Stuart ElliottI like bad news as much as any other journalist (scandal and controversy are our bread and butter), but I have to acknowledge that there is a lot more good news in the market right now than before.
The strategy of “extending and pretending” that has largely ruled the market since the Wall Street meltdown — banks artificially “extending” borrowers’ loans past their maturity date to keep them from defaulting and “pretending” that everything is okay so the bank’s books look better — is starting to wane.
Now, instead, the wheat is getting separated from the chaff. Banks are waking up. As if with a scalpel, cancerous and diseased boom-time deals are being isolated and contained, and prevented from infecting the healthier parts of the market, which are finding a new stability, and in some cases beginning to thrive.
As of last month, three of the priciest New York City deals during the boom, which set U.S. records in their respective sectors — office, multifamily and hotel — were all in default or headed to special loan servicers, with lenders in pursuit.
In February, senior lenders sued to force Stuyvesant Town into a foreclosure sale. The multifamily complex was, of course, the priciest property sale in U.S. history when it sold to Tishman Speyer for $5.4 billion in 2006.
Less attention has been paid to 666 Fifth Avenue, which set the record as the priciest office building sale in U.S. history in 2006 (the GM Building broke that record when it was sold in 2008). Last month, a $1.2 billion loan on the property was transferred to a special servicer. (Owner Kushner Companies issued a statement saying the loan was not in default, but that the transfer was part of a strategy to restructure the loan.)
And W Hotel in Union Square, which set a hotel record when it was sold for more than $1 million per room, was last month thrown into bankruptcy protection the day before a senior lender, breathing down the new owner’s neck, was scheduled to auction off a loan on the hotel.
On the residential side, too, new approaches are finally being taken to address troubled mortgages. Late last month, Bank of America announced the mortgage industry’s first large-scale principal forgiveness program. The program could involve more than $3 billion in debt write-offs.
If the plan works, that means the distressed home down the block will avoid foreclosure and won’t bring down the price of the healthy, nonforeclosed homes surrounding it. Removing toxic assets will allow the market to establish a stable footing.
And the market is finding that footing, as reporter Candace Taylor describes in a series of stories about the “Road to Recovery” in New York. It’s definitely worth a read.
Taylor reports that a number of condo developments in the city that appeared dead in the water a year ago have reached the 51 percent sold mark (a crucial point because of Fannie Mae backing), providing those projects with additional momentum.
Meanwhile, in the residential market overall, bidding wars have grown more common and inventory has shrunk. And some buyers are now even letting emotion influence their purchasing decisions, buying what they like, and not solely aiming for bargains, the predominant mentality in the year following the Wall Street meltdown.
And there is some other good news for the industry. Among the highlights, in two cases in the last two months, developers scored significant victories against buyers trying to get out of contracts using the Interstate Land Sales Full Disclosure Act. Last month, a townhouse on the Upper West Side sold for nearly $20 million, setting a new price record in that neighborhood. And U.S. commercial real estate prices have risen recently, according a report from Moody’s released last month. (That’s of course after falling 43 percent from their peak in 2007.)
It’s still too early to tell what will happen next with the market. The drawdown of government stimulus programs, or rising interest rates, or inflation, or the remaining foreclosure backlog may do us in again. But there are certainly some reasons to be optimistic these days.
Enjoy the issue.
Stuart Elliott