Archive for May, 2009

1Q09 NYC Investment Sales Extraordinarily Abysmal

I’ve been selling investment properties in New York City for 25 years and have never seen anything like the low level of sales that the market experienced in the first quarter of 2009.

In order to know just how abysmal the volume of sales has been, let’s review a little history. In order to study volume of sales we track a sample of 125,000 properties which fall into the C, D, S & K classes of properties which include multifamily apartment buildings, retail and mixed-use properties. During the last 25 years, the average volume of sales has been 2.5% of this total stock of properties or about 3,125 sales per year. The best years we have seen were 1986 and 2006 with 3.4% turnover, 1988 with 3.5% and a pinnacle in 1998 at 3.9%.

On the other side of the coin, we experienced the lowest level of turnover in both 1992 and 2003 which were both years at the end of recessionary periods and were years in which we reached cyclical highs in New York City unemployment. The volume of sales in those years was 1.6%. We had always thought that this 1.6% level of turnover was a baseline representing only those sellers who had no choice but to sell due to reasons such as death, divorce, taxes, insolvency, partnership disputes and the like. Our assumption was that volume would never get lower than the 1.6% threshold. Enter 2009.

If we annualize the turnover the market experience in the first quarter of 2009, in which there were only 233 sales closed, the volume of sales would be only 0.7%!

We certainly do not expect this trend to continue to an annual level of 0.7% but it is very likely that we may not see enough activity to hit the 1.6% level.  We believe that this extraordinarily low level of sales was created by the virtual paralysis that the market experienced after the fundamental dismantling of Wall Street on September 15th. Contract executions evaporated in the fourth quarter of 2008 as investors became timid and credit markets froze which resulted in the enemic number of closings in 1Q09.

We believe the volume of sales will increase as the year progresses as it simply could not get any lower. A factor which will artificially add to the low volume will be the fact that many lenders will opt to sell notes rather than going through the foreclosure process and then selling the assets. If the lender wants to maximize their note sale proceeds, they will sell the notes to real estate investors who will want to own the assets on a long term basis.  Many properties which were financed in the 2005-2007 period have negative equity to an extent that it is highly unlikely that the borrower will be able to payoff the loan or would even want to. This will result in the buyer of the note foreclosing and holding the asset. This “shadow” sale market will not be reflected accurately in the 2009 numbers.

While all of the percentages mentioned above related to number of transactions, we track the aggregate sales price volume as well.  Let’s compare the first quarter of 2009 with the first quarter of 2008 and the height of this market cycle – the first quarter of 2007. 

The best performing submarket was Brooklyn which was down by “only” 56.5% in the number of sales and 63.5% in aggregate sales price from 1Q08.  When comparing 1Q09 with 1Q07, the number of sales was down by 65.6% and aggregate price was down by 68.7%. Remarkably, those numbers were the most positive.

In Queens, 1Q09 number of sales was off by 68.5% and aggregate sales price was down by 82.9% from 1Q08. When comparing 1Q09 to 1Q07, the number of sales was down by 71.5% and  aggregate prices by 77.6% .

In Northern Manhattan, 1Q09 number of sales was down 62.3% and aggregate sales price was off by 88.9% from 1Q08. Comparing the numbers to 1Q07, the number of sales was down by 77.1% and aggregate sales price dropped by a staggering 93.5%.

The Bronx experienced a reduction of 74.4% in the number of sales and a reduction of 75.7% in aggregate sales price in 1Q09 from 1Q08. Comparing 1Q09 to 1Q07, the number of sales was down by 86.7% and aggregate sales price was down by a whopping 93.8%.

Manhattan activity has fallen off a cliff as comparing 1Q09 to 1Q08, the market experienced reductions of 85.5% in the number of sales and 86.9% in aggregate sales price. Compared to 1Q07, these numbers were down by 88.2% and 92.0% respectively.

Clearly, there is nowhere to go but up from here but the question is: How rapidly will the rate of activity increase? The degree of seller capitulation we see and the availability of debt will be two important factors in answering this question.

The New York State Budget is a Travesty!

There was a point in time when I was applauding the Governor for his position on the state budget. Very early on, he was beating the drum of favoring reductions in government spending as the way to solve the state budget deficit. He gave speeches and lobbied for spending cuts. At the end of the day, this positon was abandoned and 80% of the pending budget deficit of approximately $17.7 billion will be bridged by 137 new taxes, fees and charges that New Yorkers did not have to pay before.

Recently, the New York State Legislature passed a$131.8 billion budget, an increase of 10.1% or $12.1 billion over last year. State officials have maintained that the growth in spending is the result of spending the Federal economic stimulus funds. Unfortunately for state officials, we were paying attention in first grade and know how to count. Excluding the federal stimulus funds, state spending increased by 4.7% or $5.9 billion. This increase is greater than the rate of inflation by a long shot and is much greater than the increases in budgets of most businesses around the state.

New Yorkers will have to pay more taxes than before as local politicians would not allow NY to take second place to any other state in terms of the taxes that we pay. For a short period of time we were no longer the highest taxed state in the country, but that lasted for only a nano-second. New taxes, fees and stimulus funds from the government account for almost 80% of the deficit gap. Genuine spending cuts represent only 20% of the deficit reduction.

New York state’s economy will be much worse off due to this increase in spending.  Businesses and families are getting by via cutting costs and doing more with less but the State cannot seem to get it. This stimulus money will not come every year and the tough decsions have simply been put off. This budget does not address the structural problems in the state’s finances that will surely re-emerge when the stimulus funds cease. And how long can these personal income tax increases stay with us until New Yorkers head for New Jersey or Connecticut?

The new taxes which will help to bridge the budget gap are estimated at $4.1 billion consisting of income taxes on taxpayers with incomes above $200,000 (the same group the City Council believes is in need of rent welfare) including sub-S Corps, LLCs and partnerships. New York state residents earning over $200,000 will see a state tax increase of 12.7% and those earning more than $500,000 will pay 23.6% more. These tax increases are scheduled to expire in three years. Do you really think they will?

Running a municipality is just like running a business. You have revenue and expenses. When revenue is down, you have to adjust expenses. Why don’t any of our elected officials understand this? The federal government has been berating anyone who makes a decent living, many of whom are New Yorkers working on Wall Street. Additionally, the state has decided that TV commercials criticizing potential budget cuts are like pouring salt on a slug and they can’t bear to see them so they wilt and continue to spend when there is no money to spend. Is there a backbone out there somewhere? High school biology taught us that vertebrates are supposed to be more evolved than amoebas which seem to be calling the shots when it comes to balancing our budget.

What are the implications for our real estate market? The added taxes will translate into reduced consumer spending which will hurt retailers. Expect downward pressure on retail rents and increased vacancy. While decision makers do not believe so, look for people to leave the City for lower cost alernatives. This dynamic has begun which will add negative pressure to home prices and add downward pressure to residential rents. Lastly, with so many of these taxes aimed at business, look for businesses to also consider lower cost alternatives which will add downward pressure to office rents with incresed vacancies. In order to make ends meet, these businesses will have to continue reducing payroll, adding to an already high unemployment rate.

This year was a great opportunity to make fundamental changes in our financial structure and that opportunity has been missed.