Archive for February, 2009

Some Words of Encouragement in a Tough Market

Owning a brokerage business puts me in a position of wanting to encourage and inspire my troops, particularly in times like these when adversity is around every corner. We are all bombarded with negative news from every direction these days. Even speeches at industry events can leave you more depressed and wondering when the heck things might start getting better. So today, I thought I would share with you my closing remarks from a speech I gave last night at the Community Bankers Mortgage Forum in Westbury, Long Island. The audience consisted mainly of bankers, appraisers and brokers. After discussing the economy, politics and the current state of the investment sales market in New York City, here is my wrap up:

“I believe there has never been a better time to be alive in human history. Today, we have MORE opportunities, to accomplish MORE things, in MORE different ways, utilizing MORE tools than ever existed before.

One of the great rules of success states that, ‘It doesn’t matter where your are coming from – all that really matters is where you are going.’

You can make your future bright IF:

IF you resolve to make this coming year the best year of your life

IF you resolve to draw a line under your past and focus on your future

IF you resolve to set goals

IF you resolve to make plans

IF you resolve to take actions, and

IF you resolve to achieve more this year than you ever thougth possible.

Remember that the very best day, weeks, months and years of your life lie ahead. Your greatest achievements are still to come.

Shakespeare once said, ‘The past is merely a prelude’.

You need to be able to see what things will look like in a year. You need to have vision. Throughout all of history, the most successful men and women have had this quality of vision…….

They can see their future well in advance of it becoming reality. They can see the steps which are necessary to take to get there. And they can visualize the results.

How can you make success happen? You need to set goals and to make those goals multi-dimensional. This will enable you to balance every part of your life. Set goals for, not only your career but for your health, finances,  relationships, personal and professional development,  community service, and spiritual growth.

Nothing happens by accident. It is often said that everything happens for a reason. YOU are that reason. YOU are the primary creative source in your life. Dare to be the person you always wanted to be. You can do it!

If you can come out of this crazy market in great shape you will have earned a badge of honor you can wear proudly on your lapel, gaining the respect and admiration of your peers. It is all within your control. Go get ’em!”

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Are we in a Depression?…Not Quite

I was reading a weekly publication today and I saw the results of a poll asking if respondents considered our present economy a “depression”. Surprisingly, nearly two-thirds of New Yorkers feel that we are either definitely in a depression or may be in a depression very soon. And it is no wonder that people feel this way as many of the politicians we have listened to lately (from the very top on down) have been using language which is nothing short of fearmongering. Phrases such as, “an economic abyss from which we may never recover”, “catastrophic economic conditions”,  “a coming economic apocalypse”, “a complete economic meltdown” and “without this stimulus package, another depression will befall us”.  Of course the game of politics operates this way and swaying congressional votes is assisted with such grand statements.

What these politicians seem not to realize is that this rhetoric is, in fact,  harmful to consumer confidence and consumer spending.  People are starting to believe these proclamations as evidenced by the referenced poll. These statements may make for good political theatre but they do not accurately reflect the current state of our economy.

Please do not misinterpret my intentions here.  I know that times are difficult, the ecomomy is hurting and to those who have lost jobs or are  suffering financial hardship, they really dont care how the economy is characterized, they only care about paying this month’s bills. My heart goes out to them and I am not making light of their circumstances. The fact is, however, that today the state of  our economy is much more similar to the recessionary period of the early 1980’s than it is to the Great Depression in the 1930’s. Let’s compare these points in time.

Because there is not much real estate information available from the Depression period(other than knowing that the construction boom of the roaring 20’s came to a screetching halt), let’s take a look at employment, which is the metric that has the most profound effect on real estate fundamentals. Extrapolations can be made from there. In 2008, the US lost 3.4 million jobs which represents 2.2% of the labor force. From November of 1981 to October of 1982, 2.4 million jobs were lost but because the labor force was smaller, this reduction also equalled 2.2%. During the Great Depression, job losses were of a completely different magnitude. In 1930, the labor force shed 4.8%, in 1931 6.5% and in 1932 another 7.1%!  The overall unemployment rate today is 7.6%. At the peak in 1982 the rate reached 10.8% and in 1932 the rate was 25.2%. (Using the same formula to calculate the rate that was used in the prior periods, today’s rate would be 13.9%. )

If we look at GDP, in 2008 total GDP rose notwithstanding an abysmal 4th quarter which showed a 3.8% reduction in output (look for this figure to be revised downward). The Congressional Budget Office projects a decline of 2% for 2009 while several economists are projecting reductions of 3% to 4%. In 1982 GDP contracted by 1.9%. Compare these figures to 1930, 1931 and 1932 when the contractions in output were successively 9%, 8% and 13%.

During the Depression, 10,000 banks failed. Thus far in this cycle, approximately 35 have failed with another 200 on the FDIC watch list. In 2008, the Dow Jones lost 36% of its value while in the early 1930’s the crash reduced equity values by 90%. Auto production declined by about 25% last year while in 1932 the reduction was 90%. The Depression lasted 11 years while this recession has been with us for only 14 months thus far.

So yes, things are tough today, very tough. Unemployment will continue to rise and more pain will be experienced. But a comparison of the two eras leads us to the conclusion that we are not in a depression……yet!

Is ‘Land Value’ an Oxymoron?

Perhaps the most difficult property type to determine value for today is vacant land or low rise properties which one would think have a highest and best use as a development site. The difficulty stems from a lack of transactions upon which to form an opinion.

Does land have value today? Sure it does, but calculating that value is not an easy task.  Interestingly, during the most challenging years in the recession of the early 1990’s, land actually had no value. Zero. Nada! During most of 1990 and 1991, there were development sites, which had been forclosed on by banks, which were on the market for $20 per buildable square foot and there were no takers. This was shortly after the development market hit a peak in 1987 thru 1989 when the best sites in Manhattan ( Metropolitian Tower, Cityspire, and the Blockfront on Second Avenue between 64th and 65th Street) hit a record of $125 per buildable square foot. Massey Knakal sold a site, which I believe was one of the first development sites coming out of that zero-land-value period, at 408 East 79th Street to RFR Holdings for about $30 per buildable square foot. I vividly remember the seller being thrilled to have achieved such a high price.

Today, land has value but the disconnect between buyers and sellers is significant. During this past cycle, land values routinely hit $400 or $500 per buildable square foot. The most prime sites reached approximately $700 and The Drake hotel site at 56th and Park achieved a price in excess of $1,000.

Since the peak of this most recent cycle and as the economy has deteriorated, the availability of financing for development projects has all but evaporated. Accessing debt for hotel or office construction is very challenging today and the properties with the best chance of obtaining financing are residential rental developments. We are working with several developeres who are looking to purchase sites for residential rental construction, however, the common opinion is that in order to make a residentail rental project work, a price of $150 to $200 is the maximum that can be paid for the land. Given that sellers could have obtained two or three times this amount 18 months ago, they are not presently willing to “hit the bid”.

Many developers who are interested in taking advantage of current market conditions are waiting on the sidelines for the failed projects of novice devolopers to hit the market via lenders who will likely take back many of these properties.

One thing to keep in mind is that there are always exceptions to the rule.  A hospital recently purchased a site at 1133 York Avenue for just under $300 per buildable square foot and they will probably sit on this site for a while before ultimately building a new facility for their own use. Users will always have needs and sites that are extraordinarily well located or have some strategic value are likely to achieve premium pricing.

This segment of the market is where I see the most opportunity today as, not only do you need capital to take advantage of the opportunities but, you need developoment expertise as well. As transactions start to occur, the question of what land value is, will be much easier to answer.

Rent Regulation could get out of Control

When you listen to most New York politicians speaking about the current economic crisis the City is facing, you always hear a reference to the fact that, although spending and services need to be cut, conditions will not revert back to the way things were in the 1970’s.  I think there is one exception and that is that during the 1970’s the welfare system in New York was out of control. The expectation of entitlement was at an all time high and if the package of bills endorsed by the Assembly gets adopted by the Senate, we could have a 1970’s level of entitlement expectation within our housing system. Forget about “Rent Control” or “Rent Stabilization”, given the pending legislation, why not just call it “Rent Welfare”.

It is not surprising to me that there is a groundswell of momentum to promote a more pro-tenant environment among elected officials. For most politicians, getting re-elected is their main goal and taking an anti-tenant position is political suicide. In private they will tell you that the system is overly protective of tenants but simply cannot take this position publicly. MIT and The Wharton School have completed studies demonstrating that the elimination of rent regulation would result in lower average rents citywide.

Some of the proposed changes include eliminating high rent vacancy decontrol, raising the bar on income decontrol from the current $2,000 to anywhere from $2,700 to $5,000 and the means test level of income from $175,000 to about $240,000 with an indexing provision, eliminating the present method of implementation of preferential rents, reducing the vacancy bonus from 20% to 10% and reducing the increment that can be added to the monthly rent resulting from renovations to an individual unit. Another potential change which would have a profound effect on the system is the proposed repeal of the Urstadt Law which would place oversight of rent regulation in the hands of the city as opposed to the state. This would likely result in the City Council, which is extraordinarily pro-tenant, taking over which would probably vaporize the Rent Guidelines Board and  determine rent increases themselves.

Owner advocates have said that, should the present bills become law, we could see a wave of  foreclosures which would not be good for the landlords or the tenants and that fundamentally changing the rules in the middle of the game is not fair. While foreclosures may indeed increase, this will have a relatively short term impact on the housing stock. Sure the services in the buildings are likely to decrease during the foreclosure process but, ultimately, the lender will resell the property at a lower market value, a new owner will take over and the property’s operation will get back on track.  

The longer term impact is that the proposed changes will lower property values thus eroding the real estate tax base which is needed now, more than ever, to address record level buget deficits. The incentive to upgrade apartments would be greatly diminished causing, what is already an aging housing stock, to rapidly deteriorate. Vacancy decontrol created tremendous incentive for owners to invest heavily in improving the qualityof the housing stock.

There is a great need for affordable housing in New York but for the public sector to ask the private sector to provide it in this fashion is not the solution. Incentives for the creation of new affordable housing units is an easy fix but is politically unpopular. Giving tenants effective ownership of their buildings through a far reaching entitlement program is not a good thing for the city. Let’s hope, in this way, we do not return to the 1970’s.