Market poised to parachute down, not free fall

For a year now, real estate brokers and developers in New York have been grappling with the ripple effect of the Lehman Brothers collapse and the Wall Street fallout. But now, on this somewhat somber anniversary, it’s time to start looking ahead and anticipating where the market will be a year from now.

In this month’s Q & A, The Real Deal talked to economists, brokers and firm principals who described what the landscape will look like for sales activity, pricing, foreclosures and employment in the next 12 months in the city. The predictions were not all pretty.

Indeed, one economist said that prices will have dropped another 13 percent by next September.

There are also a number of wildcard issues, like Wall Street bonuses and the possible rise of Manhattan foreclosures, a problem that could spell complications for those who live in buildings where other owners are defaulting on loans.

Meanwhile, while some cited the fact that there’s been virtually no new construction as a sign that the supply and demand would be back in sync soon, others said that it would take a long time to sponge up all the empty inventory out there.

But there was also some talk of stabilization in the market.

While most said unemployment will continue rising, there was a feeling that “a year from now the worst should be over,” according to one expert.

And there did seem to be agreement that even if things haven’t leveled off entirely in a year, the pace of the decline will be far slower.

“We’re falling, but we have a big parachute instead of a free fall,” was how one market watcher put it.

For more on which neighborhoods will be doing best and worst in a year, which types of buildings will be purchased by vulture funds, and which sectors of the market are poised to improve or tank, we turn to our panel of experts.

Jeffrey Jackson partner, Mitchell, Maxwell & Jackson

It’s the one-year anniversary of Lehman Brothers’ fall. Where do you think the real estate market will be one year from now?

Flat to slightly down. Demand has improved significantly in the past quarter and the rate of price declines has slowed.

What do you think the employment situation will be like a year from now in New York City and how do you think that’s going to affect the residential market here?

Unemployment should peak in the next six to nine months. A year from now the worst should be over.

Which sector of the residential market do you expect to do best in the coming year? Why?

Moderately priced two-bedrooms, between $1 million and $1.5 million, should out-perform the general market.

Which sector of the residential market do you expect to do worst in the coming year?

New development. The over-supply will take a long time to absorb.

Which neighborhoods in New York do you expect to falter even more in the coming year?

West Chelsea has a large [amount of] new inventory. That combined with a steep price run-up over the past few years leaves this submarket with a long way to go before supply and demand are back in balance.

We’ve seen Manhattan inventory decline slightly in the last few months, but a lot of that is because sellers are unwilling to drop prices and are taking properties off the market. What do you think the inventory situation will be like a year from now?

[Sales] volume improved significantly in the second and third quarters, so inventory levels will decrease accordingly over the next few months. Since new supply has virtually stopped, the key to inventory levels is the return of demand. Overall, I predict that inventory levels will slowly drop over the next 12 months.

What do you expect the biggest challenges to be in the coming year in the New York residential market?

Getting potential buyers to move from rental to ownership will be tough as long as they feel prices may go down further.

Marisa Di Natale senior economist, Moody’s Economy.com

Where do you think the real estate market will be one year from now?

[A year from now], we expect that condo prices will still be falling. They’ll have declined another 13 percent from where they are today … Building activity will still be at a very low level, though it will have started to pick up a bit from where it is today.

Which sector of the residential market do you expect to do best in the coming year?

The best-performing segments of the market are going to be rentals and the lower end of the condo [and] co-op market where first-time buyers are likely to enter. That’s not to say that any of these segments will do particularly well, but the low end is going to do the best since it’s first-time buyers that are generating most of the home sales in pretty much every real estate market currently. Part of this is due to the first-time homebuyer credit of $8,000, which is set to expire at the end of the year.

Which sector of the residential market do you expect to do worst in the coming year?

The luxury market will do the worst. Given the collapse of the investment banking industry, many of the high salaries that supported this end of the market are no longer present or have been dramatically reduced. We’re already seeing that the luxury end of the market in Manhattan is being hit hardest, as is the luxury market out in the Hamptons, where many second and vacation homes are purchased by Wall Streeters.

What do you think will happen this year with Wall Street bonuses, and what impact will the bonus situation have on the residential market in Manhattan?

This is a big wildcard because much depends on whether or not the federal government can put compensation limits in place by the time these bonuses are paid out. I’m guessing it won’t and I think bonuses could be in the same ballpark as where they were last year — $18 billion.

What kinds of problems are you anticipating for New York in the coming year in connection with adjustable-rate mortgages?

Credit quality has deteriorated quite rapidly in New York City just since the start of the year, and some of this may be attributable to the readjusting mortgage rates. Since the recession began, New York City always had a lower-than-average mortgage delinquency rate, but during the second quarter it shot higher than the national average. The write-off, or default rate, also is higher than average and appears to be rising more rapidly than in the rest of the country recently.

Do you think you’ll see more foreclosures and more homeowners forced to sell in Manhattan because of financial difficulties in the coming year?

The foreclosure rate in Manhattan is still very low — most of the mortgage defaults and foreclosures are occurring in the outer boroughs. I do think the rate of foreclosures will rise throughout the city over the coming year, though.

What do you think the brokerage workforce will look like a year from now in New York?

I think it will be back down to the levels of employment we saw in the mid-1990s. Citywide, another 10,000 brokerage jobs could be lost over the coming year.

Sam Chandan president, Real Estate Econometrics

Where do you think the real estate market will be one year from now?

In terms of pricing and transaction activity [it will probably] begin to stabilize early in 2010. This time next year there should be fairly consistent evidence of a sustained improvement. That being said, the expected initial stages of the recovery in 2010 and early 2011 will be modest in terms of transaction volume and price appreciation in residential markets around the city.

What kinds of problems are you anticipating for New York in the coming year in connection with adjustable-rate mortgages?

Adjustments to floating-rate mortgages are going to be a significant challenge over the next year. One qualifier we should keep in mind is, the banks and Fannie Mae and Freddie Mac have significant incentives to ensure that mortgages continue to perform. While we certainly do expect an uptick in delinquency, default and foreclosure rates as a result of adjustments, we also think we will observe significant modification activity over the course of the next year. The goal of that modification will be to limit the extent and instance of nonperforming mortgages.

Do you think you’ll see more foreclosures and more homeowners forced to sell in Manhattan because of financial difficulties in the coming year?

Yes. Some programs that are available right now that are designed to support the homeowner in modifying their mortgages, or in adjusting their balances, or in refinancing so that monthly payments are more affordable, are not designed to address the needs of a family that experiences the loss of income of one or both heads of household. That will be a significant driver of foreclosure activity over the coming year.

Neil Binder principal, Bellmarc Realty

Where do you think the real estate market will be one year from now?

I think we have seen the trough of the market. However, that doesn’t mean that the market will merely bounce back to early-2008 levels. I do not believe [there will be] dramatic appreciation in the near future unless we have significant inflation.

Which sector of the residential market do you expect to do best in the coming year?

The low-end market and middle market show stronger signs of increasing activity than the high end. High-end properties have dropped considerably and I think that the decline in high-end pricing is not yet done.

Which neighborhoods in New York do you expect to falter even more in the coming year?

I am not a big fan of the Financial District or of Long Island City. Prices are too high and buyers can get better deals in core areas.

Do you think you’ll see more foreclosures and more homeowners forced to sell in Manhattan because of financial difficulties in the coming year?

I am not worried in large measure about foreclosures in Manhattan since most owners of co-ops have significant equity positions in their homes. Given that condos can still achieve reasonable rentals, I believe this segment is also reasonably secure. There will be isolated problems, particularly with newly constructed properties, but not insurmountable.

What will happen with all of these new development condos that are having trouble selling a year from now?

Some will be heavily rented. Many will sell to vulture funds or do bank workouts. There will be a glut of new [condo inventory] for some time, particularly given the current pricing structure of many new properties.

Barry Ritholtz CEO, Fusion IQ

Where do you think the real estate market will be one year from now?

In general we are not running the same crazy foreclosure rates that we’ve seen everywhere else. Going forward we’ll continue to see ongoing delinquencies and ongoing foreclosures, and the real estate market is likely to continue to drift down. Twelve months from now things will be slightly worse, 5 to 10 percent down in price, volume more or less flat, so the deceleration will be slower. We’re falling but we have a big parachute instead of free fall. And we are getting closer to what we could call the bottom. The problem as I see it going forward is, beyond that year, there’s not necessarily going to be a real quick recovery anytime soon; not the sort of snap-back that people like to see.

Which sector of the residential market do you expect to do best or worst in the coming year?

The big wildcard is: Will condos and co-ops start to run into problems as you start to see relatively low foreclosure rates pick up? If you have a 100-unit building and the other 99 units have to subsidize one person that’s foreclosed, and cover their maintenance, that’s a minor inconvenience. Once that goes to five to 10 units, suddenly that’s a massive burden on everybody else. If they pick up, it’s going to put pressure on apartment owners. It’s going to be a challenging couple of years. I’m not buying that real estate is out of the woods yet … Quite frankly, I think the numbers that the big New York agencies have been reporting are fudged. They’re afraid if they show that prices are dropping, it will scare away buyers. I think so far, the New York market is worse than reported.

What do you think the inventory situation will be like a year from now?

There is an enormous amount of shadow real estate out there — “shadow inventory” is what I’ve been calling it. From all the people we know that have two or three apartments that they have to get rid of … If there is any improvement in the real estate market anytime in the next 12 to 24 months, all this shadow inventory is going to come out. I’ve seen estimates that it is as high as a third of the total real estate out there. I would bet that it’s closer to half. I don’t expect inventory to get appreciably better anytime over the next couple of quarters or longer.

What do you think the brokerage work force will look like a year from now in New York?

We’ll probably see 25 to 30 percent off the peak.

Lawrence Longua director, REIT Center, NYU Schack Institute of Real Estate

Where do you think the real estate market will be one year from now?

There is no one real estate market, but there are many markets segmented by type and geography. Having said that, the Manhattan office, residential and retail markets will all be in worse shape than they are now. These are all driven by jobs, and jobs will be down.

How bad do you think the employment situation will be a year from now in New York and how will it affect residential real estate here?

The recent uptick in employment came about because a number of job seekers stopped seeking and fell out of the statistics. On the other hand, many of those laid-off employees who received severance packages are counted as employed until these packages run out. For this and other reasons, the unemployment numbers will rise.

Wilbur Gonzalez managing partner, ID Marketing Group, Brown Harris Stevens

It’s the one-year anniversary of Lehman Brothers’ fall. Where do you think the real estate market will be one year from now?

The fate of our real estate market is married to Wall Street performance. I think if we see a Dow Jones 10,000+ by the end of the third quarter, we will see noticeable absorption of inventory in the first two quarters of 2010. Even if we don’t, the almost zero new construction development in 2009 bodes well for the supply side of the last two quarters of 2010.

Which sector of the residential market do you expect to do worst in the coming year?

I think large-scale, 100-plus [unit] condo development projects with little personality will fare the worst. There is plenty of rental inventory on the market in nondescript, high-rise buildings offering previously unheard-of incentives. It’s very easy to wait a year in a rental while you shop for the home that truly speaks to you.

Which neighborhoods in the city do you expect to rebound in the coming year, if any?

I am a Downtown broker, so I follow those much more closely. Tribeca has experienced a very, very quiet year. I think the Wall Street job-loss concern was largely responsible. But it never bottomed out. The fundamentals remain the same. In Soho, I found the demand to be much more resilient than in any other Downtown neighborhood. The wealthy foreign buyer gives Soho the largest and widest buyer base of all Downtown neighborhoods. It’s the blue chip of Downtown and in my opinion the safest bet.

What do you think the inventory situation will be like a year from now?

In terms of the luxury residential market, we’ve seen a few [new development] projects fall off the radar in late 2008 and almost zero added to the new development pipeline in 2009. Even with minimal absorption, we should see a much more balanced inventory in 2010. I’m confident we are headed towards a smarter supply-demand market in 2010 and 2011.

Which ones do you think will be bought by distressed asset funds or returned to the bank?

Very, very few. Banks and hedge funds are not in the labor-intensive development business.