Impending doom or exaggeration by media spin doctors? While economists remain divided over the long-term implications of the Standard & Poor’s treasury bond downgrade for U.S. residential and commercial real estate, New York City’s real estate pros are keeping upbeat. The Big Apple, they said, is the best place to weather the storm.
S&P downgraded the U.S. credit rating from AAA to AA+ Aug. 5, after much debate in Congress over raising the nation’s debt ceiling. The downgrading of Fannie Mae and Freddie Mac soon followed.
The Real Deal talked to some of the city’s most well-known brokers and developers in the wake of these events to find out whether they were shocked by the downgrade and what effect they expect it to have on their livelihoods.
While they disagreed on the immediate impact the downgrade might have on market activity and whether or not we’re headed for full-scale economic Armageddon, they all agreed there wasn’t a better city than New York in which to watch the action unfold.
CEO of Thor Equities, Coney Island developer
Did the downgrade come as a surprise?
[It] was a shock, although hopefully a wake-up call to an increasingly fractious and non-functional Congress… It probably should have happened a year or two ago.
What do you think it will mean for commercial real estate in the city and even further afield?
Unfortunately, there is a significant possibility that the U.S. economy is moving into a recession — or is already there. In my opinion, for most of America, there was never any real full recovery. It’s important to recognize that the central bankers have for the most part run out of many of the options to stimulate growth or prevent a slide back into global recession. They seem to be left with only the option to continue printing money in what so far has been a futile attempt to stimulate economic growth.
[That means] lowering interest rates in the near term and panicked equity markets, both of which will create demand for prime safe heaven real estate market investing. There’s a longer-term risk of hyper inflation which can have a big effect on real estate values unless rent inflation moves along with it.
What’s the biggest concern for developers on a practical level?
The ability to originate debt for their acquisitions of real estate and for refinancing.
Chairman of the retail leasing and sales division at Prudential Douglas Elliman
What effect do you expect the downgrade to have on commercial leasing in the city?
This situation is unprecedented, but for the moment I don’t expect the downgrade to have a direct effect. To put it mildly, S&P’s track record hasn’t been the best in recent years, and most sophisticated investors know this. The judgment of one company doesn’t change the fact that New York City is the financial, fashion and cultural capital of the world and that can’t be eradicated easily.
Will companies be less eager to expand and take new space because of shaken consumer confidence?
Consumer confidence is easily shaken, as recent market volatility indicates — and that can only feed on itself if anyone looks at a 401(k). But the real driver of retail is employment. Job growth is what will drive retailers to expand and hire to accommodate demand. Sales have been doing fairly well in 2011, although I wouldn’t be surprised to see a slowdown in August because of the market. But as this panic subsides, we should continue a very slow, very cautious comeback.
Are there specific projects you feel might be affected?
The three major retail projects in New York City are the World Trade Center, the World Financial Center and Hudson Yards. All three are skewing upscale (if the Nordstrom rumors are true), and those retailers are still looking to do deals in New York City.
The few people I’ve spoken with don’t appear anxious about the rating. The comments made by the [Obama] administration saying that rates will continue to be stable reassured them that the rate environment would not change.
What effects do you think the downgrade will have on residential real estate in the city?
New York is a global community and as such has been able to withstand the economic doldrums the rest of the country is experiencing. As such, short of an explosion on the inflation front, residential real estate should remain stable. Buyers have been nervous since 2008. The Wall Street response to the recent escapades in Washington is more unsettling to them.
Should they be nervous?
We all should be nervous in that until a country-wide rebound occurs we run the risk of experiencing high rates.
How will the downgrade affect you, as a residential developer, on a practical level?
Sales have remained stable since May of 2009 with moderate increases in price from that date. [Open house] traffic has once again become seasonal, which was the normal course of business in real estate until 2004. We’ve just returned to normal. Seller concessions have shrunk, but sales incentives are on the rise. As such we are not moving off price; we are however increasing our advertising budgets and expanding our broker outreach programs to bring in more buyers.
Paula Del Nunzio
Senior vice president and managing director at Brown Harris Stevens
How has the downgrade affected your outlook on residential real estate in the city?
We had come to believe that real estate would go up in value in the short term. What recent events have done is remove the expectation that New York real estate will be worth more in the immediate future. Therefore, buyers are extremely price sensitive, even if they are personally well off. We are continuing to sell a lot of expensive properties, but only where the buyers perceive verifiable value.
Will we see home prices drop?
If past is prologue, Manhattan will always attract new entrepreneurs as a financial capital of the world and the value of real estate will increase in value in the future as it has in the past.