quarter came out yesterday. The following are highlights of the report with my comments. I continue to closely monitor the banking system because while the acute phase of the crisis is long over with, debt defaults are still at record levels. Additionally, while the banking system is slowly being recapitalized through ZIRP and equity issuance and rationalized through shotgun weddings, it is still not functioning "normally". I should clarify that the shadow banking system (as epitomized by the MBS and CMBS market) is still basically crippled (yes credit card deals have returned). Meanwhile, the regular banking system is doing what it would normally do in this part of the cycle, which is keep lending standards tight, take losses and respond to the low level of actual credit demand from gold plated borrowers. The regular banking system which makes loans and keeps them on its books, still has some heavy losses to slog through and many with high concentrations of construction loans will not make it. That said, the FDIC seems to be merging these bad actors together with healthy institutions at a reasonably good pace. As merger activity recommences we are likely to see a new tier of mid-sized banks built, that can better compete in the marketplace with the industry giants, and have the underwriting skills to eventually start to absorb some of the borrowing needs of CMBS borrowers (albeit on terms and at rates those borrowers are unlikely to be happy with). At this point I am monitoring the bank statistics less as a "death watch" and more as a guide to the "headwinds" facing an economy that looks like it wants to recover, but I don't want to get ahead of myself. Let's check out the latest data:
FDIC banks posted a $914 million profit in Q4 2009 vs. a $37.8 billion loss in Q4 2008.
This is basically a break-even performance, nothing to write home about, but it's better than the total meltdown that was Q4 2008.
For the first time in 3 years, more than half of banks saw a year-to-year improvement in profits.
Frankly with the abominable performance of Q4 08, that's pretty disappointing. I would note however, that a lot of the losses in Q4 08 were big banks taking mark to market losses, this year's Q4 was characterized by big banks making money and small banks playing catch down, by taking realized losses or writedowns on actual non-current loans (rather than trading assets) unrelated to market performance. Indeed, the FDIC points out in its report that while all banks size ranges reported increased ROAs year-to-year, only the largest banks had positive ROAs. Additionally, the FDIC report notes that trading profits were $2.8 billion in the quarter, versus a loss of $9.2 billion last year.
Quarterly loan loss provisions fell year-to-year for the first time since Q3 2006 and the $61.1 billion of loan loss provisions was the smallest amount set aside since Q3 of 2008. One might find this to be questionable considering the continued degradation in bank asset quality, as non-current loans and leases on banks books rose 67.5% year-to-year and 6.6% from Q3, except for the following:
Loans & leases 30 - 89 days past due (the leading edge of loans going bad) declined 11.9% year-to-year and 1.5% quarter-to-quarter. I have built a little graph of the < 90 day delinquency and the greater than 90 day delinquency (also known as "noncurrent assets") data as well as net charge-off data, which you can see below. (Please note that the data is revised by the FDIC with each quarterly report they put out, but I couldn't find the entire data set, so in each case I use the freshest data point available - the numbers don't move around enough to change the trend.)
A couple of observations are worth making. As you can see, loans 30 to 89 days past due peaked in Q4 of last year. So technically, loan delinquencies are improving. Note that many times a loan that is 30 to 89 days past due can be rehabilitated, but when you get past 90 days generally the borrower is going south on you. So I would take the "improvement" we have seen in this metric with a grain of salt relative to the obnoxious trajectory of loans > 90 days past due. Now of course the > 90 day category of bad loans accumulates as the 30 to 89 day delinquencies that don't get fixed rise. However, these bad loans are also worked out...the hard way....through the bank taking possession of the collateral, selling it and taking a charge-off for any amount not recovered from the sale. Now you can see from the graph that that net charge- offs continue on an upward trajectory, but are much smaller than loan delinquencies. This in part reflects severity (the amount actually lost when a bank sells the underlying property it lent against) as well as the lag in the amount of time it takes to actually foreclose and sell the collateral. My guess is that severity is actually pretty bad considering the loan to value ratios banks were allowing and the severe declines in the value of most real and personal property banks would lend against. The absolute levels of both 30 - 89 day past due loans and charge-offs most likely are being most heavily influenced by a severe backlog of dud loans to be dealt with, long processes for dealing with them and illiquid markets to sell into. All in all there are some rays of light here with regard to loan delinquencies, but expect charge-offs to continue rising and possibly go ballistic in upcoming quarters as the backlog of bad loans is dealt with.
While bank managements are up to their assets in alligators and dedicating lots of time to working out sour loans and disposing of collateral, it would seem pretty obvious that there is neither time nor predilection to make lots of new loans. As you can see from the chart above, lending by FDIC banks is still contracting. Most importantly, the amount of loans that directly lead to job growth like commercial and industrial loans and construction and development loans are still falling rapidly. Only home equity and the non-farm non-residential category (which likely relates largely to permanent loans for commercial real estate) are stable to rising. (Although I didn't include them to keep the chart digestible, farm loans and credit card loans are flattish since Q408).
While I would expect loan growth figures to lag the economic rebound, without the economic oxygen of lending related to job creation (and no shadow banking market to speak of) the durability of this recovery must still be questioned.
A: Whether you question the sustainability of it or not, you can't deny that some well priced properties out there are receiving multiple offers in the past 4-6 weeks or so. However, that doesn't mean each will end in a bidding war! In fact I find that while sellers love bids competing with each other, almost all buyers and many brokers out there hate them - it just "complicates things" they say! They call it a war but it's not really a bidding war; which I would describe as a situation in an auction where two or more bidders aggressively battle each other in a transparent manner sending the final price for the item much higher - each buyer knowing what they are up against with each move. For highest & best situations in Manhattan, interested buyers are simply provided a deadline with which to provide their most aggressive offer for the target property. In the end, the seller broker and seller review all bids submitted and choose the highest and best one to proceed with! However, "highest & best" situations are often perceived as bidding wars and that alone could scare many qualified buyers running for the hills!
Disclosure: I no longer work with sellers and currently spend my time servicing buyers only. This is a big no-no in regards to building a successful broker business model. The proven broker model is to establish a successful sell side business and to the best of your ability, recycle business (buyers) as traffic comes in - the team approach allows for this and the power in numbers adds to production volume which increases the split distribution with your employing brokerage firm. Then, the team continues to work the referral base expansion aspect of the business. Since UrbanDigs LLC became a member of REBNY, I have been working only with buyer clients as it fit my niche target audience, business model, and compliments my ongoing vision for where I see UrbanDigs.com in the years ahead. You will soon see where I am going with my vision.
The most important thing every buyer should understand about a property that declares a highest & best situation is that you only have to bid what you are comfortable with bidding!! Nobody is forcing you to get into war with anybody and since you are not told the competing offers, there is no back & forth for you to ponder whether to up the ante a bit more! It's basically a one and done!
Now, as I wrote in my "How To Handle A Bidding War" piece almost three years ago:
It is very important to note that the intended seller strategy of a bidding war is to encourage a sense of urgency via potential property loss and NOT to install fear into the prospective buyers. I can't begin to tell you how important this is. By installing fear into the bidders rather than encouragement to participate in the bidding war, chances are you will 'scare away' and lose one of the bidders messing up the entire goal of the war.I'll take this one step further and add that a desired goal of a 'highest & best' scenario is the gap-up potential from one of the interested bidders.
The ultimate goal of the bidding war is to procure the highest & best bid that generates a signed contract for the seller!
The key is knowing when the situation is ripe for a 'highest & best' declaration, as many brokers and sellers with minimal experience in Manhattan real estate transactions may get a bit excited and ahead of themselves. The ideal situation is when the listing broker receives BOTH of the following:
1) Two or more ACCEPTABLE offers - the offers must be in the realm of acceptability by the seller. There is no point in calling for a 'highest & best' situation when the seller is asking $1M and you receive two offers below $800,000 that the seller has no intention of accepting due to price alone! The buyers' terms must be acceptable as well...
2) Two or more QUALIFIED offers - the two or more offers must be financially qualified to both be able to secure a loan commitment and to pass board approval; assuming it is a co-op.
Simple. Clear. Easy enough. Now, every offer has its own variation of terms that must also be considered by the seller in these situations - closing dates, inclusions/exclusions, gifted monies, inspection requests, etc..
Assuming your property has procured both of the above, you now have a choice to make on what to do - but before I go into the choices I want to discuss the concept of 'gap-up' bids.
Gap-up Bids: this occurs when a very interested buyer deals with a highest & best situation by going all in in regards to aggressiveness! Let's say you got a property asking $2,895,000 that was priced such that it received multiple offers; a highest & best is declared and deadline for submitting offers provided to all interested buyers. To ensure they get it, one buyer decides to bid $3m! I consider this a gap up offer that may not have come in like this if negotiations were privately held. This actually occurred for 35 Bethune Street, Unit 2/3A...which is in contract now awaiting closing - let's revisit this discussion in a month or two when we see how far over ASK the winning bidder went to get that desirable duplex! Another example of a gap-up offer was 37D @ 115 East 87th street at the peak of the market, closing some $600,000 over ask after a best & final environment was set by the broker!
Gap-ups don't always happen for highest & best situations, but the environment certainly exists for one to occur. Moving on, when multiple qualified & acceptable offers are submitted the seller has two choices on how to proceed:
a) Handle Independent & Private Negotiations
Pros: Allows you to continue marketing the property and continue the negotiations back & forth for as long as the seller likes or as long as the buyer(s) participate, less chance of scaring away buyers,
Cons: Limits the gap up potential of a highest & best, time may allow for a competing property to come to market and steal one of your buyers
b) Declare A Highest & Best Situation
Pros: Increases the gap up potential in a bid, usually ends the process fairly quickly, usually keeps the sense of urgency on the most interested and the winning bidders to produce a signed contract
Cons: may scare away some potentially strong buyers who 'don't do bidding wars', the situation is usually not handled correctly by the broker or seller, if it fails to produce an executed contract from the interested buyers it could leave the seller in a bad position
Both have its pros & cons and I don't have time to think about and list them all. Experienced brokers will know when to advise a seller which path to take; there is a feel to it that good brokers are quick to pick up on. Handling this situation the wrong way can end with no deals done, no bids left, and a listing that lost all control after being in the driver's seat going full speed ahead.
For newer agents that don't know how to handle this kind of situation, go back and read my article on handling multiple offer situations. In the end, experience will be your best lesson on how to handle similar situations in the future; so when you encounter this environment be sure to focus on how you handled it, how the buyers responded and reacted, and how everything played out! Learn from your mistakes so that next time you don't make them!
It’s been touted as a consumer-empowering trend, a revolution, a win for buyers and a loss for agents … VOWs – Virtual Office Websites.
It all started with a lawsuit in which the Department of Justice sued the National Association of Realtors in 2005 for additional transparency in property listings on IDX (a data-sharing listing service). The settlement in 2008 was intended to make it a playing field for internet-based brokerages as they compete with traditional firms.
Now, the big hooplah comes from the media as it looks to large NYC brokerages who are adopting VOWS and allowing other brokers’ listings to be listed on their sites, with Halstead being the first. Basically, buyers can now see listings from Corcoran, Elliman, etc. on the Halstead site. Other firms are also jumping on this bandwagon, all under the same banner of this being the wave of the future.
Some are calling it a revolution, and big win for the little guy in the age of the Internet. Crain’s has picked up this story several times (here and here) with such attention grabbing headlines like “Brokers lose grip on their listings”.
Did I miss something? Have we not had Streeteasy and Property Shark? If I were to break down buyer’s behavior, I would say that any do-it-yourself or research-driven buyer out there will go straight to Streeteasy to do their research. Why go anywhere else? It’s as if the current dilemma has been the necessity of having to go to each and every brokerage firm’s site to conduct property due diligence; that’s not the case. Further, unlike SE or PS, VOWs adopted by the big brokerages will require a user to register in order to view the listings, an extra step in an otherwise straightforward process.
[Disclaimer: I’ve always had a bit of a philosophical problem with brokerage firms touting a huge online prowess and fancy features; those bells and whistles are supposedly targeting those do-it-yourselfers, those buyers who have chosen not to engage buy-side representation (all of 5% or so, in my experience). It’s meant as a pitch to sellers for exclusivity and touted as a differentiator in the race to attract as many eyeballs as possible. I guess I’ve never bought into it, as I feel that those 5-10% of buyers are aware of Streeteasy and PS already.]
The more fruitful idea, if we’re talking about market-leveling efforts, would be to create a true competitor to Streeteasy, with additional value-add features, rather than to transform each brokerage firm into a Streeteasy derivative. … ‘Just a thought.
I’d love to hear from the UD community on this topic:
• For those do-it-yourself buyers, where do you go online to dig?
• How often to do you visit the big brokerage websites? In which instances?
• How significant do you think VOWs will be in the NYC market?
• Sellers, how important is your chosen firm’s online capabilities to you and why?
A: I'll try to get right to the point here for you guys. I continue to see Pending Sales stay at healthy levels after a short adjustment down from the surge we saw in contracts signed starting around mid 2009. My data shows Manhattan Pending Sales hovering around the 4,356 level right now; pending sales are contracts that were signed and are awaiting approval to close. This suggests a fairly strong upcoming y-o-y comparison when the Q1-2010 market report is released in early April. In addition, the 90-day moving average for closed sales clearly shows both the plunge and improvement this market experienced over the course of the last 18 months or so - that is pulled directly from ACRIS and is public record.
The data doesn't lie and it certainly does paint an interesting picture when you filter out the noise properly from the source data and assign the right rules to calculate different metrics worth following in the Manhattan residential real estate market.
Below is a chart comparing the trends for Manhattan Pending Sales (orange) vs. the Closed Sales 90-Day Moving Average (green) the past 4 years:
Consider this another sneak peak at what's to come here on UrbanDigs in a month or so. So what is this chart telling us?
1) First off, in my eyes, the 90-day moving average for closed sales (taken from a direct feed with Acris) clearly shows the roller coaster ride this market experienced starting in mid 2008. The plunge in sales was dramatic to say the least and if you want to really blow your mind you can do some digging into the plunge in DOLLAR VOLUME this market experienced as a result of the higher fear and mortgage market freeze up surrounding credit crisis at its peak; both for residential and commercial sectors.
You will notice the slight lag between Pending Sales and this 90-day sales trend due to the lagging nature of the sales process from contract signing to closing.
The improvement in the sales trend shows you the sustained increase in deals being signed since May/June of 2009 or so - I like to look at it as this market pricing IN fear leading up to early 2009 and pricing OUT fear over time as the reflation mentality took hold.
2) Second, pending sales dropped from about low 7,000s to about mid 3,000s in about 7-8 months time at the height of the crisis. The plunge was dramatic, the adjustment was dramatic, and it had a fierce, uncertain, scary feel to it. When it was happening nobody knew how far it would go or how long it would last before stabilizing. In hindsight, the % drop from peak varied across price points and took about 8 months to find a comfort zone; as noted right here on UrbanDigs in February 2009.
As sales volume started to rise with time, we topped out around the August-November period with pending sales hovering in the low 5,000s - we are now seeing these deals close and be captured by quarterly reports. The slight move down in pending sales was more a function of seasonality in December around the holidays then a new trend to the downside in sales volume - recall that in June, July & August we were averaging about 1,100-1,200 or so contracts signed a month as buyers swooped in with the fierce adjustment in price action. It shouldn't be a surprise that we could not sustain that level of activity for long. Over the past 30 days my new systems show 971 contracts signed and that was closer to 785 or so about 6 weeks ago reflecting the seasonal slowdown in December.
With pending sales holding at a healthy level I think its safe to say that when the Q1 2010 market report is released to the public on April 1st, we will see a stunning y-o-y improvement that could have some 'headline effect'. Just be prepared for it as it will be a function of an improving marketplace being compared to the report that marked the worst period of sales in the past decade or so; recall that Q1 2009 recorded only 1,185 sales, and I would not be surprised to see Q1 2010 sales come in around the 2,400 - 2,600 level! Let's see how close I get!
For now, as I attempt to setup appointments for clients I get these types of responses about half the time:
I have the tools in place to track these CONTRACTS OUT & OFFERS ACCEPTED broker status changes but unfortunately many brokers do not bother to update a listing's status to these "in between" settings in their respective broker sharing systems. The natural progression in regards to how a broker handles a new listing that stays on the market and ultimately closes is NEW ACTIVE --> OFFER ACCEPTED --> CONTRACT OUT --> CONTRACT SIGNED --> CLOSED. It would be great if all brokers updated their sales listings as this progression took place in the real world, because having a listing whose internal status is set to OFFER ACCEPTED or CONTRACTS OUT doesn't change a thing for the active webad. For all intents and purposes, that listing is still ACTIVE in the public eye. But its clear that very few brokers update each stage as it happens which gives me less confidence to those metrics for trend purposes.
Now, even though well priced apartments are seeing strong demand I continue to question the sustainability of this pace of signed contracts! That's just me as I continue to have macro concerns and worries over the withdrawal of stimulative policy and programs. I won't deny its happening, but I do question how long it will last.
GOOD PRODUCT w/ DESIRABLE FEATURES + PRICED RIGHT = STRONG DEMAND OUT THERE
Simple - so don't interpret it as anything other than this. No, you can't price at peak levels and expect multiple offers. No, you can't have a property priced high and in need of a total gut renovation and get multiple offers over ask. And No, you can't have a property with no light or view fetch top dollar and sell fast today! If you price high and test the market or have a property with features that make it a hard sell (low floor, undesirable location, lack of sunlight, lack of view, in need of major work), you will find the market may be very different than what I am describing here. My business has been quite active for about seven months or so with about $4.1m in closings the past four months, $4.4m or so in contracts signed pending closing, and another $7.8m or so in active negotiations across varying price points in Manhattan right now. All of my deals seem to fit in with the updated range of where I see this market trading right now. I leave it to you guys to tell me if you see something different!
A: Okay okay, so I teased you a bit. But this is the first real sign that the era of exit strategy has officially begun. Sure you could have argued that it began earlier with the expiration of some emergency credit facilities, but this is a sure sign of what is to come. To me, this feels like a test of sorts by the fed to the markets as they raise the discount rate by 1/4 point; nothing really too hawkish in the grand scheme of things but a signal as to what may lie ahead of us. The stimulative/liquidity spigots are basically still on.
Via Bloomberg's "Fed Raises Discount Rate by Quarter-Point to 0.75%":
The Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent and said the move will encourage financial institutions to rely more on money markets rather than the central bank for short-term liquidity needs.While not the biggest of moves, it will be interesting to see how this affects the banks recap efforts & the greenback because that will impact other markets after what we saw for much of 2009! Should the dollar start to rise as we start to tighten policy and withdraw stimulus right when Europe seems to be facing sovereign debt issues, it could make for very interesting moves in many asset classes. The dollar rose, gold dropped and equity futures sold off on the news. As for banks, it will discourage borrowing from the fed's discount window and raise the cost for those that need access to that source of liquidity. The play for much of 2009 was for banks not to lend and instead borrow at zero from the fed, buy safe Treasuries and park them while pocketing the spread.
“These changes are intended as a further normalization of the Federal Reserve’s lending facilities,” the central bank said today in a statement. “The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy.”
The dollar jumped and Treasuries extended losses as the Fed took another step in a gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed has provided hundreds of billions of dollars in backstop credit to banks, bond dealers, commercial paper borrowers and troubled financial institutions such as American International Group Inc.
The U.S. currency rose to $1.3541 per euro at 4:40 p.m. from $1.3616 before the announcement, while the yield on two- year Treasuries increased to 0.93 percent from 0.87 percent.
The discount rate increase is effective on Feb. 19. The Board also said that effective March 18 “the typical maximum maturity for primary credit loans will be shortened to overnight.”
Now I promise you that you will start to hear the other side to this tale! You will hear the arguments that this is a sure sign the US economy is on the road to recovery and the fed is starting its strategy to temper future inflation expectations. Anyone want to bet that these sorts of headlines start to come out tomorrow? This move is really nothing in the grand scheme of things and when I cautioned about unintended consequences as a result of stimulus withdrawal, I was referring to a heck of a lot more than a 1/4 hike in the discount rate!
However we could look back at today as the start of a new era of a slow and drawn out period of stimulus withdrawal in many formats; hiking discount rate, hiking fed funds rate, stopping debt monetization experiment, removal of credit facilities, raising capital requirements, regulatory reform, phasing out of consumer tax credits, raising interest paid on excess reserves, and ultimately the selling of assets to primary dealers via POMO to further drain excess reserves just to name a few of the moves that look to be ahead of us!
Christine Toes here. Since Noah is on vacay, I thought I would give an update on what I have seen in my own business in the first half of 2010:
Jan 2010 - 201 E 28th, large one bed co-op with outdoor space/views, asking $799K on 9/1, reduced to $749K mid Oct, contract signed early January at ~6% below ask. Closed in May.
Jan 2010 - 77 Seventh Ave (14th St), renovated, converted alcove studio co-op w/ views asking $525K. Multiple offers. First open house 1/17, contract fully executed 1/27. Fastest co-op closing ever due to buyer who was really on top of everything and fast board approval. Closed in April at $520K, less than 1% below ask.
Jan 2010 - 101 W 23rd St, renovated, converted one bedroom in a landlease co-op building. In contract at asking price after being on market since 9/2009. Price drops in Oct & Nov, then with reduction from $275K to $260K on 1/4, OFAC within ten days. Since it hasn't closed, I can't give you a price yet, let's just say it was very very close to ask. Seller and buyer asked for delayed closing. Landlease building, praying for no last minute issues with financing.
Feb 2010 - 115 East 9th St, updated, one bedroom co-op w/ views. On market 2/7, first showings 2/12, 52 buyers viewed property between 2/12 and 2/15. Four offers at best and final. Cash offer accepted over asking price, 1/15. Two bidders were putting over 50% cash down. Two of the bidders had just lost bidding wars on other units, came to view the apartment during a blizzard and came in strong with offers the next day. Seller changed mind, decided not to sell (long story).
Feb 2010 - Williamsburg, Brooklyn new development condo - Under $500K One bedroom, contract out at 8% below asking price, sponsor paying transfer taxes and sponsor's attorneys fees, so total package was 10% below asking price.
Feb 2010 - Williamsburg, Brooklyn new development condo immediate occupancy, 85% sold and closed. $830K two bedroom w/ city views, buyers wanted 15% below ask, developer would only do 10% citing market pick up. No deal.
Feb 2010 - Same buyers as above. Williamsburg, Brooklyn new development condo, 60% sold and closed - $850K two bedroom w/ city views, buyers wanted 15% below ask (prices already reduced 19% since offering plan filing), developer would only do 10%. Buyers eventually increased offer but requested that alterations be done to the apartment. Sponsor agreed to do renovations but buyers had to produce a mortgage commitment letter prior to the renovations being started. Closed May 2010 at approx 5% below last ask.
Feb 2010 - Upper East Side one bedroom co-op with outdoor space, ask $560K, on market for three open houses, contracts signed at less than 5% below ask. Buyer putting 50% cash down. No closing yet due to fact that 50% of building is sponsor-owned. In February, bank said "no problem." Then lending guidelines changed and now bank said "sorry, no deal." Buyer has new lender who says "no problem." Fingers crossed.
March 2010 - Chelsea one bedroom co-op asking $650K, thought customer had it for $615K, contracts went out, higher all cash offer came in, buyer lost apartment, continuing to look.
March 2010 - Chelsea buyer finds Village apartment asking $590K. After another multiple offer situation, he signs contract on the apartment for slightly over the asking price. Closing in two weeks.
April 2010 - What's going on?! After an unbelievably busy Nov-March, nothing seems to be happening! Apartment for sale or for rent in landlease building finds a renter first. Offer of $1.4M all cash for property asking $1.6M, couldn't make a deal happen, reduced price to try to get something closer to what seller's are hoping for.
May 2010 - Offers of approx $2.5M made for two SoHo lofts. Just when we thought deal was struck, other buyers came in and out bid my customers, BOTH buyers were all cash (mine are financing 50%).
May 2010 - New development in Brooklyn comes back on line at significantly reduced prices (as in apartments that were $525K are now $410K). 40 buyers got prequalified by the building's lender within 2 days of first open house. So many buyers making offers, sales office can barely coordinate. Buyer makes offer 2 days after first open house but his first choice is gone already! Makes offer for similar apartment next door slightly below ask, sponsor paying transfer taxes (TTs) and Sponsor Attorney's Fees (SAFs.) Contracts out.
May 2010 - Made offer on UES condop asking $665K for $600K. Buyer came up to $615K, seller came down to $640K. Other broker and I could not get seller and buyer closer together. Apt still on market.
May 2010 - Received offer on Village one bedroom loft for ~7% below new asking price of $650K (was $675K). Seller gives good counter, but buyers will not come up enough to meet sellers "bottom line." Apt has only been at this price for 10 days including a holiday weekend and there are a few second showings scheduled... To Be Continued...
Toes says: Inventory is down and transaction volume is up, especially in the studio and one bedroom market. Apartments that sell the fastest have something special about them - renovations, views, outdoor space, etc. The below 23rd Street and above Houston Street market is alive and well. Williamsburg is also really busy.
Toes says: April / May were slower than the first 3 months of 2010 as far as deal actually being done. Am wondering if it is just my business or if other agents experienced the same thing. I did have two buyers who were rushing to take advantage of the home buyers tax credit, which made them more motivated to purchase. Looking forward to seeing what the summer brings! My team also does rentals and we're booked solid. Summer is the busiest season for rentals. Landlord concessions are way down, many have stopped paying broker's fees and/or free rent. Am thinking renters are going to have a hard time adjusting to new rental market.
A: Yes global market forces and sovereign debt concerns do matter. They just matter before any ripple may ultimately come our way, so its worth keeping your eyes on. After the huge rally in all assets for much of 2009, the search for yield now comes with great risk and you are seeing signs of risk aversion these past few weeks. Will the equity markets once again lag and follow the credit markets?
According to FT's, "Investors Abandon Junk Bonds" (via Yves over at NakedCapitalism):
Spreads – the difference between the yields on junk bonds and US Treasuries – have widened more than 100 basis points since January 11, and stand at about 700bp, as measured by the Bank of America Merrill Lynch index.Below you can see the latest MARKIT CDX.NA.HY INDEX, Series 13, showing the recent rise in spreads the past 4 weeks or so:
“If the result of sovereign problems is fiscal tightening and higher rates, a double-dip recession becomes an increasing possibility. This outcome would dent, if not fully derail, the positive trend in corporate fundamentals.”
Junk bonds, issued by companies with credit ratings below investment grade, soared in price last year as investors poured more than $30bn into bond funds, in search of higher returns at a time when official interest rates were at all-time lows. This demand for higher yields led to record bond issuance, allowing even cash-strapped companies to refinance. However, in the past week, US high-yield bond funds and exchange-traded funds saw outflows of $984m – the highest since the week of September 28 2005, according to Lipper. The redemptions pushed the trailing four-week average sales figure to an outflow for the first time since March. The net asset value of bond funds tracked by Lipper fell $1.6bn in the week, because of market declines, the largest such drop since November 2008 in the thick of the downturn.
Junk bonds soared in 2009 (reuters states HY bonds soared a record 57.5% in 2009) as the search for yield was the name of the game. Now, after that huge move the search for yield comes with a high price: higher risk, as investors demand higher yield to own junk bonds rather than risk free US Treasurys of similar maturity. As market junkies know all too well, investors hate uncertainty and risk.
Sovereign debt issues & tightening in China now seem to be at the forefront of investor concerns, causing a flight to safer assets (mainly treasuries and US dollars) and that is causing a ripple effect to start an unwind of a huge dollar carry trade that built up for much of 2009 behind Fed ZIRP and guarantees on everything and anything. The buildup of such a crowded trade usually leads to an exaggerated unwind when confidence and perception changes; the challenge is timing and pinpointing the exact spark as you never know what the market will deem worthy of reversing the trade and not. For example, Dubai's default was all but a case of fleas that markets quickly shook off. Greece and other concerns over the PIGS, however, are a different story today. It's still a bit too early to tell if this is simply a healthy adjustment after a huge move in 2009 or something else that will lead to a more extreme adjustment in global markets; either way, our eyes should be open!
As I said before, its possible a future double dip is the result of fiscal/monetary tightening as an unintended consequence of actions taken to stem the crisis we just went through...China began already, time will tell when we do the same.
We thought we would share a bit of what we’re seeing on the investor front at this time. In this market, we’re speaking with lots of groups with cash galore (particularly foreigners), looking to capitalize on this “depressed” market that we’re in. News are a’buzzin’ over in their respective countries that Manhattan is THE place to buy right now, and all of them want to get in on the action before their competition does. We’re finding that many of them are stepping into the NY market for the first time based on this buzz, with little local experience and much hearsay upon which they’re hanging their hats.
The issue is that many believe that they can purchase property at distressed prices and still get out of the investment in the next few years. While this can happen, it is far from the norm, with the plan generally executed by heavy hitters versus first time investors. Further, many are looking for “opportunity”. Who isn’t? It quickly slides into a question of which came first: the chicken or the egg?
The conversation usually goes something like this:
Agent: What are you looking for in terms of an investment?
Investor: I want to see properties that offer great value.
Agent: What does that mean to you?
Investor: You tell me, where is there opportunity in this market.
Agent: It depends on your needs, financing and exit strategy
Investor: We are in this to make money, and will tailor the strategy according to the opportunity.
So for those of you looking to wet your feet as a newbie investor, (or merely if you’re interested in that side of the coin) here is what it takes to make a deal happen today.
Keys to getting a deal done:
- Understand the basics: let’s look at very round numbers to make the point. Assume that you’re looking at a $300-$500 sq. ft. purchase price to acquire a building. Add on to that another $350-$400 in construction costs. Add on 5%+ in transaction costs. We’re now already nearing the $900/sq.ft. mark, and this doesn’t even take into account other soft costs associated with completing the project. Considering that condominium apartments are selling at an average of $1000/sq.ft. in the city, we’re talking razor thin margins for a re-sale opportunity, and long time-frame for renting the apartments out. Compare this to the ability to purchase in bulk new construction at less than $650/sq.ft. and you have to really wonder.
- Realize that it’s all scalable: “Yes but what about Harlem, Brooklyn or LIC?” you ask. Sure, most of the related costs are scaled down to be cheaper, but so are the prices on the way out, meaning there’s only a slight marginal benefit for investing in less expensive neighborhoods for the near term.
- Have your financing lined up: Understand that financing for acquisition needs is a max of 50%, and for development it’s close to non-existent. No longer can you rely on leverage to make a project worthwhile, refinancing just one or two years down the road as your exit strategy.
- Know your investment strategy: what does “opportunity” mean to you? Yesteryear’s mom-and-pop developers are this year’s vulture investors. You are not alone in trying to find a deal; chances are the bigger players have already scoured through the existing market opportunities. What is your time horizon? How realistic is it? Be disciplined about what your needs are, and then diligently work to find situations to meet your needs. If you do happen to work it the other way, be ready to work quickly and with all cash (further about that below).
- Are you an investor or not? We find it interesting when so-called investors get wrapped up in location, views or the quality of finishes. Unless you have a large portfolio you are trying to diversify, what should matter most to you is your return on investment. There is a buyer or renter for every apartment out there; don’t use individual standards to judge institutional opportunities.
- On the down low: As banks continue to extend and pretend, and developers maintain their pain, no one wants to make distressed opportunities too public. Most of the good deals taking place happen via relationships, conversations and quiet negotiations. Don’t expect to have 10 opportunities in front of you at any point in time. You need patience to allow the opportunities to surface; any public deal with readily available information is likely not going to give you the returns you seek.
- Speed: parlaying on the above, when deals do arise, be ready to move quickly. Speed to closing is absolutely key, and making the process easier on the bank or distressed owner/developer will be a significant competitive advantage to you. The window you will have to move on the deal will likely be tight, which is why having your ducks aligned in terms of your required returns is so important. That will NOT be the time for you spend weeks upon weeks determining if the deal makes sense or not. You will need a turnkey system in place, along with a team of trusted professionals, to help you quickly ascertain the situation to be able to jump on it.
- Cash rules: ‘nothing new here, but we couldn’t emphasize it more. All cash deals enable you to have the speed and ease of closing that any distressed seller will be looking for.
- Have realistic market expectations: don’t expect to get out of the project in the next 1-3 years; although the flip mentality should be long gone by now, many investors still believe that they can enter an exit an investment in the blink of an eye. Long term money may well be waiting to be made, but the short term bets are riskier than ever.
A: This is a stupid little thing that does indeed happen out there in the world of real estate. The reason is because selling your home is a very emotional decision that can make some sellers wary and nervous. When the reality of a deal getting done inches closer, that is when the wariness can turn into nervousness; and that can lead to a rash decision that surprises everybody involved. Luckily it doesn't happen too often, but I did go through this three times in the past two months alone. In my opinion, the last thing you want as a seller broker is to have your client second guess their decision to sell OR their pricing strategy when first putting the apartment on the market. History usually shows that the best offers come in the first few weeks, but as a seller, sometimes you can't help but wonder if you really did price your property correctly?
One of the biggest headaches I find in this business is when you run into a seller that gets nervous or scared when you present a solid offer soon after the property hits the market. What does the seller want???? If you price at $1,250,000 and you get a solid bid in 3 days from a motivated buyer, why is that reason to get all nervous and nuts that ultimately leads to a rash decision?? Well it's not my place to say! I just question why the seller listed the apartment in the first place before thinking things through properly. Unfortunately my clients and I just experienced this situation for a midtown condo. Asking price $1,250,000, 3 days on market, we submit a solid offer and get a seller response of $1,240,00 - so we ACCEPT! And what are we rewarded with? A seller that got scared and removed the listing from the marketplace. This was the third one in the last few months (520w19, 144w27, & 200e58), and I thought it might make for a good topic of discussion.
Here is the rub: Its the seller's home to sell, they need to agree to all terms of the deal or its just not worth getting the attorneys started! In the end they are the one that must countersign the contract that the buyer signed first to seal the deal. Nobody can force anybody to sign that contract. Sure you might be able to calm a buyer or seller into more seriously considering one way or another, but you can't force them to sign the contract! That is something they must do on their own; likely after dealing with the emotions of buying or selling in their own way.
Whenever I present a solid offer for a property whose listing history is under 7 days, I get a bit worried that the seller may start to question things. On the one hand you may get a seller that is ecstatic to have gotten a solid offer in such a short period of time and who feels lucky to be able to move forward so fast. On the other hand, the seller may start to rethink their pricing strategy ---> Did we price too low? Did we give the market a chance to present all offers? Am I making a big mistake here? In both situations, the reality of selling hits home once that first solid written offer is received - it just becomes real and sometimes that can scare a seller a bit. Usually things work out just fine, but sometimes they don't!
I recall selling my condo at 245 E 93rd St, Unit 2M in early 2006. I received a $975K offer in the first week and played tough! The strategy didn't work and I lost the bidder. I wonder how serious they might have been anyway just removing the offer after we were $50K apart in negotiations that first week. Turned out I sold for 40K less some 4 months later. Doh! Live and learn I guess.
The worst is when a seller starts to rethink their pricing strategy and questioning if they are leaving money on the table because they got such a strong offer so quickly! Ugh, that is when the seller broker should educate their client on how markets sometimes work. Sometimes you have a perfect buyer (highly motivated) that missed out on a few places and maybe recently lost a deal because the seller took a higher offer or decided to remove the listing from market after accepting an offer. So, naturally, when the new place hits the market (your place) and the buyers like it they are ready to go in aggressively with all ducks in a row - something as simple as a situation like this. Yet the seller may interpret the situation differently; that they priced incorrectly and that is why they got this strong offer so fast. After all, this is my home and my biggest asset and I have one shot at getting the most money as possible on this trade! That is the thinking in the seller's mind in this specific situation.
The seller should be mindful that if the property was under priced in a market that is clearly active, that you should not only get a ton of traffic immediately but you should also receive multiple aggressive bids. Therefore, if you get one solid offer in the first 7 or 14 days you should NOT mis-interpret that to mean your pricing strategy was wrong; that could lead to a rash decision. The reality is more likely that a perfect buyer found your place at the right time and decided to make a statement to you in a timely manner that they want to do a deal - within reason of course!
I have always explained here on UrbanDigs that brokers do not dictate value of any one individual property, the market does! The broker's job is to educate you on where this market is, how to price your property to meet your time line to sell, and to market/service your listing in the broadest way possible to procure the highest & best offer. The market will ultimately price the true value of your home; and the market is bigger than all of us! Pricing right is the best strategy any seller can do right now, but it sometimes comes with the consequence of raising uncertainties in the seller's mind if they really have no true motivation to sell other than to test the market to see what their place might fetch. That is when the listing broker needs to either educate their client on market dynamics or question if this seller is real enough to warrant their time. Nervousness and wariness are natural human emotions that many sellers and buyers will feel at some point in the process - and the process can get very emotional! The key is to avoid letting those emotions cloud the right decision that works for your personal situation.
A: Now I am not one to start plugging the NY Times or other broker-influenced mass media outlets to re-inforce what I discuss here on UrbanDigs, but this article clearly provides real examples of what I have been saying for a while now: The Improvement Was Progressive in Nature. The main reason I do not like to plug these broker sourced reports is because a) I feel it is too salesy and gives the impression that you have an agenda outside of unbiased reporting on the Manhattan real estate markets, and b) because I really don't trust many other broker reports other than what I see out there and the contacts I know for many years whose trust was earned. But this story is just another example of what is happening out there. I do NOT think it is sustainable, and I see it maintaining itself for a few months more.
The NY Times reports on..."The Bonus Bounce":
Take the recent bidding on a one-bedroom condo with a terrace on East Ninth Street.How else do you explain this and the many examples I listed in my "Manhattan Markets: Things Just Keep Moving Along" five days ago? As I stated in that discussion:
The property was first listed in June 2009. “We were holding open houses diligently every other week,” said the broker, Tristan Harper, a senior vice president at Prudential Douglas Elliman. But the traffic was almost nonexistent. “Zero to five parties, max,” Mr. Harper said. The seller took the property off the market for the December holidays, then put it back on in early January in hopes of benefiting from a bonus bounce. At the first open house, 18 parties showed up, 30 to 40 percent of them from Wall Street. Mr. Harper was stunned.
Within a day he had an offer. It was under the asking price of $1.049 million, but the owner was able to negotiate for a little more.
While the place was in contract, the seller received a significantly better offer — above the asking price — from two men. One of them worked on Wall Street.
Then the original bidder matched that offer with all cash. In the meantime, a third offer came in, but the specter arose of all three bidders’ fleeing if a bidding war ensued, so the seller never really entertained it. The first bidder won, at a price slightly over asking.
"What is interesting is following listings that had a hard time selling even as sales surged in June, July and August of 2009 following the plunge in sales volume from the adjustment we had. The main reason is that bids did not improve as much back then as they did to today's marketplace following the March lows...This is why you are starting to see properties that have been on the market for 3+ months, start to go to contract. Some are cutting prices to get there, some aren't, and others are going over ask."How many examples and how many brokers need to tell the same story before people deny that this is actually happening out there? What people mis-interpret are my discussions on real time changes in the market with a future prediction of sustainable sales growth and price appreciation that I never even said! People read, see the reports, and interpret that I am jumping on the bandwagon even though I discuss my bigger picture macro concerns quite clearly and often here on this site. Let the other guys say things like, "It’s more the value now,” he said. “Real estate has bottomed out, and it’s time to step in.", as stated in the NY Times piece above.
Then you got those out there that rely solely on the quarterly reports that prove time and time again to be lagging and inconsistent across the brokerage firms. I addressed the lagging nature of these reports in the clearest way possible on Tuesday! They are a snapshot in time of deals closed and captured by public record that were signed into contract some 2-7 months earlier - sometimes more! But, if you want to see hard core evidence of the improvement on a quarter to quarter basis, something I don't put much weight into due the seasonality of this market, look no further than Streeteasy's Q4 2009 Market Report released 4 weeks ago:
Significant findings in Q4 2009I rather look at existing Co-op and Condo resales over New Dev sales for a better indication of this improvement. The average sales price data is clearly showing you the increase on a quarter to quarter basis - something worth discussing when explaining what is happening out in the Manhattan markets on relative basis! People want to know what is going on, where we came from 3 months ago, 6 months ago, 12 months ago and 2 years ago! Each of those increments would warrant a slightly different response from me in the short term and a more extreme answer for the longer term. On a year over year basis, YES prices are down! On a quarterly basis, prices seem to have been improving in terms of where bids are coming in right now! This improvement was progressive in nature over time starting with the height of fear in February & March of 2009. I can't explain it any other way and I hope by now you know that I am bearish when there is a reason to be bearish and will adapt when there is a reason to adapt! In the end, I refuse to deny the change that I see happening over time but will do my best to leave 'perma' out from in front of any bullish or bearish views.
CLOSING PRICES CONTINUE TO DECLINE FROM A YEAR AGO. Overall average and median prices, which include condo and co-op resales and new developments, have continued to decline from a year ago, about 7.8% and 10.0%, respectively. However, since last quarter, price gains were made in overall average and median prices, about 5.5% and 2.0%, respectively.
The overall average price was $1.327M while the overall median price was $765K.
Condo resale median prices decreased slightly by 0.4% since last quarter to $890K, and decreased by 3.5% since last year. Average price ($1.482M) is up 2.3% for the quarter but down 5.9% since last year.
Co-op resale median prices increased by 6.3% to $612K compared to last quarter but are down by 1.3% since last year. Average sales price ($954K) increased by 9.1% since last quarter but decreased by 12.3% since the prior year.
New Developments median sales price decreased by 6.1% since last quarter to $1.12M and by 4.6% since last year. Average sales price ($1.9M) increased by 6.4% since last quarter and by 10.5% since last year.
For Manhattan Residential Real Estate, I considered myself 'less bearish' since November 2008 when I started to see bids and contracts signed in this market start to reflect the uncertainties and harsh realities that the severe credit crisis brought upon us! On June 4th, 2009 I re-iterated these feelings based on the rising volume of contracts signed I started to see.
A: Let me know what you guys think of this Twitter thing. When I started talking at the real estate conferences years ago, Twitter started to really gain steam and I questioned why it would succeed. "Micro-blogging", everybody said - the coolest new thing! Now people can see you talk about shaving, dressing, going out for coffee, whatever! My first thought is, r u kidding me? Who the heck cares about that sh*t - don't we all have better things to do with our lives? Now you hear about a mom twittering after their son drowns, celebrities twittering about their lover's passing, athletes twittering about big trades, and marriage proposals. But does this service have a sustainable place in this virtual world? And more importantly, does it have a place on UrbanDigs when the new site launches????
You can follow UrbanDigs on Twitter by clicking here...but do you really care to?
This is what I am grappling with and I'm 50/50 on the worth of this thing. Is this technology just a passing fad or the real deal? Does it deserve a spot on the new UrbanDigs when we launch in 7-8 weeks? If anything, I can probably see myself tweeting (is that the right term?) about more in the field Manhattan real estate situations as they unfold; that may be useful for some readers. Lost deals, monthly production/signed contracts, changing trends, losing a bidding situation to a higher offer, board turndowns, etc..sometimes I find it hard to write discussions once a day when working with as many clients as I do. So does Twitter fill in the gaps when I have no time to blog? Or is it useless, like I first thought 3 years ago when I first learned of the micro-blog service?
Please do share your opinions and any other suggestions of improvements you want to see for the new site! I'm building it for you guys to add transparency to this market, so do speak up!! Thanks!
A: When bearish sentiment on anything gets too extreme, crazy things can happen. And this is exactly what is going on in the US dollar relative to other major currencies. Signs of the dollar carry reversal continue: volatility rising, equities/commodities selling off, and the dollar rising. The dollar is now at a 6-month high. Keep an eye on that upward trend as the dollar does what nobody expects it do: continue rising!
US DOLLAR INDEX via Bloomberg:
Discussed ten days ago as China started to cutback bank lending and raise capital requirements - a signal of what a withdrawal of stimulative policies may do to world markets:
"...expect continued volatility especially if the dollar does something nobody expects it to do: continue rising! Quietly, the greenback is at a 5-month high against the Euro and I wonder if this is the beginning of the carry trade unwind, as traders close out short term debt positions funded with cheap dollars? "Equities are down 2%, Gold is down 4%, Oil is down 5% and the US Dollar is gaining ground against 15 of the 16 major counterparts; especially against the commodity producing nations! This is something to keep our eyes on.
A: Again, lets make sure we separate the concerns over macro fundamentals and future stimulus withdrawal with what is going on out there in Manhattan real estate. Its not a 1:1 relationship and often the two don't correlate. If things out in the field change, I'll report on it. Today equities are jittery over a poor jobless claims report suggesting a continued weak labor market, euro-zone worries resulting in widening CDS spreads and rising gov't bond yields, and as Dave says, talk that the 'era of the great policy reflation is over'. The era of great policy reflation which allowed the system to carry trade their way to where we are today, will certainly see some bumps as stimulus withdrawal results in consequences that were never intended.
TODAY'S MARKET MUSINGS - BREAKFAST WITH DAVE (you can subscribe here):
Says a lot. In regards to capital preservation, after a year long search for yield via a massive dollar carry trade built on short term fed/government policies and guarantees, the end just can't be smooth and orderly. It works until it doesn't anymore. Soon it may become more of a 'Return OF Capital' instead of 'Return ON Capital' story.
risk appetite appears to be fading; credit default swaps are widening and government bond yields are soaring in Europe; the era of the great policy reflation is over
No oomph in the service sector ISM report — it came in below expected and the majority of the industries reported contraction
Sticking with the capital preservation/income orientation theme for 2010
No bubble, eh? Toronto’s housing market started the year with a bang with existing home sales jumping 87% YoY in January
A carry trade unwind, sovereign defaults, failed bond auctions, and the unintended consequences from the end of all the fed/gov't guarantees and policies and stimulus withdrawal were all part of my biggest fears outlined in my 2010 Predictions late December:
"I refuse to deny the possibility of unintended consequences of all the fed/treasury guarantees, zirp, liquidity facilities, and the massive debt monetization experiment.This site always had two clear missions:
My three biggest fears for 2010 may be: surprising sovereign defaults + failed bond auctions somewhere + the unintended consequence of a massive dollar carry trade unwind that comes with withdrawal of stimulus."
MISSION 1 - Report on the real time, in the field, happenings of the Manhattan real estate marketplace as they change - always trying to keep reports unbiased with bigger picture macro concerns. If there is a reason to be bearish, be bearish, if there is a reason to get less bearish, get less bearish, and if there is a reason to get bullish, then get bullish. 'Perma' should not come before either
MISSION 2 - Discuss bigger picture macro thoughts and concerns that may lie ahead, not behind, us. How do these macro fundamentals potentially impact and ripple down to the Manhattan residential sales market
Both are constant challenges and both may behave counter to each other for a while. After all, if you recall late 2007 and early 2008, it did in a big time way as the secondary mortgage market froze up, credit blew out, and leveraged financial firms started to implode. It took the failure of Lehman in Sept 2008 for Manhattan real estate to really freeze up and fall off a cliff. Up until then, this market held on in the face of adversity leading many bulls to think this market would never get affected and already survived the so called credit crisis. That is proof enough that the two may act very differently at the same time in the face of the same pressures.
I've had a couple of people ask me about the recent sale of three buildings by Harry Macklowe to Sam Zell's Equity Residential Properties. I love the title of the Wall Street Journal blog post "'Grave Dancer' Sam Zell Returns to Haunt Macklowe", which points out the searing irony that it was Macklowe's top marking purchase of assets from Zell's Equity Office Properties that drove the Manhattan real estate mogul to ruin in the first place, and now he is being forced to cough up some prize New York City multifamily assets to Zell to try to save himself from debtors prison. But I think i the story makes for slightly better copy than the reality of the deal price really reflects.
According to J.P. Morgan analyst Anthony Paolone quoted in the Wall Street Journal's original article on the deal the $475 million price tag for the RiverTower, 777 Sixth Ave and Longacre House, reflect a 30% - 50% discount to what they would have sold for at the peak of the market. The published numbers imply that the purchase price represents about $470,000 per unit and $545 per square foot. Recall that I implied in a recent article on the Stuy Town deal that a bargain for rent-regulated apartments in Manhattan proper would be $200k per unit, but realize that the buildings in this transaction are prime full market rate buildings. According to EQR's 10K it's average rental rate in New York City was $2,748 per square foot (well above rent regulated rates commonly seen).
According to EQR's press release the cap rate for the transaction is 5.52%. If we assume that the apartments being acquired, which are very high-end assets, garnered a premium $3,000 per unit /month in rent, gross Income from the 910 apartments would be around $2.7 million per month or $33MM per year. Factor in a historic vacancy and collection loss rate of 5% and operating costs of 40% (assuming these guys are really good on cost controls due to the leverage of operating 6,246 additional units in New York City according to the last 10K), the properties would be throwing off around $19 million per year from the residential segment (note that the operating expenses implied above should also cover running the retail and parking garages in the buildings). This would leave $7.2MM of NOI attributable to the 23,339 feet of retail space and 50,000 square feet of parking garage or $98 per square foot (I won't split the atom on these numbers but they make sense to me). So the stated cap rate appears not to be based on a fluffy pro forma NOI number, but rather one that would make sense as being based on actual trailing 12 months numbers, or reasonable projections for 2010.
So the question becomes, should a 5.52% cap rate be assumed to be the new "benchmark rate" for midtown Manhattan market rate multifamily transactions? Now I know there are those who will call me an old grandma stick in the mud with no vision, but I have trouble with people buying properties for cap rates below their financing rates. I am pretty sure that financing rates for these assets are around 6% today (I checked with a buddy who is closer to these kinds of deals). To the extent that these assets are leveraged to any degree (say 60% LTV), the implied return to equity would be 2% or less. This is unless the NOI somehow is much higher in the future, due to significant rate increases above operating expense inflation or conversion to condos. Haven't we already been here before and seen what happens when valuations are pushed due to expected upside that is on the come?
So why does Sam Zell's Equity Office do a transaction like this? I believe that the answer lies in its status as a REIT. As a diversified real estate operating company, a REIT can take on debt secured by its properties, but can also take on unsecured debt that has recourse only to the equity of the REIT itself. They get double leverage. In fact, according to EQR's recent 10Q, the firm has nearly $5 billion of debt secured by properties and about $5 billion of unsecured debt. The weighted average rate on its unsecured debt is just 5.32% or less than the 5.52% cap rate on this property. Not only that, the firm's unsecured debt constitutes an amount roughly equal to the firm's $5 billion of shareholders equity. When you include the firm's secured debt, it's debt to equity ratio is roughly 2:1. If they merely buy the asset for cash, using corporate level debt, leverage gives them a significantly better return than the headline cap rate.
So much for the theoretical aspects of this discussion. A buddy of mine who happened to have a discussion with one of EQR's people in their southeast division about a property in that area got right to the source. Being a New Yorker during his conversation with the EQR employee he had to ask about this deal. What he was told, was that the firm was most excited about the fact that they believed that the $545 per square foot they were paying for the properties was well below "replacement cost". To break this down a little, assuming a $400 per square foot high-end construction cost in New York City not including financing costs, they are paying $145 per FAR for the land. Considering the prime locations for these assets, that is indeed a bargain even in today's horrible land market and EQR certainly has the wherewithal to make some selective bets on land value in its portfolio.
When looking at the value of a property transaction as a benchmark for other transactions, one must always factor in whether the buyer had special financing unavailable to the buying public at large. One must also take into consideration whether the sale was made under normal marketing conditions or duress. In the case of Macklowe's sale of these properties, both of the aforementioned factors were at work. Could a better price have been garnered given a longer marketing period? maybe. Is this property worth the same amount to any old commercial real estate investor as it is to Equity Residential Properties, no way. EQR has economies of scale in property management in New York City, a purview that includes land purchases and development and favorable financing not available to just any old player (although available to a handful of other REITs).
All of the above said, it is good to see some assets trading in New York City that look to me to be at decent prices for the seller (despite that seller being somewhat "under the gun"). Such a transaction, which is partially a land bet, implies that a very knowledgeable buyer and local asset manager believes that rental fundamentals are bottoming and will ultimately improve and/or that redevelopment of the properties in question either as condos or ultimately as some higher and better use will be fruitful.
A: One reason why Condominium closing costs are higher than co-ops, assuming the buyer is taking out significant financing for the transaction, is that co-ops enjoy a loophole when it comes to the mortgage recording tax. Well, this loophole may be closed if Governor Paterson gets his way. As I long stated, higher rates + higher taxes are in our future and the city will look to every nook & cranny to squeeze more tax revenue out of city residents to help close record budget deficits.
From The New York Observer (via The Real Deal), "The Bell Tolls For Co-ops":
In the governor's cross hairs are loans for co-ops, which have long been free of taxation while taxes on equivalent condos and houses run between 2.05 percent and 2.175 percent of any mortgage. The budget seeks to allow the city to slap this mortgage recording tax onto co-ops, swinging the tax lasso around a cash source that has been eyed-but untouched-by city officials since at least the days of Ed Koch.Love the 'this is an issue of equity and tax fairness' line...can't we spin it the other way and argue to eliminate the condo mortgage recording tax to be more fair with the co-ops??? Nah, that is not happening!
The tax would mark another step in the assimilation of the co-op, an outlier housing type that was once beyond the reaches of many housing rules and laws, and it would bring in, by the mayor's count, at least $50 million annually in revenue for the city. For the Paterson administration, the current lack of a co-op mortgage tax is merely a "loophole" in need of closing. "Ultimately, this is an issue of equity and tax fairness," said Matt Anderson, a spokesman for the state's Division of the Budget.
Recording taxes do not currently apply to co-op mortgages because they are, in actuality, not mortgages at all. Officially, a co-op buyer purchases shares in a corporation that owns a building, not a specific piece of real estate. Thus, a buyer cannot get a mortgage on property, but rather a loan backed by shares of the building.
For UD readers, this will come as no surprise; higher taxes are coming, its in what form and exact rules that are only now coming together.
So, we must ask ourselves how buyers will re-value co-ops on the open market if closing costs do in fact now rise via this mortgage recording tax? In my opinion, I don't think it will be that much of an effect; perhaps a minimal one more as a headline effect that will wear off with time. My thinking is this:
The main reason I find buyers to value condo's over co-ops is the legal structure that bypasses a strict board approval process and the liberal rules and guidelines as to how the condo property can be used.In my opinion, the gap in value between a condo and a co-op is not because the co-op closing costs are 1.8%-1.925% (loans under 500K is 1.8% of the loan amount, loans over 500K are 1.925% of the loan amount) of the purchase price lower! Although that does play a role, I just think there are other forces that play a deeper role as to why buyers value condos higher than coops! Rarely do I find buyers willing to put a premium on a co-op's value solely because the closing costs are lower. So, how much of a penalty will buyer's put on a co-ops open market value if closing costs do rise just under 2% of the loan amount as a one time closing fee? In my opinion, minimal if any that will dissolve with time.
Buyers value condos over co-ops because of the following that doesn't change with this added closing tax, if it passes:
1. Right of First Refusal Board Process
2. Lack of Strict Financial Preset Requirements for Purchase / Secure Financing Most Important
3. Ability to use as Pied-a-terre (2nd home)
4. Ability to Freely Sublet
5. Ability to use Guarantor
6. Ability for Parents to Buy for Children
7. Speculative Investors / Foreign Buyers without Citizenship
etc..you get the point!
Those above noted items is what expands the desirability and affordability of condos over stricter co-ops. The end result is a much wider buyer pool to market condos too! That is not to say co-ops aren't desired, they are, just to point out to you the more important differences that I find from working with buyers that expand the marketability of condominiums! Just my $0.02!!
A: Thanks 'jjfashion' for your comments to yesterday's discussion on real time broker status updates to Contract Signed and how the market was faring after the first month of the new year. To hear this guy say it, "To suggest anything other than what is supported by closing data is low integrity unless you disclaim it explicitly...". Now I wont disclaim the quarterly market reports, which happen to consistently vary from one brokerage firm to another, but I will continue to defend how lagging these reports are and how one of the mission's of this site has always been to try to close the gap on what is happening out in the market today and what the lagging reports tell us. In the end, the best information we can get on current market activity and strength is where these contracts are being signed right now and how the pace of contracts signed changes with time!
If you guys know a better way to consistently find out where contracts are being signed today, I'm all ears! The only ones that know this information are the buyer, seller, brokers, attorneys, lender, managing agent that processes the purchase application and the board that will ultimately approve the purchase. It is true that I am just one man and that discussions on this site are taken directly from my business in the field, putting bids in on multiple properties for clients, talking to my colleagues after they go to company sales meetings, talking to sales managers I keep in touch with, and interpreting the real time data I get updates for about 6 times a day directly from one of the distributors of the REBNY broker sharing system. As I stated clearly yesterday and many times before:
"For now clearly buyers and sellers are agreeing somewhere out there - I'm just trying to figure out where!"It's a constant challenge to figure out where deals are being signed today and I love that challenge!
Now, lets move on to understanding the big time lag with these quarterly reports whose data is based on a collection of closings captured by public record - to get there a number of things have to occur and as readers of this site know I focus on WHEN THE CONTRACT WAS SIGNED as the snapshot in time that defines how the market was doing when the deal was made:
LAG #1: Broker Status Updates - The data is only as good as the agent that updates and maintains the listing. As good as Streeteasy, NYTimes, and Broker Sharing systems are, if the agent does not change the status of a listing from ACTIVE to CONTRACT SIGNED, we will not get that update! So the first lag is the one directly from the agent servicing the listing who is in charge of updating their webad using the broker sharing system provided by their employing brokers. Corcoran uses TAXI, Elliman uses LIMO, and Halstead/BHS/Sothebys uses RealPlus. Other firms use OLR. In the end, the updates are supposed to be immediately shared with all REBNY member brokerage firms and their agents. I find there is usually a 1Day - 14Day lag between when a contract was actually signed and when the broker updates their listing to be shared.
LAG #2: Purchase Application - Generally, Co-op purchase applications are a bit more tedious and time consuming than ones for a condo. Since condos have a 'right of first refusal' board process as opposed to a stricter 'review and interview' process for co-ops, I find co-op buyers spend more time making sure all requirements are exactly as requested and the package is as meticulous prepared as possible. This takes time to gather business and personal references, tax returns, all statements to verify assets, landlord/mgmt letter, employment letters, complete purchase application, etc..
LAG #3: Loan Commitment / Aztec Forms - As we all know, the underwriting process is quite different than it used to be; banks actually check everything and verify that you can qualify to secure financing for the transaction. Additionally, recent HVCC code changes require outside appraisals rather in house ones. All in all, the goal is to get that commitment and aztec forms (for coops) as required if there is financing in the deal; which most deals have. Since there is an overlap with LAG #2 during this part of the process, usually the loan docs are the final piece of the purchase application needed to complete the package for processing. I am seeing loans take anywhere from 3 weeks to 6 weeks these days to come in.
LAG #4: Management Processing - Everybody wants the managing agent to process their package fast! But we all dont get what we want. I find it takes anywhere up to 2-3 weeks for management to fully process a purchase application and send it over to the board for review.
LAG #5: Board Review - In a perfect world, the purchase application will be reviewed within days of receipt by the condo or coop board. But this world is far from perfect. Depending on how your board handles purchase applications, you may have to wait for the next meeting for the package to be reviewed. I find this board approval process to generally take anywhere from 10Days-4 weeks upon receipt of the fully completed and processed package. If I get a package reviewed and approved within 10 days of receipt, I find myself lucky!
LAG #6: Closing - After the co-op approves the deal or the condo waives their right of first refusal, the attorneys will start to work on coordinating a closing date. This date must be agreeable by the purchaser, the seller, the buyer's lender/seller's payoff bank, and the managing agent handling the transfer. Either buyer or seller can also delay the closing a bit if that is preferred before one of the attorneys issues a TOE to get things moving. Generally I find that my closings take place about 1-2 weeks AFTER the approval comes in from the board to close the deal.
LAG #7: Public Record - The final lag for the deal to be captured by the quarterly report! This can take anywhere from weeks to months! If public record happens to capture and record the sale right after the cutoff date for quarterly report inclusion, well then it needs to wait for the next quarter's report!
All of these forces contribute to the lag it takes for a listing to be captured for inclusion into the quarterly report that is released to the public and interpreted as conditions that exist today. That is where I try to come in and explain the flaw.
But don't take my word for, MillerSamuel's Methodology site clearly explains this Public Record lag to you:
Quarterly Manhattan Market Overview: A quarterly analysis of co-op and condo sales in Manhattan. Unlike the stock markets, apartment sales data continues to fall in the prior quarter as it becomes available because sales are usually not recorded at time of closing and may lag the closing date by several weeks or months. However, in order for the report to be useful and timely, the report represents a reliable analysis of market conditions during the quarter based on the sales data obtained by the end of the quarter.Bam! Right there, in black & white, disclosed to you the lag of several weeks to months for the closing to get recorded and included in the quarterly reports. That is the nature of the data of the quarterly reports!
But if you want me to make it even easier for you, let's take one of my recent closings as an example; with my client's blessing of course:
67 Riverside Drive - Apt 9A
So, here we have a transaction that was signed into contract October 26th after a 2 week attorney diligence review period that due to the lags mentioned above will not be included into the Manhattan Quarterly Reports until Q1 2010 is released April 2nd, 2010! So, when the report is released in April it will contain this one transaction that was representative of the market conditions in mid October, 2009, some 24 weeks earlier!
Is it possible that where contracts are being signed in March right before the Q1 2010 report is released, have changed a bit from when this deal was signed? The answer is YES! But this is all we got right now and what many are using to analyze and interpret where bids for Manhattan property seem to be coming in today! This is the gap I am trying to fill. Apparently, some people cant take it and say that to ignore these reports as indicative of today's market is to degrade my integrity! Okay then....
A: Trying to keep it real here guys, unbiased and all, and continue to separate my bigger picture macro thoughts and concerns with what is happening out there in the Manhattan residential real estate market right now! In the last week alone, my new backend systems see about 222 new contracts signed telling us that the market continues to move along. This pickup comes after a brief 5-7 week slowdown in signed deals as we entered the end of November and the holiday season. Let's discuss along with a few sneak peak charts from the upcoming new UrbanDigs Analytics!
The data doesn't lie and as always, you have to understand that every property on the market is viewed and valued differently by the prospective purchaser. With that said, I can't deny the action out there and the numbers are showing it.
What is interesting is following listings that had a hard time selling even as sales surged in June, July and August of 2009 following the plunge in sales volume from the adjustment we had. The main reason is that bids did not improve as much back then as they did to today's marketplace following the March lows ---> rather, the improvement was progressive in nature:
"The reflation was slow to start and progressive in nature. It did not all occur at one point in time. Rather, it started in the lower end around May/June and trickled to the higher end over time. It was progressive in nature meaning the improvement in bids occurred as time went on, to where we are today!"This is why you are starting to see properties that have been on the market for 3+ months, start to go to contract. Some are cutting prices to get there, some aren't, and others are going over ask. I can name dozens of these types of apartments from the data I see in my UD 2.0 beta site, but for sake of brevity I will list a few:
490 WEA, Unit 10D ---> 325 Days on market, no price cut since last June, entered contract yesterday
171 West 79th, Unit #41 ---> 150 Days on market, price cut 8% on Nov 1st, entered contract few days ago
625 Park Ave, Unit 1B ---> 449 Days on market, price cut last April, entered contract 3 weeks ago
77 Park Ave, Unit 15E ---> 210 Days on market, price cut 6% on October 10th, entered contract few days ago
925 Park Ave, Unit 11/12 ---> 345 Days on market, price cut 6% in early December, entered contract a week ago
35 Bethune St, Unit 2/3A ---> 40 Days on market erupted into bidding war
1035 Park Ave, Unit 9A ---> 117 Days on market, price chop 11% in late Oct, entered contract less than 2 weeks ago
30 East 76th, Unit 5A ---> 175 Days on market, price cut 6% early November, entered into contract about 10 days ago
...you get the picture. The point is there is action out there. Not everything sells at once and to see weekly contracts signed trends at or above 225 or so is very healthy! Recall that Manhattan averages about 8,000-9,000 closings a year (around 708 contracts signed a month) and it was only the euphoric peak year of 2007 that saw over 13,000 closings (or about 108 contracts signed a month on average). Given the seasonality of our markets and that we are in the active time of year, its healthy to see this level of activity this time of year. This is especially true when considering where we came from and the delayed seasonality effect that we experienced due to our markets adjustment process late 2008 into early 2009.
Now please don't mis-interpret this discussion to mean bids are coming in at peak levels again, they are not - or that every development is saved and no good deals are happening! Rather, we can't deny the progressive improvement in bids over the past 11 months and the fact that desirable properties that are priced right are moving in today's market! I wouldn't expect this pace of sales to sustain itself for that long, maybe a few more months because if sell side optimism starts to outpace buy side confidence, well then us brokers will find deals harder and harder to put together. Time will tell. For now clearly buyers and sellers are agreeing somewhere out there - I'm just trying to figure out where!
Here is a sneak peak into one of the new UrbanDigs charts on Pending Sales for Manhattan Real Estate:
You can clearly see the steep plunge in sales volume around Aug/Sept of 2008 and the bottoming out of that freefall around February/March of 2009! Interesting stuff isn't it! The rise in sales volume after the March lows really gathered steam around June and July of last year and maintained that pace for a few months before adjusting down a bit prior to the holidays. I now have pending sales at the 4,416 units level which means when Q1 2010's report is released in early April you will see a whopping surge when compared to Q1 2009's level!
To feed the curiosity in you a bit more, here is another sneak peak into Total Active Inventory trends for Manhattan going back the past 4 years:
Again, you can see the sharp rise and fall of our inventory levels before Lehman failed and after the March lows when sales volume started to surge. The latest tick up shows the new listings hitting the marketplace in the past 3-4 weeks, as Active Inventory currently stands around the 7,833 level. So, even with the strong sales pace lately we are starting to see inventory levels tick up - telling me that more listings are entering the market and coming back onto the market these past few weeks, then are being excluded due to contract signings or temp/perm removed from the marketplace! In short, YES the market is active and moving, and YES new listings are coming back on!
Transparency is good and you guys are about to get a ton of it in a few months!