If there is one glaring conclusion from 2008 that everyone can agree on, it’s that making predictions about New York City real estate is often an exercise in futility.
But with key facts at hand about construction financing, condo sales and office vacancies, everyone in the city’s real estate community is preparing for a brutal 2009.
In this month’s Q & A, some of the biggest residential and commercial players tell The Real Deal what they fear and anticipate in the New Year.
Some say they expect the industry to shrink across the board, and others say they have set resolutions to never overestimate the price of a listing. And at least one of those interviewed said that the biggest challenge of 2009 will be operating in the black.
On the residential side, brokers say that developers who are 40 percent sold or less could have serious problems; that renovation and retrofitting will take on new significance as ground-up construction wanes; and that emerging areas like Bushwick will get hammered.
On the commercial side, the consensus is that the already elevated vacancy rate will increase even more as planned financial industry consolidations take effect and office space is dumped. In addition, the distressed assets funds that spent the latter part of 2008 raising money will probably get their day in the sun in mid-2009, when prices start seeing even more significant drops. For more, we turn to our panel of experts.
Fred Peters president, Warburg Realty
What do you think will happen to all of the new luxury condo buildings that are now 40, 50 or 60 percent sold?
Some will change to rentals; others will continue their selling efforts depending on their cash position and their lenders. Lenders are calling the shots on some of these decisions.
What will you do differently this year because of the changed market? Do you have any real estate New Year’s resolutions?
I think all of us in the marketplace are extremely cost conscious. Every dollar we spend has a clear relationship to value received. My focus and the focus of the management team will be about sales training in the realities of this marketplace. The skills required here are different from the skills that were required two years ago.
What parts of the residential market do you expect to fare best and worst in 2009?
To predict in an environment as volatile as this is cuckoo. Conventional wisdom says that when it gets difficult, the bottom end falls apart and luxury stays secure, but it has been 180 degrees the other way. The transactions have been at the lower end, and there has been very little activity at the high end. At its height, the high-end pricing got too big even for the people who could afford it.
How much do you expect apartment prices to drop in 2009?
I have seen prices drop up to this point anywhere from 10 percent on the low end through 15 percent and up to 20 or 22 percent at the high end. And I think there is probably a little more to go.
How do you expect the brokerage world to fare in the coming year?
I think it will shrink in every way: closing offices, letting staff go, letting agents go, and agents will be leaving the business because they can’t make ends meet.
What do you think the biggest challenge will be for the residential brokerage world in the coming year?
Operating in the black.
What’s your prediction for how new development in the city will fare in the coming year?
Some developers will convert to rentals or convert partially to rentals if the project is only partially sold. Some new developers will shutter their sales offices until the spring or shutter their sales efforts until the building is closer to being built. It’s becoming increasingly difficult to sell something that you can’t touch and feel.
Don Capoccia managing principal, BFC Partners
What is your prediction for how new development in the city will fare in the coming year?
My guess is that it’s really going to slow down, and what everyone sees coming out of the ground right now is probably all there will be.
What do you think will happen to all of the new luxury condo buildings that are now 40, 50 or 60 percent sold? Do you think they’ll sit partially empty all year?
There is a huge difference between 40 and 60 percent. Buildings that are 40 percent sold are going to have bigger challenges in getting lenders to work closely with them. Buildings that are 60 percent sold will have a much better shot at getting lenders to work with them to encourage sales or rentals.
What parts of the residential market do you expect to fare best and worst in 2009?
I recently drove by projects that were going up in East Bushwick and noticed that construction had stopped on a number of them. It can’t get much worse than that. Those properties that are in fringe neighborhoods are not going to do as well.
What do you think the next big trend in residential real estate in the city will be?
Preservation; working with existing buildings to reduce cost. There will be a lot of renovating and retrofitting of those buildings as a way to [lower] costs.
Who will be the most active residential buyers in the coming year?
It’s a great opportunity for first-time buyers. We are also starting to see requests for setups for investors doing bulk purchases.
Paula Del Nunzio senior vice president, Brown Harris Stevens
Who do you think will be the most active residential buyers in the coming year?
Sales will continue to occur when three conditions are met: First, the buyer has a strong, specific need and perceives good value. Second, the property must be well priced in terms of recent sales — not recent asking prices. And third, it’s a long-term decision, not an investment.
Will 2009 continue to be a buyer’s market?
The key issue will continue to lie between the buyer’s requirements for a property and a specific seller’s need to sell. If the buyer is “in love” and the seller needs to sell, the transaction will move forward. If the seller is extremely wealthy, they will be willing to wait until they achieve whatever price they feel is appropriate for their property. If the seller is under stress or in serious financial difficulty, the situation will be different.
What are you most worried about in real estate as we move into 2009?
The hardest thing that any business has to deal with right now is the fear and uncertainty that seems to have taken hold of the consumer. If the consumer could possibly view current conditions in a more balanced way, it would be a benefit to everyone. Long-term real estate projections from other times of stress might be helpful. Three years from now, we may remember this period quite differently.
Peggy Aguayo principal broker, Aguayo & Huebener
What’s your prediction for how new development in the city will fare in the coming year?
I don’t have a crystal ball, but people are coming up with a lot of different creative ways to assure buyers that developers and sponsors are not abandoning their projects. We have a project, Hello Living, where we are now offering rent-to-own, allowing people to put the rent that they pay toward reducing the purchase price. People who are skittish can see where the market is going. We also have a program allowing purchasers who sign a contract and then see prices go down 10 to 15 percent in their building the opportunity to get the reduced price.
What do you think will happen to all of the new luxury condo buildings that are now 40, 50 or 60 percent sold?
If a developer is smart, he will do everything in his power to get it sold or rented or a combination of both. If he paid off his bank, I suppose they could sit for a while, but if 40 to 50 percent of units are unsold, I doubt that’s the case. If there are three left, he can wait to sell.
What will you do differently this year? Do you have any real estate New Year’s resolutions?
Yes, definitely. In order to get listings, I will never overestimate a selling price. Whatever I can control, I will cut back on. I will offer sellers incentives that other big agencies can’t offer, if they have realistic prices. Most of the listings I get are exclusives, and I am willing to co-broke.
How do you expect the brokerage world to fare in the coming year?
If the big firms can adapt and change and give people honest numbers, they should be OK. Smaller firms tend to have less overhead and have the ability to contract and expand without getting the opinions of 13 or 14 senior vice presidents first. I don’t know if the corporate world has the ability to adapt as fast.
Roger Erickson senior managing director, Sotheby’s International Realty
Who do you think will be the most active residential buyers in the coming year?
The most active buyers will be those with a real [need to sell] and those in high-priced rentals who are smart enough not to let a once-in-a-lifetime buying opportunity pass.
What’s your prediction for the uppermost sector of Manhattan’s residential market in 2009?
The tippy top of the market will not be as affected because those sellers have the financial wherewithal to wait out a lousy cycle. Those in the most prized co-ops and mansions will simply wait until the market resumes its uptrend instead of selling into a soft market. And if a buyer has to have one of those homes, I expect we’ll continue to see near-record prices for that segment of the market.
How much do you expect apartment prices to drop by?
I think it will vary dramatically based on location, a seller’s needs and the size of the property. I also expect prices to literally skyrocket once this downward trend comes to a close.
How do you expect the brokerage world to fare in the coming year?
I bet we’ll see fewer brokers in the business by the end of 2009.
Daun Paris president, Eastern Consolidated
Building sales have obviously been hit hard in the last few months. What do you think is going to happen with sales activity in the city in the coming year?
Sellers that don’t need to sell won’t. There will be sales due to partnership dissolutions and families doing estate planning, but we will continue to see less sales volume across all asset types.
We know that a number of distressed asset funds have been formed in the last few months, but not many of them have started to buy in force yet. What do you expect to see as far as distressed asset fund activity in 2009?
There is still disequilibrium in the expectations of buyers and sellers. Bid and ask are still on opposite sides of the canyon, but the gaps are narrowing slightly. There is a lot of money in the marketplace waiting on the sidelines and, until pricing comes down, we will not see a lot of people jumping in. By the middle of 2009, we expect pricing will be at the level where buyers will see deals worth pursuing, and activity should pick up dramatically.
Which type of investor or sector of the market will lenders be most keen to lend to in 2009?
Properties with a stable cash flow — multi-family, retail condos, parking garages and bulk condo sales are the asset classes most in demand, but they must be based on actual cash flow, not projections, even in very prime locations. In retail condos, if the lease is not backed by a corporate parent, then it will be difficult to get financing. Where we were seeing 4 to 5 percent on a retail condo sale, we are now seeing 6 to 7 percent, and trending even higher in buildings that are fully leased and very well located. I think in the next year, we are going to see deals trading at 9 percent [cap rates], which is unheard of in Manhattan.
Which areas will investors have the hardest time getting financing for in 2009?
Investors in large properties with high vacancies, because there are very few deals being done in the $100 to $500 million dollar range and absolutely no prospect of refinancing for the next 24 months. Office buildings will be hit hardest, followed by new hotel or condo construction, which we see disappearing except in extraordinary circumstances. As in the past, Lower Manhattan will be more affected than Midtown. The boroughs will be more affected than Manhattan, and Manhattan’s Class B and C office and loft buildings will suffer because they are nearly 100 years old and have the hardest time accommodating the modern tenant.
What do you expect on the retail front in 2009? Will there be an increase in retail vacancies, big turnover among retailers and a decline in retail rents?
After [the holidays], there may be a bloodbath with retailers both large and small leaving spaces, consolidating or renegotiating their leases. Soho retail remains one of the best locations in the world in the eyes of many international investors, and cap rates on deals there are still hovering around 5 percent, while the rest of the city moves to cap rates of 7 to 8 percent. On a positive note, companies with sound fundamentals may enter the market where they previously had been priced out.
What do you see for the fate of New York’s hotel market in 2009?
There will likely be a softening in the average daily rates enjoyed in 2007. There are fewer rooms than expected coming on line, which should help keep pricing strong. Quality hotels will still enjoy the highest occupancy rates, since tourists that stay at the top hotels are less affected by the downturn. The hotels that are built and are up and running are doing fine, but projects that were purchased mid-block at benchmark pricing of $200 to $350 per square foot to investors [and] developers who had not only not built a hotel before, but had not built a building before, will be facing very difficult challenges. Hospitality development projects in the metro area that have not secured construction financing as of today — these jobs are stuck and may face foreclosure. Hotels are the first piece of real estate affected in a bad economy.
We’ve already seen some layoffs in the New York commercial brokerage world. Do you expect that to continue?
Just as in earlier down cycles when transactions dropped significantly, Darwin will probably apply to the field of brokerage. Shrinkage in the order of 30 to 40 percent would not be surprising, and would be consistent with the cycle of the early ’90s. In the past five years, there has been an influx of inexperienced brokers.
What are going to be the biggest challenges that commercial brokerages are going to face in the coming year?
Finding willing sellers who are going to accept the new pricing. Buyers want to buy real returns rather than assumptions based on continued upside from higher rents in the future. Investors used to pay for the opportunity of creating value. Now, they want to see the value before they jump.
Peter Riguardi president of NY operations, Jones Lang LaSalle
What do you expect to happen with commercial rents in the New Year? Will they continue to drop?
The adjustments will definitely continue. We are definitely just starting to see the impact of space from the financial service sector, and I think we are going to see more of that as layoffs and downsizing results in empty seats. There will also be adjustments in how people utilize space as they look to get people to work from home or use less square footage per person, which will also bring space onto the market.
Some have predicted that the office vacancy rate will increase to nearly 12 percent in 2009. What do you expect to happen with vacancies in the New Year?
I think that’s a pretty safe bet that we are going to get a vacancy rate of about 12 percent. Hopefully, it doesn’t go worse than that.
What are going to be the biggest challenges for commercial brokers in the coming year?
The broker is going to need to be able to foresee the future and develop an appropriate term and condition for their clients not solely based on comps, because the comps that are a few months old might not accurately reflect the market that they are dealing with that day. They need to be able to understand where the market is going and convince landlords and users that the terms they are talking about are appropriate without comp support.
Do you think there will be another Macklowe-like downfall in New York City in 2009?
I don’t think there is anyone out there right now who has that much real estate in one basket like [Macklowe] did. But there will be others that have a similar fate and a similar sequence of events.
Bruce Mosler president/CEO, Cushman & Wakefield
What do you think will happen with building sales in the coming year?
Investment volume should pick up as an economic recovery begins to take shape in the second half of 2009.
Some are predicting that the office vacancy rate will rise to 12 percent in 2009. What do you expect to happen on that front?
Overall, we expect vacancies to peak in 2010 in that range.
What type of investors and sectors of the market will have success arranging financing?
Equity will drive deals in the near term. We’ll see well-capitalized investors, funds and joint ventures active in the market. Foreign investors will continue to play an increasingly significant role in the future as well.
Robert Sammons managing director of research, Colliers ABR
What do you expect to happen with commercial rents in the New Year? Do you think they’ll continue to drop?
Asking rents as well as effective rents will certainly continue to fall in the New Year. At present, Colliers is forecasting a drop of 25 to 30 percent from the peak figure, which was in May 2008. One must remember, though, that average asking rents skyrocketed between 2003 and mid-2008, with the Manhattan overall average asking rent climbing a whopping 83 percent over that period.
What will that mean for the relationship between landlords and tenants?
Landlords are much more willing to work with a tenant who might have a lease expiring, even if it means a short-term deal — something the landlord wouldn’t have been interested in a year ago.
We’ve already seen commercial leasing activity slow down. What do you expect to happen in that arena in 2009?
Leasing activity will remain weak in 2009, though not totally dead. There will continue to be renewals and no-growth relocations. In fact, what we may see is more of a flight to quality as tenants with leases expiring may trade up to a Class A building from a Class B building or a tertiary submarket to more of a prime submarket due to the easing in pricing. Many of the spaces coming back to the market from [financial] firms are in prime buildings in prime locations.
What do you expect to happen with vacancies in 2009?
We currently are forecasting a year-end 2009 overall Manhattan vacancy rate between 13 and 15 percent. Honestly, I feel that the higher figure is more likely given recent data regarding layoffs and the general weakness not only locally, but globally. [That means] there will be no expanded demand from any industry.
What do you expect on the retail front in New York in 2009?
We will see additional space come back on the market, and the lease-up time for these spaces could be double what we have seen in the recent past.
What do you see for the fate of New York’s hotel market in 2009?
Business travel, we know, has fallen off sharply, especially to expensive markets such as New York. Domestic tourism is dropping as well due to layoffs and the overall nervousness of the economy. And finally, foreign travelers to New York are not as plentiful as the dollar strengthens. Hotels should have a difficult time unless they begin a significant reversal to the steep run-ups to room rates that we have seen over the past few years.
We’ve already seen some layoffs in the New York commercial brokerage world. Do you expect that to continue?
In most cases, there will be a continued drop in the ranks of brokers. For some firms, though, this could be an ideal time to hire successful brokers — or entire teams — away from other companies.
What are going to be the biggest challenges that commercial brokerages are going to face in the coming year?
There will be a lot of trading and re-trading of deals. More than ever, the market is changing very rapidly, and the tenant rep will be most interested in getting the absolute best deal for his client, while the landlord rep will be trying to succeed in satisfying the ownership position.
Woody Heller executive managing director, Studley
What do you expect to see as far as distressed asset fund activity this year?
Most, if not all, of the money that goes into the real estate sector will be in the form of the buyer looking to buy distressed properties. At the moment, all they are really doing is raising money; very few are buying assets. The exception to that will be if you are buying a property that the bank has taken back. Most of those transactions are happening at market rate, so those transactions will occur. Even if the bank takes it back, they are not always able to sell at market rate though. An example of that is the Drake site at 56th and Park. The first lender, Eyestar, took that loan to market and conducted an auction. The bids they received were so disappointing that they elected not to sell. Even in that situation, you don’t always get a result, which is quite sad.
What do you expect to happen with commercial rents in the New Year? Do you think they’ll continue to drop?
I do think they will continue to drop. If I said otherwise, I’d be the only person on the planet saying that. I think triple-digit rents are an anomaly in this marketplace.
We’ve already seen commercial leasing activity slow. What do you expect to happen in that arena in 2009, and how will it be affected by financial sector layoffs?
The challenge with layoffs is that they are announced on a national and even an international basis … so it’s very easy to read the headlines to be considerably worse than it is. Although there is no question that the news is quite bad, it is possible that it is not quite as bad as reported because of distortion.
Which type of investor or sector of the market will lenders be most keen to lend to in 2009? Which areas and investors will have the hardest time getting financing in 2009?
Lenders will start by lending to properties that have the least amount of risk and need the money the least. For example, fully leased office buildings that are better quality and in good locations with high-credit tenants will always attract the most interest. In a world where credit is difficult to ascertain, some landlords may feel that they would rather have many small tenants where they don’t have to depend on the credit of any of them. Income is diversified among them, so if any go down, it has no material effect on the property overall. Those will be the early properties that will get financed. Whereas in a building with a few large tenants, if any of them go down, it has a large impact on the whole building.
What do you expect on the retail front in New York in 2009?
There will be a general trend away from opulence. That will have an impact on retailers. Having said that, the lifestyle of the wealthiest echelon of Manhattanites won’t be impacted, but they may think it’s not appropriate to continue consuming the way they did prior to the change in the world. [But] if you look around the country or the world at the density levels per square foot, Manhattan has one of the lowest ratios. So while retail pain will be felt, it is not traditionally an over-retailed market.
We’ve already seen some layoffs in the New York commercial brokerage world. Do you expect that to continue?
In the last cycle, the commercial broker ranks shrank from 2,000 to 800. I don’t know the correct number currently, but it could well be that half the brokers will explore alternate opportunities.
Do you think there will be another Macklowe-like downfall in New York City in 2009?
There could well be. There could be several. Who else is positioned to have that experience? One of the comments I have heard is that Macklowe is not the only guy to have overpaid; he’s just the only one to have done so with one-year financing. I can’t think of anybody else that bought that large a portfolio in Manhattan. [But] I think there are others facing challenging times where properties may get taken back by lenders.
Barry Gosin CEO, Newmark & Co.
What do you think is going to happen with building sales activity in 2009?
I actually think sales activity will pick up as long as the price discovery period is over. People are looking to take advantage of the opportunities in less expensive real
estate at high cap rates.
What do you expect to happen with commercial rents in the New Year? Do you think they’ll continue to drop?
There has been a decrease of 14.2 percent in the last quarter, and we’ll probably see it continue to drop an equivalent amount in the next six months.
Which type of investor or sector of the market will lenders be most keen to lend to in 2009?
That’s a function of underwriting and leverage. Underleveraged multi-family rental housing is the best bet to get financing.
We’ve already seen some layoffs in the New York commercial brokerage world. Do you expect that to continue?
Well, we haven’t laid off any brokers. We think it’s a great opportunity to attract talent. In fact, we are still hiring. I think there will be brokers who, in the nature of survival of the fittest, may not be able to withstand [the environment].