More Wall Street worries over jobs

By Alison Gregor | December 14, 2007 11:07AM

As the rules of real estate financing continue
to be rewritten, some wonder how the job outlook among struggling
Companies On Wall Street may affect the real estate market in New York
City.

The credit crunch has already caused layoffs nationwide in the
securities industry, with some cuts affecting New York City, putting
annual bonuses for many Wall Street workers in a precarious position.

Over a dozen large securities firms said job cuts were in the works
that would affect the roughly 188,200 employees who work in New York
City. According to State Comptroller Thomas DiNapoli’s office, the
seven largest financial firms headquartered in New York City saw their
profits fall nearly 65 percent from the year-ago quarter. As a result,
bonuses will be trimmed.

Typically, news about bonuses creates as many headlines as news about
job cuts. Why the focus on bonuses? Because financial firms drive the
New York City economy, and annual bonuses on Wall Street are much
bigger than salaries. But that’s not the whole story when it comes to
the real estate market.

“To a large extent, the big bonuses on Wall Street really only affect
the very top of the market,” said Stuart Saft, a partner at the law
firm Dewey & LeBoeuf and the executive committee chairman of the
New York City Workforce Investment Board, which tracks employment. [On The Real Deal Webcast, a panel of experts including Saft discusses the future of the residential market in New York City.]

While the real estate market is indisputably affected by conditions on
Wall Street, some market analysts such as Saft believe it’s tied more
closely to the overall employment rate in the city.

“Of course, Wall Street is an important economic engine for the city,
but the overall employment issue has more of an impact” on the real
estate market, he said. “The balance of the market is affected by what
the ordinary person is doing — whether or not they have jobs.”

And that means the ordinary person may eventually be losing their job.

An analysis done by the State of New York comptroller’s office released
in October shows that for each job added in the securities industry
between 2003 and 2006, two jobs in other industries were created.
During that period, Wall Street employment increased by 18,100 jobs,
and thus, 36,500 jobs were created in other industries, according to
the report, with 30,700 jobs in industries that do business with Wall
Street and 30,700 jobs due to increases in household consumption.

Also, according to the report, Wall Street may account for only 5
percent of the jobs in New York City; however, it also accounts for a
disproportionate amount of the wages, at 23 percent.

While Wall Street grew by 9,500 jobs last year and 10,000 jobs during
the first three quarters of 2007, the securities industry has announced
that that type of growth will not continue. There will be layoffs, even
in New York City.

Though nobody knows for sure, analysts are not predicting fallout as
gloomy as that following the crash of 1987, when some 50,000 Wall
Street jobs were lost in subsequent years.

Still, any job losses now may have more impact on the city’s overall
economy. Before the 1987 crash, Wall Street’s share of employment was
4.6 percent, which is similar to current conditions, but its share of
the city’s wages at 9.7 percent was less than half of its current
level, according to the comptroller’s office.

Since Wall Street provides nearly 9 percent of New York City’s personal
and business tax revenues, the city has revised its four-year financial
plan to lower its tax revenue expectations. The real estate industry
might do well to do the same, analysts said.

Wall
Street “does have a ripple effect,” said Fernanda Forman, managing
director at Bond New York. “The lower echelon will also be affected,
because the personal assistant of the high-powered Wall Street
executive will also be making less money or will also perhaps even lose
their jobs; therefore, they will not be buying the $500,000 apartment.”

How
will that affect the residential real estate market? Stan Ponte,
president of the Previews international luxury marketing division of
Coldwell Banker Hunt Kennedy in New York, said that he believes Wall
Street bonuses will still be relatively strong in early 2008, perhaps
falling by up to 15 percent, since the first three quarters of 2007
were strong in the securities sector.

The
New York Times offered a similar range. Bonuses could be flat to down
15 percent, a recent article said, because some firms, such as those in
the mortgage industry, fared worse than others, such as those in
investment banking.

Even
with bonuses down 15 percent in 2008, it shouldn’t make much of a dent
in the residential market, Ponte said. But, he said, he anticipates
bonuses will plummet in 2009, after securities companies go through
perhaps a full year of poor returns. Paradoxically, that may have a
buoying effect on this spring’s residential market.

“At
a time with oil prices going through the roof, and gold going high, and
some stocks performing badly and some losing serious value, it’s a
bricks-and-mortar time,” he said.

Last
month, for the first time in four years, Standard & Poor’s
500-stock index and the Dow Jones industrial average dropped more than
10 percent below their October all-time highs, which is the standard
definition of a correction.

“It’s
not just the bonuses, it’s also the underlying value of the stocks,
because if somebody has a portfolio that was half a billion dollars and
now it’s down to $100 million, they’re feeling pretty poor,” said
Ronald Kremnitzer, a partner and co-head of the real estate department
at the law firm Pryor Cashman.

Kremnitzer
said he expected the $3 to $5 million apartment market, perhaps even
apartments as expensive as $10 million, to be hurt most this spring by
reduced bonuses. New development may also take a hit.

“People
will buy fewer four- and five-unit blocks, which they’ve been doing to
combine them into mega-residences, with that phenomenon driving in
significant part the new construction sales,” Kremnitzer said.

Some
of those people may even shift into rentals, he said.

“If
you now have a class of people that were looking to buy expensive
apartments and can no longer afford to do that, and they have to move
into rentals, you may see the rentals of the premium buildings may be
strong,” Kremnitzer said.

However,
if there are job losses at The Entry Level On Wall Street or in some of
the industries it deals with, that may affect the rental market as
well, and not for the better.

JEMB
Realty owns Herald Towers at 34th Street and Sixth Avenue, which has
690 rental apartments that often serve employees in entry-level
positions at financial companies, law firms and accounting firms. It
may take a hit if there are layoffs at securities firms.

“Candidly,
if there are layoffs at the entry level, it will affect the rental
marketplace and the lower tier, but maybe not the purchase marketplace
as much, with the higher bonuses that the top people get,” said Joseph
Jerome, principal of JEMB Realty, which also owns 150 Broadway and 75
Broad Street.

Still,
the upper end of the residential market should continue to get a boost
from foreign buyers, who are pouring into New York City due to the weak
dollar, Forman said.

“The
movement of foreign money to New York is unprecedented right now,”
Ponte agreed. “Part of that is a change in the supply side. Fifteen
years ago, there were not all these $12 and $14 million condos to buy;
they were co-ops, and you weren’t seeing too many co-ops approving
deals from overseas,” he said.

In
the commercial real estate market, office landlords can anticipate
having to compete with space put on the market for sublease by
securities companies, said Jerome.

“If
financial services firms, which are the driving factor in leasing
space, or one of the top three, start faltering a bit and having
layoffs, they’re going to have excess space,” he said.

“The
space they put on the sublet market is at lower rates, because, in the
past at least, what they’ve tried to do is just recoup as much as they
can. That affects direct rents with landlords, so we’re competing
against a cut-rate price.”

Jerome
said that JEMB Realty is a low-leverage company, so he anticipates
riding out any possible downturn in the real estate market, but that
highly leveraged firms might have more trouble.

“We’ve
been through the downturns since the late 1980s, and we’re not pressed
to have full occupancy,” he said.