Manhattan has been mostly insulated from the subprime mortgage crisis that has wreaked havoc elsewhere in the country so far, but what lies ahead for the city’s real estate market? A slowdown in the financial services industry, the main driver of the city’s economy, has some observers worried about the city’s real estate prospects going forward — not to mention the recent rise in outer borough foreclosures.
In a recent Webcast interview, The Real Deal’s Jen Benepe spoke to an esteemed panel of experts for the scoop on whether New York City residential real estate will suffer any immediate or long-term damage. Guests included lawyer Stuart Saft of Dewey and LeBoeuf, a real estate veteran of 30 years and author of numerous books on commercial real estate; Frank Braconi, chief economist for the New York City comptroller’s office of William Thompson; and Paul Purcell, co-founder of real estate consultants Braddock and Purcell and former president of Prudential Douglas Elliman.
The Real Deal: OK, first question is for you, Frank. In a New York Times article, recently you said, “There’s a very high likelihood that, yes, several years of very healthy and well-balanced economic growth in the city are probably behind us.” What do you mean by that, and can you give us some numbers?
Frank Braconi: In the recent economic recovery coming out of the recession of 2001, the city gained steam more slowly than the rest of the country, but eventually got a very good head of steam to its economy. In 2006 and 2005, we approached 4 percent real change in the city’s gross city product. We’re expecting it to slow somewhat this year and, probably, in 2008, to slow considerably.
TRD: Are we really that immune to what’s happening in the rest of the country? I’ve heard yes, I’ve heard no, I’ve heard maybe; what’s the truth?
Stuart Saft: If you go to Miami, you see empty buildings all over. And they have 150,000 units of condominiums coming on the market in a market of about 1.7 million [people]. All that housing is coming on the market in the next 18 months. In New York City, in a market of almost 8.5 million people, we have fewer than 20,000 units of housing coming onto the market in that same period of time. So from my perspective at least, I haven’t seen any signs of a softening in the New York market.
Paul Purcell: I’ll add to that. I’m more Manhattan-centric, but our inventory (of homes on the market) actually in the third quarter of 2007 is down about 32 percent versus the same quarter a year ago. Our sales in Manhattan are up about 65 percent in the third quarter of this year versus the same quarter a year ago. That doesn’t tell me we’ve made any kind of negative switch yet.
SS: We’re seeing an interesting dynamic, and it’s multifaceted. We have a lot of empty nesters who are selling their homes in the suburbs and moving into Manhattan — and all of the city — because they think it’s an easier quality of life. And we also see a tremendous amount of foreign money coming into New York, because the dollar is so cheap.
PP: And this is not the euro only. As we were discussing earlier, this is Russian money, Indian money, Asian money. You know the expression “New York is on sale?” It continues to be for the foreign buyer.
TRD: Let’s drill down to very specific issues here. We talked about the international guys; they definitely are a big factor. But what about Wall Street? They’ve lost 42,000 jobs.
FB: I don’t think that relates directly to New York City. I think that might be the firms nationally. Now, there is some concern that some of the recent layoffs that were in-house will be disproportional to here.
SS: And the other thing is that Wall Street is really just one component of the New York City economy. You also have travel and entertainment, which is a huge portion of the economy; you have the health industry that employs a very large segment of the population; you have our educational institutions; and you have all of the professional firms: law firms, accounting firms, advertising agencies — and they’re still growing.
TRD: You guys do sort of buck the trend I’ve heard previously that Wall Street bonuses drive the real estate business. What about that?
PP: There’s no doubt that there’s a correlation; we’re in New York. In fact, that’s probably one of the negative things about our real estate. We’re so closely related to Wall Street that we almost think of real estate as a stock.
TRD: What about bonuses?
PP: Oh, I didn’t get to that. [Laughter] I’ll make one quick comment. I have many friends that work on the Street, and it is hard for me to feel sorry for someone who’s going from an $8 million bonus to a $6 million bonus. So bonuses may be down in some instances, but as far as I’m concerned, they’re still doing well.
FB: The first half of the year on Wall Street was also extremely good; it was better than the first half of 2006.
SS: You have to remember that our economy is far more dynamic than that. If you look at real estate prices, they track the employment rate more. And our unemployment rate is the lowest it’s been in 20 years. That makes a big difference.
The other thing is what’s happening in the outer boroughs. We have 2 million first- and second-generation Americans living primarily in Brooklyn, Queens and the Bronx, and they are buying up properties as quickly as they possibly can, because they believe that’s a part of the American dream.
TRD: I beg to differ, in a sense, because that’s where the largest amount of subprime is happening. And also, as we had discussed previously, prior to this meeting, you don’t have a lot of numbers in the boroughs.
FB: Before we get too sanguine about this situation, one corollary to the economic data I was giving earlier is it really depends on whether the national economy goes into a recession or not. The question, I think, is, “How does cooling off turn into a negative trend?” And my office is not projecting that in any significant degree.
TRD: Okay, taking bets: Give me your forecast for the next year, next two years, and if you’re brave, the next three years, starting with you, Stuart.
SS: Shouldn’t we do this in alphabetical order? [Laughter] I see in terms of 2008, the market will be quieter than it is right now, because there’s such uncertainty. By 2009, I think the buoyancy will be back. And certainly, we don’t presently have planned enough product coming onto the market in 2010 through 2012 for there not to be substantial increases in price. So, looking at it that way, I would say the market will be maybe a 5 percent increase in 2008, a 10 percent increase in value between 2008 and 2010, and then back to where we were, at 10 percent to 15 percent a year, from 2012 forward.
PP: I’ll give you year-out. I think we’re going to be sideways to up about 5 to 7 percent in 2008. Beyond that, I don’t think I can venture a guess just yet.
FB: I guess I’m the pessimist of the group, though I don’t consider myself that pessimistic. Basically, zero nominal growth citywide over the next two years in house prices, which means some erosion in the real value of them over the next, say, 24 months — but no price calamity — and then picking up sometime in 2009 to 2010, and getting back to some kind of stable growth rate on the order of 5 to 8 percent.