As brokers and developers ring in the New Year, they are predicting even more shifts for New York’s already slowing real estate market.
Experts interviewed for The Real Deal’s end-of-the-year Q & A said while they expect the upper echelon to be insulated in the coming year, they are worried about the possibility of an increase in interest rates and market slowdowns in the outer boroughs and other areas that may not be able to absorb the recent glut of new construction. Also among their predictions for the New Year: prices will drop to more realistic levels, investors will evaluate their property choices more closely, overpriced properties will sit on the market, banks will go back to lending off their own balance sheets, and blockbuster commercial deals will get financed by more than one lender as banks minimize their risks.
As one residential broker put it: “For a long time the attitude was, ‘Anything I buy in Manhattan will be worth more money tomorrow.’ Now it’s, ‘I hope it will be more money tomorrow.’”
Others said they expected the already cutthroat world of New York City real estate to get even more competitive for brokers as the market tightens.
For more predictions on how the economy, interest rates and lending will affect the city’s market, here’s what our experts had to say:
Residential
Dolly Lenz vice chairman, Prudential Douglas Elliman
Where is the market now, and where is it headed?
It’s a stale market. It’s very good under $6 million or less, which I attribute to two things: the rental market is so tight and high as a result of deregulation and conversions have made buying versus renting favorable. There are a lot other [factors] converting tons of renters to buyers. Normally, at this time of year everything is dead. People are concerned with being able to finance in the future so they are locking loans in while they can.
What are you most worried about?
Interest rate hikes — that will throw the balance off.
What parts of real estate do you expect to fare best this year?
People are going back to basics. It is better on the Upper East Side and Upper West Side, which had been out of favor as people moved to Alphabet City, Tribeca, Soho and the East Village. They grew up there — young people that are having a child or plan to have children are moving back to the Upper East Side in droves.
What parts of real estate do you expect to fare worst?
I think anything a little fringy like Westchester, Connecticut, Long Island and to a lesser extent Brooklyn, Queens and Jersey City overbuilt. Anywhere where there is too much supply.
Betsy Dean managing director and executive vice president, Stribling
What will you do differently this year?
Coaching the brokers to change when the market changes. We are currently helping our clients and customers on pricing and bidding in this market. In addition, [we’re holding] workshops on dealing with the foreign buyer.
What’s the next big trend in real estate?
More brokers partnering with each other and a stronger foreign market.
What parts of real estate do you expect to fare best this year?
Quality apartments at the top of the market that are in immaculate condition.
What parts of real estate do you expect to fare worst?
Overpriced apartments in poor condition.
What’s the most overrated aspect of NYC real estate?
Studio apartments are overpriced. You can buy a studio for $500,000 and a one-bedroom in the same building could be $550,000.
Gil Neary president, DG Neary
Where is the market now and where is it headed?
The exuberance has dissipated a bit. For a long time the attitude was, ‘anything I buy in Manhattan will be worth more money tomorrow.’ Now it’s, ‘I hope it will be more worth more money tomorrow.’ In the next few years some co-ops are going to feel the pull of condos. Even now some well-qualified buyers who have bought a number of co-ops before are not entertaining the idea of going before a co-op board again. They want to know they can rent an apartment if they want, and they do not want to be subject to the whims of a co-op board.
What are you most excited about?
Chelsea is becoming a showcase for real high-quality architecture, like the Jean Nouvel building on the West Side Highway. This evolution is adding to the overall value of the adjoining historic district neighborhood.
What are you most worried about?
If the market softens, the banks tighten up lending and people become more nervous about the market we will have a correction. Some condos could get stung by defaults. With a large number of defaults, the value of co-op ownership becomes more apparent.
What will you do differently this year?
Just about everything. It’s a competitive market. People have to be on their game more than ever. There has to be more counseling to understand that it is not a sure thing. We have to work harder to market properties to convince people that the New York City market is a good bet. We’ll also probably have to tell some people that their prices are too high.
What’s the next big trend in real estate?
Designer condos seem to be the big trend. Everything seems to have a name attached to it. Everything is branded. It used to be classic, beautiful, old prewar buildings. Now new flashy namedropping, designer, high style is very hot. The other trend is high service — a dining room with free breakfast like the Orion on 42nd Street. It’s been done at the Macklowe building, the Metropolitan. People are looking at living in a hotel style with value added service. You need a $200,000 income to buy a new studio in these buildings. In general the median income for anyone who can afford to purchase would be in the top 2 percent of the rest of the country.
What parts of real estate do you expect to fare best this year?
The uber-luxury market, new construction with high service, the menu items du jour, the truffles of real estate. Some of the green trends are becoming very popular with buildings. Since the mayor’s green plan for New York City, co-op boards are becoming more conscientious about how their energy is used and having green roofs and sustainable architecture.
What’s the most underrated aspect of NYC real estate right now?
Probably some of the neighborhoods in Manhattan that are the secondary choices, like the East 20s, the far East Side, East Side Uptown, which are perfectly accessible, attractive and practical places to live but don’t have a hipness. Other areas are probably Murray Hill East and Midtown East.
What’s the most overrated aspect of NYC real estate?
Probably the value of designer appliances, designer labels on your refrigerator, wenge wood, stainless steel.
Klara Madlin president, Klara Madlin Real Estate
Where is the market now, and where is it headed?
Currently if a property is pricedécorrectly it sells quickly — sometimes for more then asking. Yes, Virginia we are still seeing bidding wars. If it is not [pricedécorrectly] it will sit on the market until it is.
What are you most excited about?
In the coming year, sellers will no longer be expecting unrealistic prices. If a seller wants to sell then they will be realistic.
What parts of real estate do you expect to fare worst?
The most underrated real estate right now is the Upper East Side. East of Third is definitely not trendy. It’s more space for the money. And, if the Second Avenue subway actually gets built, it’s a really great investment.
Jim Mazzeo president, Weichert Realtors Mazzeo Agency
Where is the market headed?
I see greater competition from the developers as their products come to market and more wooing of the foreign investor.
What are you most worried about?
The only thing I ever worry about are the perceptions of the media. Unfortunately bad news always sells better than good news, and the media is always tempted to trumpet, exaggerate and sensationalize the bad. For example, the subprime mortgage market really has to do with only a very small segment of the market.
What parts of real estate do you expect to fare best this year?
The West Side from Chelsea up in to the 50s should become stronger, especially because the city has enacted such favorable zoning.
Sandy Krueger CEO, the Staten Island Board of Realtors
Where is the market now and where is it headed?
The market on Staten Island is relatively slow right now, and it will stay there at least through the middle of 2008.
What are you most excited about?
Probably St. George and the revitalization down there with 2,000 co-op and condo units on the drawing board.
What are you most worried about?
The economy. With the current talk of inflation, even beyond the price of oil and the possibility of the Fed stepping in and affecting the mortgage rate. If they try to tighten down things, rates will go up and that will be a negative affect on the market.
What’s the next big trend in real estate?
In Staten Island, it’s St. George. With the new transportation, young people are coming across the water. As we continue to implement transportation to Manhattan from Staten Island, that will continue to develop. Another trend is toward better retail development on Staten Island, which will give residents an alternative to shopping in New Jersey.
What parts of real estate do you expect to fare worst?
The big pressure is on the freestanding units right now. It is one-family homes, detached properties that are seeing the most pressure.
What’s one telling statistic about the current market?
Our sales are down to more historic levels. That shouldn’t be a surprise. In our market the bottom hasn’t fallen out. We are really back to where we should be. The good news is that our inventory peaked in the middle of last year and it has been coming down.
Isaac Katan principal, Katan Development
Where is the market now and where is it headed?
Current inventory is selling well, interest rates are still low, and there are indications that the Federal Reserve will decrease the discount rate by .75 by next summer. The condo market will remain in the development mode until the 421-a program expires in June 2008.
What are you most worried about?
The continual credit crises creating more difficulty in obtaining development financing. The lack of city and state bonding capacity for 80/20 rental projects.
What’s the most overrated aspect of NYC real estate?
The assumption that development of the residential market will continue without the 421-a tax abatement program. On a cost-benefit basis, the taxes paid by the owners of the new condos to the city and state coffers far outweigh the 421-a cost. There will be huge drop in tax revenue to the city as a result of this change.
Jeffrey Jackson chairman and co-founder, Mitchell, Maxwell & Jackson, Inc.
Where is the market now, and where is it headed?
The market is generally flat, but there is no one answer that covers the entire city because the market is a collection of numerous sub-markets, each with its own forces. There is one common characteristic to all New York City’s sub-markets: slow sales volume. The difference in value between quality and mediocrity will continue to widen.
What are you most worried about?
The loss of liquidity in the financial markets. This has manifested itself in excessive rate premiums on jumbo and super-jumbo loans.
What’s the most overrated aspect of NYC real estate?
The perception that values are increasing by double digits.
Commercial
Peter Hauspurg chairman, Eastern Consolidated
Where is the market now, and where is it headed?
It depends on what asset type you’re talking about. There are really two markets. The market over $200 million in deal size has slowed markedly. Generally speaking, the lenders for the larger deals have stopped in their tracks with the temporary halt in securitization. So they have to put together loans from three to five different banks now, and the pipeline is clogged as they are trying to get rid stuff they have already securitized. The only way is to split the risk between banks so they might get around $40 million from each. The action under $125 million is almost unchanged. There are lots of banks and insurance companies still in the market to lend. We may have returned to 2006 levels, and that’s definitely not a bad thing. My colleagues and I agree that things got out of hand in 2007.
What are you most excited about?
The fact that we had the correction in August and people still want to own New York City real estate. People are not thrown off by the financial turmoil that occurred. They are bullish on New York City.
What are you most worried about?
The credit crunch may restrict or dry up liquidity in our financial markets. If that’s the case then we can face an increase in interest rates and financing costs, which could cause prices to fall beyond the current levels of 5 percent or so. If we did get an increase in the cost of credit, it’s likely that transaction sales volume would decrease significantly.
What will you do differently this year?
We are spending more time with lenders and mezzanine funds and selling their various note positions. We are spending time with Wall Street investment banks, raising liquidity by selling select mezzanine loans and other financing.
What’s the next big trend in real estate?
Lenders are going to go back to lending off their own balance sheet and reversing the trend of the last five years of selling the loans not securitized by them. Instead of lending to anybody because Wall Street said, ‘I’ll take the loans off your books,’ they have returned to making loans of their own money. It’s a great trend. I hope we see more of it.
What’s one telling statistic about the current market?
There is still extreme price volatility when it comes to well-located properties. There was a 28,000 square foot office building at 414-418 West 14th Street in the heart of the Meatpacking District that sold at $400 a square foot, or $12 million, 16 months ago. It just resold, unchanged, for $70 million — that’s $2,500 a square foot.
What’s the most underrated aspect of NYC real estate right now?
Multi-family rent-stabilized apartment buildings in any part of the city is the straight road to wealth. It’s an asset class that gets short shrift, but I think it has the most potential.
Jeff Winick CEO, Winick Realty
What are you most excited about?
The continuous growth of the Financial District. The neighborhood finally started earning recognition by retailers. Wall Street has attracted many fashion houses and luxury-goods retailers like Hermes and Tiffany. This year our company closed deals with Thomas Pink, Canali, Tumi and others.
What’s the next big trend in real estate?
Mixed-use developments, with international and national retailers looking to make a New York City presence.
What’s one telling statistic about the current market?
Enormous increase in rental values on streets and avenues catering to luxury retail. There is a growing number of wealthy shoppers who seem to have unlimited spending power and this, in its turn, has increased the demand of retail space.
Robert K. Futterman chairman & CEO, Robert K. Futterman & Associates
What are you most excited about?
It’s exciting to see how some of Manhattan’s neighborhoods are evolving. The Bowery, Soho, Harlem, the Meatpacking District and Lower Manhattan are turning into true 24-hour, seven-day-a-week retail destinations.
What are you most worried about?
I think the challenge for the coming year will be reassuring consumers that the subprime mortgage crisis will not have a lasting impact.
What’s the next big trend in real estate?
The multi-brand store — a shop that mixes fashion forward items from various designers — is the new “it” concept in retail. Multi-brand retailers, such as Intermix, Ron Herman and Scoop, are expanding rapidly in urban markets. Another significant trend is the emergence and expansion of international retailers including Uniqlo, Topshop and Zara.
What’s one telling statistic about the current market?
Retail vacancy rates are low throughout the city, and demand for space is at an all-time high despite some recent financial turbulence.
What’s the most underrated aspect of NYC real estate right now?
I am excited to see what’s going to happen with retail on the Upper West Side. The area hasn’t been known as a fashion district, but all that is changing with the emergence of high-end retail developments popping up, including 350 Amsterdam Avenue and 2075 Broadway, as well as hip retailers such as Barney’s Co-op, Jacques Torres, Crocs, Club Monaco and Intermix.
Richard Baxter executive vice president, Cushman & Wakefield
What are you most excited about?
Our new offerings in January. We’ve got two prime office buildings we’re bringing to market and one of the best residential buildings in Manhattan.
What’s the next big trend in real estate?
From an investment perspective, the trading of preferred equity interests and secondary loans. I think over the next several years that will become a new trend in Manhattan.
What’s the most underrated aspect of NYC real estate?
From an international perspective New York is considered to be very undervalued. We hear it consistently from international investors who look at London, Tokyo, Beijing and Shanghai. All other markets are, on a price-per-square-foot basis, so much higher than Manhattan.
Stephen Siegel chairman Global Brokerage, CB Richard Ellis
Where is the market now and where is it headed?
The market is in a pause mode for the financial firms, but for the rest of the world it seems to be business as usual. Transactions have closed or there are letters of intent or term sheets for Omnicom, Newsweek, Grey Advertising, Ogilvy & Mather, and Gibson Dunn & Crutcher. The financial services companies are taking a step back to assess the impact and whether they will need more space or if they will free up surplus space due to layoffs; this will be resolved after the New Year.
What are you most worried about?
Not being 100 percent in the know leaves the possibility that financial service firms are in worse shape than I believe. If that’s true, maybe we are headed into larger blocks of space available, which will give a negative perception. It may even lead to broader based recession. I don’t feel that way, but I am worried about it.
What’s the next big trend in real estate?
A return to more traditionally structured deals with less leverage and more cash. I see the need for not-for-profit zones in some of the outer boroughs and see more absorption zones added to Brooklyn and the Bronx as it gets more expensive.