The Real Deal New York

Dramatic compensation cuts could devastate luxury housing market

November 25, 2008 11:51AM
By David Jones

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New York’s troubled residential sales market could face even more peril
than expected in 2009, as some of Wall Street’s top investment banks
slash or weigh plans to cut bonus compensation for top executives.

Just
today, American International Group announced that its top seven
executives would accept no bonuses for 2008 and that its top 57
executives would accept no salary increases through the end of 2009.

Edward Liddy, chairman and chief executive of AIG, has agreed to
cut his annual salary to $1 for 2008 and 2009.

Goldman Sachs and UBS earlier this month said they would forego bonus compensation for their top executives, and Citigroup’s board of directors is expected to make a decision on bonuses in early 2009. Meanwhile, Morgan Stanley officials are expected to make a decision on bonus pay within the next few weeks, according to Wall Street sources. JPMorgan Chase declined to comment on the investment bank’s plans for bonus compensation.

New York real estate experts say the loss of such compensation could devastate an already weakened market for luxury housing.

Wall Street bonus compensation fueled the real estate boom in New York, rising from $9.8 billion in 2002 to a record $33.9 billion in 2006. After slipping to $33.2 billion in 2007, a report released Monday from New York State Comptroller Thomas DiNapoli warns that bonus compensation could plunge more than 50 percent over the next two years.

“Since Wall Street accounts for such a large share of the state and city economies, lower bonuses will have a significant adverse impact on the economy and tax collections for some time to come,” the report stated.

Barbara Byrne Denham, chief economist at commercial brokerage Eastern Consolidated, said that Manhattan sales would be hit the hardest, and could shift some buyers into rentals.

“As many prospective buyers put off buying a condo/co-op, this could be beneficial to the rental/multifamily market, but only at the margin,” she said.

Attorney Hugh Finnegan, co-director of the real estate department at New York-based Sullivan and Worcester, said it would hit both primary and second-home buyers.

“The first impact will be on the residential condo market in Manhattan and Brooklyn. That market is often driven by Wall Street bonuses,” he said, adding that the loss of bonus money will make it tough for buyers to make deposits on luxury apartments. In the second-home market, he said that the loss of bonus money would hurt home sales in the Hamptons and the Jersey shore.

Sam Heskel, executive vice president at Brooklyn-based appraisal firm HMS Associates, said he’s already seeing some buyers in the Brooklyn Heights area lose deposits due to the loss of bonus compensation.

“I’ve seen a client who didn’t qualify after the appraisal there,” said Heskel. “He lost the deal [because he] could not get financing.”

Executive compensation has become a sensitive issue in recent weeks as major Wall Street Banks have asked Washington regulators to buy billions in toxic assets.

Citigroup reached a historic agreement Sunday evening with the Bush Administration for $40 billion in capital investment under the Troubled Asset Relief Program. The agreement prevented a potential collapse of the New York-based bank, which lost half of its stock value last week after announcing plans to cut more than 50,000 jobs.

A report issued last week by Pearl Meyer & Partners, a New York-based executive compensation firm, said that 90 percent of companies surveyed planned to review their pay and bonuses. The company surveyed 410 board members of various firms.
 

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