Tuesday, October 07, 2008

Real estate bust slams into New York

From The New York Times:
After seven years of nonstop construction, skyrocketing rents and sales prices, ... the credit crisis and the turmoil on Wall Street are bringing New York’s real estate boom to an end.

Developers are complaining that lenders are now refusing to finance projects that were all but certain months or even weeks ago. Landlords bewail their inability to refinance skyscrapers with blue-chip tenants. And corporations are afraid to relocate within Manhattan for fear of making the wrong move if rents fall or a flagging economy forces layoffs. ...

“Everything’s frozen in place,” said Steven Spinola, president of the Real Estate Board of New York. ....

Barry M. Gosin, chief executive of Newmark Knight Frank, a national real estate firm based in New York, said: “Today, the entire financial system needs a lubricant. It’s kind of like driving your car after running out of oil and the engine seizes up. If there’s no liquidity and no financing, everything seizes up.”

It is hard to say exactly what the long-term impact will be, but real estate experts, economists and city and state officials say it is likely there will be far fewer new construction projects in the future, as well as tens of thousands of layoffs on Wall Street, fewer construction jobs and a huge loss of tax revenue for both the state and the city. ...

After imposing double-digit rent increases in recent years, landlords say rents are falling somewhat, which could hurt highly leveraged projects, but also slow gentrification in what real estate brokers like to call “emerging neighborhoods” like Harlem, the Lower East Side and Fort Greene. ...

“Most transactions in commercial real estate are on hold,” said Mary Ann Tighe, regional chief executive for CB Richard Ellis, the real estate brokerage firm...

Although the real estate market in New York is in better shape than in most other major cities, a recent report by Newmark Knight Frank shows that there are “clear signs of weakness,” with the overall vacancy rate at 9 percent, up from 8.2 percent a year ago. Rents are also falling when landlord concessions are taken into account.

The real estate boom has been fueled by a robust economy, a steady demand for housing and an abundance of foreign and domestic investors willing to spend tens of billions of dollars on New York real estate. It helped that lenders were only too happy to finance as much as 90 percent of the cost on the assumption that the mortgages could be resold to investors as securities.

But that ended with the subprime mortgage crisis, which has since spilled over to all the credit markets, which have come to a standstill. As a result, real estate executives estimate that the value of commercial buildings has fallen by at least 20 percent, though the decline is hard to gauge when there is little mortgage money available to buy the buildings and therefore few sales.

Long after the crisis began in 2007, many investors and real estate executives expected a “correction” to the rapid escalation in property values. But after Lehman Brothers, the venerable firm that had provided billions of dollars of loans for New York real estate deals, collapsed two weeks ago, it was clear that something more profound was afoot. ...

“Any continued impediment to the credit markets is awful for the national economy, but it’s more awful for New York,” said Richard Lefrak...

“This is the company town for money,” he said. “If there’s no liquidity in the system, it exacerbates the problems. It’s going to have a serious effect on the local economy and real estate values.”

2 comments:

  1. I can definitely see this same thing happening out here in Oakland. Companies are "frozen" in place because they are too afraid of the ramifications of moving. Good article.

    Sean Murphy, Rofo - Oakland Office Space

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  2. Great article Commercial Real Estate investors but investors may want to consider another way to look for commercial investments.

    I started using BuilderBrokerNetwork.com, it's really inexpensive (I think it's $59.99 a year). Basically, it networks commercial brokers, builders, and commercial investors together. They have a Wants/Needs section that allows investors or buyes who are looking for certain types of commercial properties to post their needs then it's broadcasted to their database.

    Hope this helps.

    ReplyDelete