In the last few weeks, as many of the city’s big banks have been besieged by bad news, and the stock market has seesawed sharply in a short span of time, the question on many analysts’ minds is: Could a new round of pain on Wall Street trickle down to New York’s already vulnerable commercial and residential real estate markets?
Indeed, the thinking goes, the financial services industry and its numerous offices keep commercial occupancy rates high in Manhattan, while its well-paid executives buoy the high-end residential market. Meanwhile, its lower-rung workers drive demand for rental units, sources say.
Wall Street has served as an economic engine of the city for decades, ever since major manufacturing and energy companies — like Mobil, Exxon and chemical company Union Carbide — abandoned their New York corporate headquarters in the 1970s and 1980s for other (cheaper) addresses.
However, political fights over debt limits in Washington, along with weak consumer confidence and the sovereign debt crises abroad, have recently spooked investors, leading to reduced profits across the board at the big investment banks. Bank of America, run by Brian Moynihan, is facing the most severe problems, but other stalwarts of the Street — like Citigroup, headed by Vikram Pandit; Goldman Sachs, led by Lloyd Blankfein; and Morgan Stanley, headed by James Gorman — are also hurting, to name a few.
Many of the problems are sparked by new government reforms and uncertainty among the banks about the production power of their trading divisions — which suggests that the current bump in the road might be more like a steep and treacherous hill. “Those expecting things to go back to where they were in 2007, before the bubble popped, are asking to be disappointed,” said Thomas Fink, a senior vice president with Trepp, a research firm that counts banks among clients.
“What we were looking at then was a market driven by excess global liquidity that allowed people to do deals at a very high velocity, which made for a lot of bad decisions,” he noted.
In addition, the Street’s sources of capital could diminish, as brokerages in other cities, like Fidelity in Boston, or Vanguard, outside of Philadelphia, make a play for wealth management business currently concentrated in New York, Fink suggested. Indeed, as a wave of retiring baby boomers look for people to help them invest their savings, those brokerage could be the beneficiaries, he said.
In the shorter term, evidence of the struggles the big banks are facing is mounting.
At Bank of America, even a $5 billion cash infusion from Warren Buffett in August hasn’t fully stabilized the company, which announced a leadership shake-up last month. The company is still dealing with the fallout of its ill-conceived 2008 purchase of Countrywide, which left its balance sheets swimming with toxic mortgages.
In addition, it’s being sued for $10 billion by insurance behemoth AIG, which is claiming that the bank used deceptive sales practices involving securities.
At the center of the suit is $28 billion in securities issued by Bank of America and its Merrill Lynch and Countrywide Financial units (and then insured by AIG), according to the 200-page complaint. AIG said in the suit that 40 percent of the mortgages underlying those securities were found to be worse than advertised and even possibly fraudulent, with exaggerated incomes and work histories. A BofA spokesman has said that the sales process was appropriately transparent, and that the securities lost value simply because the housing market tanked. According to a court spokesman, a trial date for the case has not been set.
Early last month, BofA also announced it would cut 30,000 jobs over the next few years — some of which will likely be in Manhattan, where the bank’s offices are housed in the city’s second-tallest building, the Bank of America Tower on Sixth Avenue between 42nd and 43rd streets.
Those job cuts, plus the layoffs forecast throughout the financial industry, are expected to have an impact on both the residential and commercial markets throughout the city. In April, the securities and commercial lending sector, which includes the best-known investment banks, employed 257,300 people, according to data from the New York State Department of Labor and Eastern Consolidated. That total was far below pre-Lehman Brothers-collapse levels of 278,800, but it was a bit of an increase over August 2010, when the total was 250,200, the data shows.
However, by August 2011, that total had declined back to 252,800, essentially wiping out all of the employment gains of the past year, according to the data.
And the contractions are far from over, said Marisa Di Natale, a director with Moody’s Analytics. “There will be a few thousand more net job losses through the middle of next year,” she said.
On the residential side, fewer investment banking employees means fewer high-income earners on the prowl for apartments (see related story).
“Everybody is tentative. They’re not grabbing stuff like they used to,” whether $10 million homes, or studios, said Barbara Fox, president of Fox Residential Group. “And this is Wall Street’s fault, 100 percent.”
On the commercial side, it could mean more office space flooding the market, which could drive up vacancy rates to levels not seen in more than a decade (see story here), said Robert Knakal, chairman of Massey Knakal Realty Services, who added that the problem of dwindling demand for office space is not limited to the banks.
“If companies continue to shrink, it’s a real concern,” Knakal said.
Meanwhile, as the New York Times and others have reported, the federal bailouts that were boosting the banks in the aftermath of the Lehman Brothers collapse in 2008 are now fading, forcing them into cost-cutting mode.
“In light of the current environment and our ongoing efforts to tightly manage expenses,” Citibank spokeswoman Shannon Bell said in an e-mail, “we are currently only filling positions we believe are critical to the line of business or function.”
Stock slides
The combination of all of these pressures is already being reflected in the stomach-churning stock price drops at the big banks. For example, BofA’s stock was at $6.99 on Sept. 19 — down more than 50 percent from $14.19 at the start of the year — while Citi’s stock plunged 44 percent to $27.71 from $49 over the same time frame.
Goldman’s shares also dropped, to $104.81 from $173.05, or 40 percent, since Jan. 3.
And as the compensation structure has changed recently for bank employees, with more of their pay tied up in stock, these declines could have a profound effect on how much individual bankers spend on real estate.
“Clearly the amount of people running around the city willing to spend money has an effect on everything else,” Knakal said.
The banks’ problems — which are widely believed to be self-inflicted and a
result of the flimsy securities they peddled in the first place — don’t end there. There are legal and regulatory minefields ahead for all of the firms.
Last month, the Federal Housing Finance Agency, the group responsible for getting the finances of Fannie Mae and Freddie Mac in order, sued 17 banks over what it claimed were deceptive mortgage practices.
The lawsuit — which named BofA, Citi, JPMorgan Chase (which is headed by Jamie Dimon), Goldman Sachs, Morgan Stanley and Royal Bank of Scotland — is reportedly seeking $20 billion in damages. The banks, which sold mortgage-backed securities to Fannie and Freddie, have said that Fannie and Freddie were well aware of the risks when they purchased the securities.
Separately, the Federal Reserve this summer announced that it’s seeking damages against Goldman for misconduct at a mortgage servicing unit, which the bank recently unloaded.
Also, the Dodd-Frank Wall Street Reform Act — which was signed into law in 2010 but won’t be fully enacted till 2014 — could create a chilling effect for the banks in the short term, sources say.
Many support the goals of the act, which aims to eliminate much of the risk and leverage from the way banks do business. But critics say the requirement that forces banks to have greater cash reserves will place a pall on lending.
Similarly, the legislation allows regulators to keep a closer eye on derivatives trading, which is resulting in fewer derivatives being sold, another obstacle to lending, sources noted.
Other parts of Dodd-Frank seem less controversial, like the creation of a new watchdog group to advise consumers about, say, harmful credit-card fees.
And, the new act gives shareholders more voice about executive pay.
So what is the impact of all of this going to be on the New York real estate market? “Firms are very skittish right now, and might become even more conservative,” said Moody’s Di Natale.
Tightening lending
Many analysts expect banks to tighten their purse strings both with home loans and commercial lending, further stifling the market, analysts say.
“Dodd-Frank has hamstrung financial institutions,” Knakal said. “They are not making the loans they otherwise would.” To wit: One of Knakal’s wealthy clients is now trying to get a $400,000 loan on a $1 million property, and can’t, he said.
The debt-to-loan ratios are starting to skew heavily toward the borrower, he said. Other trend lines indicate that the market could tilt even more in the favor of all-cash buyers, who already have an advantage, others said.
And, as The Real Deal has reported, there’s also some concern that the market for commercial mortgage-backed securities, or CMBS, which earlier this year seemed to be emerging from a funk, could also be stifled by the problems with banks. If they don’t buy the mortgages in the first place, the thinking goes, the whole financing system, which lubricates the wheels of New York’s commercial and residential markets, could seize up.
For all the doom and gloom that’s settled in over the last few weeks, there is some sense that Wall Street’s problems are not endemic, but temporary, and that certain demographic trends favor it for the long haul.
Dan Fasulo, the managing director of research firm Real Capital Analytics, said that the tens of millions of baby boomers poised to retire need money managers, which will create Wall Street jobs.
He’s also not worried that banks will decamp for greener pastures. Most back-office jobs have already been relocated to the suburbs or overseas, and to attract the most skilled employees, banks will have to stay put in Manhattan, which continues to be a popular place to live, he said. “There is only a finite amount of talent available,” Fasulo said.
Indeed, even if Wall Street hits “speed bumps,” New York’s real estate markets won’t collapse, he predicted. “I would still rather own a piece of property in Manhattan,” Fasulo said, “than in the middle of the country.”