As the calendar turned to 2010, New York City’s real estate scene was just starting to show signs of a recovery that would explode into a development boom over the next 10 years.
Residential sales activity had begun to bounce back at the turn of the decade, though construction projects were saddled with troubled loans and residential foreclosures were still a problem across large swaths of the city.
Following a sustained expansion, the city’s residential market is once again in a slump, with the number of sales on pace to match 2009 figures. And reverberations from the not-so-far-off recession can still be felt, according to Terra Holdings owner and co-chairman Kent Swig, who experienced one of the sharpest climbs and hardest falls during the last downturn. His firm owns residential brokerages Brown Harris Stevens and Halstead Property.
The Real Deal caught up with Swig recently, as he discussed the city’s sputtering residential market amid an otherwise robust economy and why building “bigger, faster, stronger” isn’t always the right move.
What lessons did real estate developers learn from the recession?
New York City today, this year, is going to have the least amount of apartment sales in Manhattan than we’ve had since 2009 in the recession. Ten years later, what’s happened? For all intents and purposes we have the greatest booming economy ever, and yet we’re back at 2009 with the fewest amount of transactions.
This is where some people did not learn [their] lesson: The developers on 57th Street started building condominiums for people that barely exist in the world. I don’t think people did their demographic homework. So, they built these massive buildings thinking they could sell any product as long as it was bigger, faster, stronger. Take 432 Park — the very first contract signed was 2012. Today we’re approaching 2020 and they did not sell out yet. Who can sustain that? It doesn’t mean they did a bad job. It means there are no people to buy these things.
What were developers thinking back in 2010?
On a residential basis, 2009 was one of the worst transactional-volume years in New York’s history for a long, long time — up until this year. This year [2019], we’re going to be at that level, for different reasons. We didn’t lose a lot of jobs.
By 2010, when things started rocking again and things started coming back, New York City’s economy was like somebody rigged the books. It went way, way down in ‘08 and ‘09 and popped way way up in 2010. Because everybody was gainfully employed and the bonuses started coming back.
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By the end of 2010, we had regained most of our job losses. It was a very quick return. What happened in the residential community, for instance, transaction volume in condominium sales in Manhattan was 18,000 transactions. By 2009 we went down to 9,000 transactions — cut in half. By 2010 we had regained it and were back up at our average, which was typically at about 14,000 transactions.
Who were the biggest winners and losers coming out of the recovery?
At Brown Harris Stevens and Halstead what we did was, we bought every firm that moved. We bought five or six firms in Connecticut. We bought some in New Jersey and we bought in Miami because we had faith that there would be a return to stability. That doesn’t mean we weren’t nervous. We were nervous. But firms were willing to do anything to get out from under things. We, thankfully — correctly — made a business judgement to expand.
So why? Construction costs were down. What happens? You could go build out office space very inexpensively. Commercial leasing rates were down. We went into 499 Park, for instance, for Halstead and signed up space in that building at unbelievable, ridiculous prices. Commercial leasing rates were down, construction costs were down and brokers move at bad periods of time. The way to expand brokerage firms is during a countercyclical expansion.
What’s a ripple effect from the recession that’s still felt today?
Now you’ve got a lot of private companies — private, non-regulated companies — buying debt when the people who made the initial deal made it with a nationally-chartered bank, assuming there was a level playing field. That, in my opinion, is not fair.
Now if I, on a brand-new deal, go and make a deal with Related [Companies], that’s my problem. That’s OK. And if I did a bad deal, shame on me. But if I did a deal with Bank of America and I think I’m dealing with them and all of a sudden I’m dealing with a Related, SL Green or Vornado, who don’t have the same rules and regulations, why should they buy my debt and change the ground rules on a deal I made? That impact is still going on today. That’s the stuff that doesn’t meet the smell test. Those are the things that happened as a result of the ripple effect.