Why NYC Housing Won't Crash

[Blog: UrbanDigs] 8/14/06

With all the bubble talk and speak of a housing market doomsday, I thought it would be warranted to take a step back, and see why NYC's housing market is likely NOT to crash compared to other highly speculative local markets such as Miami, Las Vegas & Phoenix.
First of all, housing must NOT be taken nationally! What is happening in one local market might be the complete opposite of what is happening in another local market! For example, as the housing market in Miami continues to see inventory rising and speculators rushing to flip their already purchased properties, the housing market on the outskirts of Philadelphia are seeing more demand and increasing prices.
See Jonathan Miller's post: Real Estate Brotherly Love: 2nd Quarter 2006 Market Report For Philadelphia, PA
On UrbanDigs, I try to focus on the NYC housing market because it is so different than almost all other markets across the country and the fundamentals powering it standalone. Given current macro-economic conditions that include rising interest rates, high energy prices, geo-political tensions, and inflation pressures where would one look to mark strength in housing? Well, people need a roof over their heads and rental prices nationwide are on the rise! That's a start. But what else?
Here are 5 reasons why I think the NYC housing market will correct but will NOT crash as the housing downturn continues into the next few years:
1. Population Growth - According to www.census.gov, NYC's estimated 2005 population is 8,143,197! Just to give you an idea of the size of this number, here are some population stats for other major cities.
New York - 8,143,197Miami - 2,376,014Chicago - 2,842,518Denver - 557,917Las Vegas - 545,147Boston - 559,034

NYC's population is still growing and buildable land is scarce! Housing will always be in demand and it will only be a matter of time until the rise in rental costs combine with a slowdown in housing put BUYING back in favor again! Read my post on "Rent-Hike Induced Housing Surge" for more info on this changing dynamic.

2. Rent Increases & Vacancy Rate Will Prevent A Housing Crash - Taking #1 a step further, NYC has experienced a declining vacany rate for the past 1-2 years or so mainly because of the housing boom and the conversions of rental buildings to condos to take advantage of market trends. The combination of high housing prices and lower inventory translated into a nightmare for renters; higher rental costs, less inventives offered, and little inventory to choose from!
Now, as the housing market continues to cool and inventory slowly rises more choices will be available to prospective purchasers feeding a buyer's market for years to come. Once prices start to come down as a result, I would expect more and more renters to convert to buyers to take advantage of the opportunity. This may not happen for another 1-2 years, but seems a very logical chain of events to predict given information at hand right now.
The skyrocketing rental market in NYC will be self-defeating and will contribute in providing a floor in the housing market downturn.

3. Lack of Speculators - Very interesting fundamental right here in that NYC is made up mostly of co-op's (aproximately 75% of NYC is co-op). As we all know, co-ops are private corporations that issue stock and a proprietary lease to the homeowner and generally have strict policies governing who is allowed to buy into the private corporation!
Since the other shareholders of the corporation have a vested interest in who becomes a stockholder, they can reject those who do not meet their financial guidelines or those who intend to use the property as a second home (pied-a-terre).
Speculative investors (a.k.a. flippers) do NOT like the co-op legal structure because it limits the marketability of their property and therefore goes againts their gameplan of buying and selling for a quick profit. In a nutshell, speculative investors go for condos! Since NYC is mostly co-op it is also protected against a large # of speculative investors which in turn will prevent a large # of apartments hitting the market at once as flippers run to 'cash out' before its too late!
On the other hand, a market like Miami is closer to 80% condo and allows a buyer to sell a pre-contruction unit even before they closed! That is speculator friendly and presents a very tough market to profit from when housing starts a downturn! Watch out Miami, San Diego, Las Vegas, and Phoenix!!

4. New Yorkers Earn $$$ - NYC is the financial capitol of this country and there is a ton of money floating around this city both to be made and to be spent! The median household income of a NYC family in 2004 was $50,731 as opposed to these other cities:
New York - $50,731Miami - $37,025Chicago - $40,656Denver - $43,777Las Vegas - $44,737
With the economy only now beginning to hint of a slowdown, NYC workers have had a very good run and incomes have risen over the past few years fueling the creation of a very large and suitable buyer pool. As the housing market cools and new workers save up for homeownership, I think all these dollars will be put to work via home ownership providing another floor to prevent any housing crash here in NYC!
The skinny: There is no lack of demand in NYC because people can't afford it! If anything, people are choosing to wait and save more to eventually buy down the road! In the end, there will be a very healthy and growing buyer pool waiting to put their money to work in NYC housing when an opportunity presents itself! NYC housing tends to have longer boom cycles and shorter bust cycles making it very hard to time the market perfectly.

5. Energy Prices & The Fed - I'm stretching a bit here on this one but I don't care. Its worth noting that living in NYC doesn't require a car! Everything is right at your footsteps here and if it's not, then your only a short subway/bus ride away; which is one of the main reasons why I love this city. The money you save on buying/leasing/financing car and the gas, insurance and maintenence fees are enough to rationalize moving to NYC! If you will save $800 a month by living in Queens but need a car to do so, then calculate what your spending every month on car expenses, gas, insurance and maintenence. I bet you it adds up to the difference in housing expenses saved! But, some people want a car and this argument won't apply to them. Fine. I'll stick to renting a car for $75 all in when I need to.
The there's the fed and their monetary policy. I reported last week on the fed's pause in raising interest rates for the first time in 2+ years. Good news for homeowners (especially HELOC owners) and potential buyers as mortgage rates dipped a bit in anticipation of this pause. The worst may not be over but its a start! With interest rates very close to their peak, money will still be historically cheap to borrow making homeownership possible for those who planned accordingly! While your monthly payments will be higher now than if you borrowed a few years ago, but hopefully the temporary decline in prices will be enough to offset the difference.

There you have it! My 5 reasons why NYC real estate will NOT crash. I do think a correction is already underway and that once the housing market makes that turn, it is very hard to stop it from proceeding down its chosen road. But you should all note that a correction in the housing market is a HEALTHY, NECESSARY STEP FOR LONGER TERM SUSTAINABLE GROWTH of housing. So, save up, get your credit perfect, and look for the opportunity that will both put a roof over your head and make you money!

Market Matrix

[Jonathan Miller's Matrix] 8/31/2006

With the dog days of summer wrapping up (my kids start school today), I looked back over the month of August and concluded that the housing market coverage seemed to be over blown relative to what change actually occurred, especially in the last few weeks.
As a simple test, I used Nielsen’s BuzzPulse to search on the word “housing” and sure enough, we have a spike in “housing” discussion. This of course doesn’t capture big media’s coverage but since quite often blog content is an off-shoot of big media content, my gut seems to be right.
In other words, while the housing market has weakened nationally, the media coverage of the weakening conditions seemed currently seems disproportionate. This happened last year at this time as well, when including the word “bubble” was an automatic heavy does of eyeballs on the article. This is not in any way to suggest that housing is not experiencing difficulties.
Nationally, inventory is rising, demand is falling, appreciation is waning, yet nothing significant or new really new happened this summer other than the fact that mortgage rates have fallen since July.
Mathew Hougan of Index Universe concludes just the opposite in his article "Worse Than It Seems?"
The housing market feels like its falling apart. The newspapers are full of stories about falling prices and rising inventories. Where I live, “price reduced” signs are popping up, and some houses have been on the market for more than a year.
Yet housing statistics are more rosy than his first hand experience. He cites a quirk in statistics of seller concessions or incentives that is not captured in sales prices that may be the cause national stats to appear better than they really are.
Here’s the problem with all of this. Local impressions may or may not correlate with national statistics.
Real estate is local.
Last year at this time we had the hurricane devastation. At least this year, thankfully, so far we don’t.

15 CPW Construction Update

For those not able to walk by 15 Central Park West everyday here is a photo from this week.

Narrowing the Broadway sidewalk 61st Street.
I am curious as to whether this is temporary or a permanent change.

HardRock is relocatig from 221 West 57th Street to Time Square.

Walking down 57th Street there is just scaffolding everywhere.

New Development Watch

The Element Condominium
555 W. 59th Street
Amenities

• Doorman
• 60' Pool & Whirlpool with Atrium Style Glass Ceiling
• Children's Pool
• Fitness and Wellbeing Spa
• 12,000 Sqft of Landscaped Outdoor Space
• Outdoor LoungeAdjacent to Residents Lounge
• Regulation Size Squash Court
• Half Court Basketball Court
• Indoor Playroom with FAO Schwartz Toys!

10 West End Avenue Condominium

Anenities

• Doorman
• 50' Pool
• Children's Activity Center Created by the Children's Museum of Manhattan
• Gym Designed by Celebrity Trainer Ari Weller
• Valet Parking

Breaking News: Garment District Becoming Fashionable

Now again I know the Garment District is not in the area this blog covers but a rise in prices in the Garment District will have an impact felt all the way up the Westside. Finally! finally! I've been waiting to find articles about how the Garment District's apartments are desirable/hot. It makes you wonder what took that area so long to get cleaned up? Now its like why go to Hoboken, NJ if you can get a steal in the West 30s and some nice appreciation too?

[NYPost] 8/31/06

"And the neighborhood should continue on its upswing because the area is ripe for government and private investment. Moynihan Station, a $900 million expansion of Penn Station and Madison Square Garden, was supposed to break ground this fall; it has been delayed until at least 2007, but is still generating big excitement. There's also talk of extending the 7 train line west, which, politicians like Chuck Schumer say, would make millions of square feet of unused office and residential space suddenly viable.
"The West Side will not just be a place for kids to go clubbing," says Jonathan Phillips, a broker for Halstead Property, who has sold properties in the Garment District for years.
"I'm seeing more and more younger buyers moving to the West 30s," says Brown Harris Stevens broker Tom Hemann. "The average buyer two and three years ago was in their 30s or 40s; now I'm getting buyers in their 20s..."


Beginning in the late 1920s, the Garment District became the center of the fashion industry, when many of the shops moved from the Lower East Side. At its height in the 1950s, there were more than half a million industry workers. By 2001 that figure had dropped to less than 50,000, with labels moving to less expensive cities or out of the country. (But there is talk of Bugatchi Uomo and Flores & Flores setting up shop.) The result is that a number of office buildings and clothing factories have been converted to residences or mixed-use buildings.

The Glass Farmhouse, a mixed-use office/ residential building, has been selling lofts for just over $900 per square foot. That's significantly less than the average of $1,038 per square foot you'll find a few blocks south in Chelsea, but it's still a huge step up for the Garment District, where many units are still less than $800 per square foot.

At the Bryant Park Tower, a 93-unit condo on top of the Marriott at 100 W. 39th St., prices are climbing even higher - penthouses are going for $1.95 million and $2.35 million.
Older residential buildings have also seen demand like never before: 433 W. 34th St. is a 1929 Bing & Bing building, which, according to Tom Hemann of Brown Harris Stevens, has seen unit prices double in three years - to $625,000 for a one-bedroom.

Rockrose Development is building a 388-unit rental at 37th Street and 10th Avenue, scheduled to be finished in 2008. Lots along Ninth Avenue have been sold, and brokers speculate that rentals will be built there."

Trump Jr. Living at Riverside Blvd with Model Wife

[NYPost] 8/31/06
The Trumps live in a 1,550-square-foot apartment - at Trump Place, natch - on the Upper West Side's Riverside Boulevard. It has parquet floors and river views that, Don says, are peaceful and unusual in such an urban setting.

"We don't see any brick walls, and the sun sets in the center of this window," says Don, referring to the living room, just off the open kitchen and dining area.

The apartment is filled with photos of the young couple and their families, including Don's youngest sibling, baby Baron Trump, and lots of noise from their Havanese dogs, Fraggle and Faluffa.

"After a long day, I love to come home and play with these little dogs. They both have a big-dog personality," Don says from one of the comfy brown leather couches in the living room.
"They were from Don's bachelor days," Vanessa says of the sofas.
There's also a big-screen TV and an antique cabinet from Afghanistan that was one of the first purchases the Trumps made as a couple.
As for the rest of Don's old stuff: "She's fighting to get the remnants of the bachelor pad out," he says.

"It's not so bad," adds Vanessa. "We have similar tastes, which helps."
Don describes the apartment as "not too contemporary and a little eclectic," with walls painted sky blue and deep red.
The bedroom and the guest room/den, with its zebra print rug and white antique desk, have oil paintings by Vanessa's Danish grandfather, as well as photos and all sorts of objects lovingly saved from both of their childhoods.
Vanessa has a teddy bear she's kept since she was 6 months old. ("I sewed it up a few times," she says.) And Don has "Captain Pickle," a doll from his own childhood.
"We're nostalgic pack rats," Don says. "We don't get rid of anything."
"We're normal," adds Vanessa.

Their antique canopy bed was something Vanessa's mom had for about 20 years.
Other favorite items include a still-empty engraved Asprey photo album Don bought for pictures of their wedding, which was held last November in Palm Beach.
"If there was a fire - and there wouldn't be because this is a Trump building - all I'd take are my photo albums," Don says.

There's also his fly-fishing collection - a painstakingly intense, colorful, neatly pinned arrangement.

And, of course, there's the kitchen. The Trumps knocked out the walls to create an open space. Don usually cooks while Vanessa does the "prep work and clean-up," he explains.
Don began to cook when he was "in the single digits - 8 or 9 years old," after watching chefs at Mar-a-Lago prepare food for his family.

"I learned at a young age and was into it," he says, adding that he loves to cook "Italian stuff, seafood, curries, pretty much everything."

Although the couple have been in the apartment about two and a half years, it's still in the midst of being decorated. That is really in Vanessa's hands, says Don.
"I spend more time at the office than I do here," he says.

The Trumps also have a three-bedroom home in Bedford, where they go most weekends. The upscale area is far more sedate than the Hamptons, which Don says he enjoyed more when he was younger.

"It's not really appealing to me to sit in four hours of traffic, though Vanessa loves it and goes to visit her sister there," Don says. "I prefer it in October, to fish in Montauk. It's really pleasant then."

Both, however, also just love being in their city apartment.
"We'll stay here until we have two children, then we'll move," Vanessa says - adding that she hopes to have five.

A Shift in Strategy

It is interesting to read about other areas and see what we can learn about our own:

[RealDeal] 8/06
"Fueled in large part by speculators, the recent real estate frenzy in South Florida more than doubled housing prices seemingly overnight. Now that the buying fever has cooled, builders in Downtown Miami are trying to move product by shifting to more affordable housing that "real" people can afford.

Developers are creating smaller apartments with leaner and more efficient layouts, and are in the process of applying innovations in design to maximize space that will likely change the face of apartment living across South Florida.At the Boulevard, a 16-story condominium on Biscayne Boulevard and 33rd Street, the units are made to feel more spacious with the inclusion of I/O (indoor/outdoor) rooms, fully-covered terraces that are deep enough to place furniture and serve as an extension of the interior space.The 127-unit condominium, designed by architect Bernard Zyscovich with interiors by Alison Spear, has apartments starting at just 442 square feet, with prices ranging from $351,000 to $1.75 million for the penthouse. Most units float between $400,000 and $500,000, the sweet spot in a market with precious few buyers for anything between half a million and $1 million in the current slowdown.

The Related Group, headed by Jorge Perez, was one of the first developers to go small in a big way.Enlisting the cutting-edge Miami-based design firm Arquitectonica to create ultra-efficient layouts, Related launched the two-tower, 896-unit One Miami with apartments as small as 507 square feet.It followed up with the 22-story, 196-unit Loft Downtown, which has a preponderance of one-bedroom apartments from 620 square feet, which is petite for Miami."

The prices were insanely affordable," says Nury Enamorado, purchaser of a 712-square-foot one-bedroom at Loft Downtown for $112,000 in August 2003. "I didn't think twice," she recalls. "At that price I purchased for under $250 a square foot and the standard project in Miami started at $300 to $350, even at that time." Enamorado moved in this past January. "Everyone is jealous," she says.Now Related is about to break ground on a higher-end condominium offering luxury product with smaller layouts, the Oasis on the Bay on North Bay Island. The new complex is located near the 79th Street Causeway that connects the city of Miami with Miami Beach.With one-bedrooms starting from $290,000, says Eric Fordin, Related Group Project Director, "it has the look and feel of some of our Trump projects [Related partnered with Trump on the Miami Trump Towers project], but with smaller units, so the absolute price will be less expensive."

The Oasis will have two 20-story towers with 475 apartments, mostly one-bedrooms from 721 square feet, modest for luxury product. The average price for the first phase is $440 per square foot."Bigger isn't always better," says Alicia Cervera Lamadrid, head of Related Cervera Realty Services, the marketing agent for Related. "People are willing to abdicate square footage for more interesting architecture and unique finishes. You don't have to have a humongous walk-in closet that you can't use half of anyway."According to architect Bernardo Fort-Brescia, one of the founders of Arquitectonica, "

One of the most important things today is to have a workplace or den in the unit, because a lot of people work from home. We try to do that in the same space in which we once would have done a 700-square-foot one-bedroom, even if it means sacrificing some of the bedroom. It's an important part of a new age layout."Fort-Brescia conserves space by totally eliminating circulation, including all hallways, and designing bathrooms with two doors, one to the bedroom and one to the small den, which can serve as a guest room."There's been a movement toward smaller apartments for at least a couple of decades in Europe," says Fort-Brescia, "particularly in France, England and Germany, where prices are high, and in Hong Kong, Japan and Singapore."

The most innovative layouts are in Japan, San Francisco and Miami, he says.Broker Paolo Scattarreggia, principal of Miami Lodge Realty, notes that while apartment prices and construction costs have each doubled in the last five years, construction costs shot up more steeply in a shorter period, escalating in the last year and a half from approximately $100 per square foot to $200 per square foot."Apartment prices went up because of the increase in construction costs," Scattarreggia notes. "Developers haven't really increased their profits over the last five years."When Related opened the Loft Downtown in 2003, it offered pre-construction one-bedroom apartments in the low $100,000s. "But with costs the way they are now," says Scattarreggia, "it's impossible to have a one-bedroom in a new building for less than $320,000."

To take advantage of every buildable square foot on the sites they purchase, he says, "developers started to conceive buildings where there is no wasted space, with no big corridors and halls and reduced spaces in the units." The key was to make the absolute price point of the unit affordable even while price per square foot went up.Fort-Brescia notes that a handful of affordable, though very small, apartments come up in South Beach occasionally -- condo conversions of art deco buildings with 500-square-foot studios going for around $250,000.But the real action, he says, is Downtown. "There are an unbelievable number of new projects in the Downtown core, which didn't exist three years ago," says Fort-Brescia. "A real new city is being created there." "

Hotel-Condos Grow in City

[RealDeal] 7/06
"A new project was also announced for 12-18 West 55th Street, by Lincoln Property Company of Dallas.

The 55th Street project is right next to the St. Regis New York, which is also selling hotel-condos. In March, the St. Regis offered 24 condos on two floors as part of its hotel-condo program.

These units are priced at $1.7 million to $7.3 million -- for sizes ranging from 450 square feet to 1,550 square feet (hotel-condos typically run larger than the average hotel room)...

In New York, the city's first foray into successful hotel-condos was considered 1998's Trump International Hotel and Tower at One Central Park West. Also in the Columbus Circle neighborhood is the Mandarin Oriental at the new Time Warner Center, which is considered the most luxurious.

Brenda Powers, a Brown Harris Stevens broker who herself owns a Mandarin Oriental hotel-condo, said she is seeing an increase of interest from people who live in the hurricane-afflicted Gulf Coast region as well as from corporations looking to pamper their top executives while investing in real estate.

The Plaza Hotel is also selling hotel-condos.

The post-renovation Plaza will include 152 hotel-condos, which were expected to hit the market by July 1. Unlike the common ownership use cap of 180 days and nights per year, the Plaza's is set at just 120 nights per year.

While those buying into the concept in New York seem to embrace these policies, a few social and economic barriers got in the way of this trend getting off its feet here. The booming residential real estate market ate up a lot of existing hotels by way of conversions, said Julius Schwarz, executive vice president at the Bayrock Group, which is the managing partner for the Trump SoHo project.

"There have been a plethora of residential properties coming on the market and a lot of conversions," he said, adding that, in a red-hot real estate market, no one felt the need to try out a product that "had not been tested in New York."

These tides have shifted in part because of a booming lodging market in the city and a weak dollar internationally. On a broader scale, baby boomers are retiring and buying second and third homes, and interest in real estate as an investment remains strong, Ordover said.

When it comes to the market for hotel-condos, Fernanda Forman, St. Regis' director of residence marketing, said that the project is attracting international customers familiar with the hotel's brand.

By contrast, Schwarz said that he projects interest from buyers living in the tri-state area who work frequently in Manhattan.

"The average buyer might live in the tri-state area, but comes to city on business quite a bit and needs a place to stay when they're here," Schwarz said, adding that people "like to say they own an apartment in New York..."

While it is possible to secure a mortgage for hotel-condos, industry sources interviewed said that most buyers purchase these luxury properties outright. As far as income, legally, sales agents are forbidden to discuss possible returns on those days when the owner is not residing at the property. However, the hotel can discuss its average nightly fee and its occupancy rate based on industry-wide research.

Unsurprisingly for business people working in this segment of the industry, the sources interviewed expect the hotel-condo trend to accelerate -- for New York and other major metropolitan hubs.

"We live in such a fast-paced rhythm of life, it's crazy," Powers said. But with a hotel-condo, "you just travel with a bag and you're fine. It's the most convenient way of traveling in luxury 24 hours a day." "

Real Estate Deals to Flip Over

[NYTimes] 8/30/06
When word got out last spring that a 23-story building on Fifth Avenue and 44th Street in Midtown Manhattan was about to change hands for the second time in less than a year, some real estate specialists said that the $420 million price was too high.

Scott J. Lawlor paid $420 million for 522 Fifth Avenue last spring and hopes to sell it for $468 million or more.

The buyer of the property, Scott J. Lawlor, the chief executive of Broadway Partners of New York, has heard that kind of talk repeatedly during his company’s six-year existence.
After all, it was only last July when J. P. Morgan Chase, the longtime owner of the building, 522 Fifth Avenue, sold it for $165 million to Stellar Management, of New York, and the Rockpoint Group, the team that had bought the land under the building for $53 million from multiple owners the year before. J. P. Morgan Chase had occupied all 575,000 square feet of the building but was planning to move out.

Initially, the skepticism seemed justified, especially after a couple of financial institutions turned down the chance to take space in the building, which has a deep portico with large chandeliers. Then in June, just as the sale transaction was closing, Broadway Partners signed a long-term lease with Morgan Stanley for the entire building. According to brokers who did not participate in the deal, the rent is about $83 a square foot — more than enough to justify Broadway’s investment.

Now Broadway is selling the building again, most likely to Morgan Stanley, which has an option to buy it for about $468 million. Another potential buyer could be an institution or company looking for a safe investment with a steady income stream, brokers said.
That sort of risk-free investing has not been part of Mr. Lawlor’s business model. Rather he is typical of a breed of real estate investors who have profited handsomely in recent years by buying important buildings and holding them for only a short time. Since its inception, Broadway has sold or is in contract to sell 13 buildings it has held for an average of 2½ years, Mr. Lawlor said. Its annual returns have averaged more than 38 percent, he said.
“We have a very strict discipline we try to bring to bear about sales,” Mr. Lawlor said. Once the building’s income has increased, the company’s job is done, he explained. “We never track assets under management as a measurement of growth,” he said. “It’s, ‘How are we performing and are we continuing to find new assets?’ ”

Low interest rates and an unreliable stock market have resulted in a huge flood of capital to commercial real estate, stimulating competition for choice deals, driving up prices and making it possible for risk-takers to earn huge profits quickly. Until recently, building prices continued to rise because of a phenomenon known as cap rate compression. In part because capital was cheap, buyers were willing to accept an ever-declining initial rate of return, which is known as the capitalization rate.

Buyers have often been able to meet their investment objectives ahead of schedule without spending additional money to spruce up their buildings, said Robert M. White Jr., the president of Real Capital Analytics, a New York research firm that tracks sales valued at $5 million or more.

In the past, Mr. White said, most buyers would evaluate the potential cash flow for a particular building over a 10-year period. Insurance companies often used 30-year projections, he said.
“Investors have greatly shortened their time horizons now,” Mr. White said.
Flipping, the practice of reselling real estate quickly, has been occurring in all commercial property sectors, but Mr. White said the trend was most pronounced among office buildings. Nationally, of those sold so far this year, 40 percent were acquired within the previous five years, and 13 percent were held for less than two years, he said.

Reiss on Columbus

British sportswear chain to open at 69th & Columbus Autumn of 2006.

New Banana Republic at Broadway & 67th Street











Old Banana Republic at 70th & Columbus Avenue

Good to Know

Peter's is located 182 Columbus Avenue between 68th & 69th Street. It has both a bar and restaurant. The restaurant stays open until 2:00 am for dinner. Not too many other restaurants in the area I know of that are open that late.

West 57th is Selling

[NYTimes] 8/05/06
For a decade and a half, the stretch of 57th Street between Fifth Avenue and the Avenue of the Americas has struck many real estate specialists as a missed opportunity. While the block of 57th between Fifth and Madison Avenues is studded with fancy stores like Chanel, Yves St. Laurent and Burberry, the block directly to the west makes do with less glamorous retail tenants paying a fraction of the rent.Ever since Henri Bendel closed its elegant 57th Street store in 1991 and moved around the corner to Fifth Avenue, its former block has lacked a clear identity, brokers say. It has one of the city’s premier office addresses — 9 West 57th St., where hedge-fund tenants pay top rents to have a view of Central Park — and a new midtown branch of Nobu, the popular TriBeCa Japanese-Peruvian restaurant. But it also has a McDonald’s, low-priced clothing stores like Bolton’s and Strawberry, and a shop with bronze sculptures of lions and golf caddies spilling onto the sidewalk.

Annual rent for retail space just to the east of Fifth Avenue has climbed to $850 to $900 a square foot or more, more than four times the amount that most retail tenants to the west are paying. Since January, however, several small buildings on the block have changed hands, with the fifth and costliest deal scheduled to close next month. The buyers paid $605 to $743 a square foot and were willing to accept a low initial rate of return of about 5 percent on the bet that rental income from the properties is poised to improve. “It’s unusual for five buildings to trade within a six-month period on the same block,’’ said Richard Baxter, one of the team of Cushman & Wakefield executive directors who marketed four of the buildings. “It shows that there is strong, strong investor appetite for prime Midtown buildings, and on 57th Street in particular because of the retail and office components.’’ He said recent new developments like the Hearst Tower on Eighth Avenue and the Time Warner Center at Columbus Circle have also encouraged talk of West 57th Street as a high-end shopping destination.

A small portion of it already is. Immediately to the west of the Bergdorf Goodman entrance at 3 West 57th Street, a succession of luxury retailers — the most recent being the jeweler Bulgari — have opened temporary stores in recent years while their permanent spaces were being renovated. “Any temporary tenant that goes into that store does incredibly well,” said Faith Hope Consolo, the chairwoman of Prudential Douglas Elliman Retail. Brokers say the space commands an annual rent of more than $800 a square foot. Adjacent to the temporary space is a town house that was leased to Ascot Chang, a men’s clothier that is buying its own space on Central Park South.But then comes the long curved facade of the Solow Building, at 9 West 57th Street. Brokers say the design interrupts the retail window line both because the building is set back from the sidewalk and because it has no retail space other than the restaurant 8½. “It creates a bit of resistance,” said Alan Victor, an executive vice president of the Lansco Corporation, a company that represents tenants. “It’s not retail-friendly.” There are other defects on the block, including another setback in front of 40 West 57th Street, on the south side. That side also has a weed-covered empty lot, which could remain undeveloped for years. The owner, Jeffries Avlon, has no immediate plans to develop it, said a spokeswoman, Michele de Milly.

From a retail perspective, the block is something of a hodgepodge. “If you’re a luxury-goods retailer, you don’t want to be next to a McDonald’s or a coffee shop,” said Benjamin Fox, an executive vice president at the real estate firm Newmark Knight Frank.Of the newly acquired buildings, all but the small structure at 49 West 57th Street that houses the Strawberry store, were built in the early part of the 20th century, including 31 West 57th Street, which has been leased to Rizzoli International Publications since 1984. Originally a residential brownstone when the block was lined with mansions owned by prominent New York families like the Roosevelts, the building was altered for commercial use in the 1920’s, when the other three Art Deco buildings were completed.

Those buildings have high ceilings that appeal to art galleries. Other office tenants include dentists and doctors and fashion designers. The most ornate of the buildings is the former Chickering Hall at 29 West 57th Street, which is decorated along the roofline with gilded caryatids, or statues of draped female figures, and was once the headquarters of a piano manufacturing company. That building and three of the others — at 31, 49 and 50 West 57th Street — were bought by a partnership of two major New York companies, Vornado Realty Trust, a real estate investment trust, and the Lefrak Organization, the owners of a 34-story office building at 40 West 57th Street.Richard S. LeFrak, the chief executive of the Lefrak Organization, said that initially the companies were competing against each other for the properties. “We decided that rather than kill each other we would just join forces,” he said.Vornado executives declined to be interviewed. But Mr. LeFrak said: “We feel that retail-wise, the street has a pretty good future. If you look at the rents east of Fifth Avenue and the rents west of Fifth Avenue, they are quite a bit less. Fifty-seventh and Fifth is ground zero. There’s no reason there should be that kind of disparity.” He said that Vornado was negotiating with Rizzoli to extend the publishing company’s lease.Vornado and Lefrak also bid on the largest of the properties, the New York Gallery Building at 24 West 57th Street. But they were outbid by a smaller New York company, APF Properties, which agreed to buy it for $69 million. The seller, Sitt Asset Management, paid $40.7 million for the building in 2004 and then spent $450,000 to upgrade the lobby. APF intends to pour more money into the building by improving the facade. “You don’t notice it when you walk by,” said Berndt Perl, a principal with APF. The company plans to combine the retail spaces — one tiny store is vacant and two others have leases that expire next year — to attract a major retailer. Originally built as a department store, the building was combined with 25 West 56th Street (where Beacon restaurant is now) in the 1940’s. Kenneth S. Aschendorf, another principal, said the company would seek an annual rent of at least $400 a square foot — an amount that Ms. Consolo said seemed like a stretch for this location.But C. Bradley Mendelson, an executive director at Cushman & Wakefield, said that the retailer Club Monaco had agreed to pay that much in 2002, when it decided to move its flagship to West 57th Street, filling the space once occupied by a movie theater.

Confusing A Housing Bubble For A Lending Bubble

[Jonathan Miller's Matrix]
"Much of the housing boom can be attributed to the current lending environment. over housing prices as an indicator of where things are going. But its tough to do since the stats are few and far between. In other words: the cart before the horse.
I have long vented about the perils of weak underwriting standards and the pressures placed on appraisers by the structure of the lending system, namely collateral valuation (appraisals). A double hat tip to Barry Riholz for articulating this point so clearly in his post Is a Housing Crisis Approaching? [Big Picture] via the very good Roger Nusbaum post in SeekingAlpha
Barry’s post is based on a seminal piece in Barrons about loosening underwriting standards by Lon Witter [subsc].

The U.S. has is a lending bubble. His evidence is how loose the lending standards have become, and why not? The banks ultimately just flip the loans to the Fannie Mae (Federal National Mortgage Association, on the NYSE: FNM), where foreclosures and defaults become the headache of buyers looking for greater risk and return.
(And if that doesn’t make you squeamish, simply look at the recent accounting scandals at Fannie Mae.)

Traditionally, Mortgages have been low risk lending, as the loan is securitized by the underlying property. When banks were lending less than the value of the property (LTV), to people with good credit, who also were invested in the property (substantial down payments) you had the makings of a very good business: low risk, moderate, predictable returns, minimal defaults.
Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s.

The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.
The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department. Recently they pulled completely out of the valuation process [Soapbox] and have begun to rely on appraisal management companies [Soapbox] exclusively, which are notorious for attracting the worst element in valuation. The appraiser who work for them are usually form-fillers and provide no analytical service. [Disclaimer: My firm worked for WAMU from the first days of their expansion in New York and saw the problems first hand. They recently jettisoned every appraisal firm across the country (we were one) as part of their cost-cutting move.]

Barry’s post analyzes WAMU’s market position in his post.
Right now, many mortgage lenders are still hanging in there, any way they can. I yearn for the day they actually want to understand what their risk is. Unfortunately, only a select few actually get this point."

Pop star Ricky Martin will be leaving the TWC

[NYPost] 8/24/06
Pop star Ricky Martin will be leaving la vida loca at the Time Warner Center, now that he's got a buyer for his 65th-floor apartment.
The four-bedroom, 41/2-bath condo, which measures nearly 3,000 square feet in the south tower of the complex, had a $9.95 million asking price. Martin bought the unit, which features soaring city and Central Park views from its floor-to-ceiling windows, for $6.832 million in spring 2004.
The former boy-band and soap-opera star also has houses in Miami and Puerto Rico and reportedly sold his Beverly Hills mansion for $18 million last month.
Sources say Martin, who stayed at the sparsely furnished pad when in town, is looking for other digs in Manhattan. Listing brokers Dennis Mangone and Pablo Alfaro of the Corcoran Group could not be reached for comment

Fed Policy-Makers Concerned About Rate Hike Impacts on Economy

[FoxNews] 8/29/06
"Federal Reserve policy-makers at their August meeting halted their rate-raising campaign for the first time in two years, expressing concern that they didn't want to push up rates too much and hurt the economy.

By taking a breather, the Fed would have time to assess the toll on economic activity and inflation of its 17 rate increases since 2004, according to minutes of the Fed's Aug. 8 meeting, released Tuesday. It can take time for rate increases to work their way through the economy.
"The full effect of previous increases in interest rates on activity and prices probably had not yet been felt, and a pause was viewed as appropriate to limit the risks of tightening too much," the minutes said."

We're No. 7! City cracks list of world's 10 priciest

[RealDeal] 8/06
Rents rose so high and vacancy rates dipped so low in the first half of 2006 that some analysts wonder aloud now whether the pricing in the Manhattan commercial market has shifted fundamentally -- and permanently -- upward.

Second-quarter numbers compiled by brokerage Cushman & Wakefield show 20 Manhattan leases were signed in the first six months of 2006 with asking rents of above $100 a foot; just 10 were signed last year. Also, there were 23 Midtown lease deals between 50,000 and 100,000 square feet of space inked in the first half of this year, three more than in all of 2005.

This leasing helped drive the overall vacancy rate in Midtown to 6.9 percent in the second quarter, down from 7.8 percent in the first quarter.Average Manhattan asking commercial rents stood at $43.46 a square foot for the three months ending June 30, according to Cushman & Wakefield, the highest level in nearly four years.

The average asking rent for Class A space in Midtown hit more than $56 a foot in the second quarter, its highest amount since at least 2002.

These moves helped place Manhattan 7th among the world's 10 most expensive cities to lease office space, according to an analysis by Cushman & Wakefield. Manhattan, the most expensive location in North America, was the only city in the Western Hemisphere ranked among the 10 priciest this year; it ranked 11th last year.

Manhattan could well keep moving up the list, as the city's economy shows no signs of slowing. The city's May unemployment rate was its lowest in 18 years and demand remains steady for commercial space, with the overall vacancy rate dipping to a five-year low of 7.8 percent in the second quarter.

New Hilton Hotel on West 57th Street

[NYPost] 8/29/06 Hilton plans all-suites hotel on West 57th
Hilton Resorts has filed an application with the city to build a 28-story, 310-foot-tall hotel on the site of the former Shelly's restaurant at 102-104 West 57th Street. The hotel will be all suites from floors three through 26.

Empty Prime Retail Store

Retail remians empty at the corner of 65th & Broadway. The store has been empty since Glenwood's flagship rental building, The Grand Tier at 1930 Broadway, opened.

My guess is that this store will not be empty for too much longer. Once 15 Central Park West's residents and retail and the Empire Hotel's retail and guests fill into the area the demand for prime retail will be strong.

Lincoln Center Construction Update

65th Street without the bridge.

"Read Between All Those For-Sale Signs"

[NYTimes] 8/27/06
"Perhaps the biggest reason to be skeptical about a real estate crash is that the country has not really suffered through one before. Not since the Depression has the combined value of residential real estate fallen over the course of a full year. Homes seem to be much less vulnerable to crashes than other assets, because people rarely sell them in a panic.But earlier booms have been followed by modest price declines in some cities that turned into long periods in which increases trailed inflation.

After peaking in much of California and the Northeast in the late 1980’s, house values fell during the recession of 1990-91 and then drifted for years, often rising more slowly than the price of milk. In inflation-adjusted terms, prices in the New York and Washington areas did not return to their late-80’s peak until 2002. In Boston, it didn’t happen until 2000, and in San Francisco, 1999. It isn’t hard to imagine a similar chain of events over the next decade.

Based on futures contracts traded on the Chicago Mercantile Exchange, investors expect the median house price in Los Angeles, New York and some other regions to fall about 5 percent in the next year, which would be similar to the decline that started the 90’s slump. From there, prices might start rising again, but at a slow enough pace that incomes would eventually catch up. Families that now need an exotic mortgage to buy a house in Los Angeles could eventually afford one the old-fashioned way.

Interest rates could play a role in a long slump, too. They have been falling for much of the last decade, helping push house prices higher by allowing buyers to afford bigger mortgages. Most economists expect rates to remain lower than they were a generation ago but not to return to the extremely low levels of a few years ago, making big swings in house prices, in either direction, unlikely."

RATES DECLINE MODESTLY IN SLOW SUMMER TRADING ON WEAK HOUSING REPORTS

[Lenny Holler, Preferred Empire Mortgage Company]

Continued slowing in the housing industry dominated this week’s economic reports. Sales of new and existing homes declined faster than economists expected, and the supply of available-but-unsold homes swelled. Existing-home sales in July were lower for the fourth straight month. Sales dropped 4.1% to an annual rate of 6.33 million units, steeper than the 0.9% decline that economists had expected and 11.2% lower than a year earlier.

The inventory of unsold existing homes, which has been steadily climbing since the fall, set another record in July. At the current sales pace, it would take more than 7 months to sell all of the available houses compared with 2005’s average of 4.5 months. Sales of new homes also fell in July, by 4.3% to an annual rate of 1.07 million units. Economists had expected a decrease of 1.8%. New-home sales were 21.6% lower than in July 2005. The inventory of unsold new homes rose to a record 6.5-month supply at the current sales rate, which was slightly higher than in recent months.

Rates will likely stay in a fairly limited range until after the Labor Day weekend. A variety of reports are set for release this week: the Conference Board’s index of consumer confidence (Tuesday); gross domestic product (Wednesday); personal income and factory orders (Thursday); and employment, construction spending, and the Institute for Supply Management index of manufacturing activity (Friday).

· 10 year treasury yield down for the week from 4.84% to 4.78%. 2 year treasury down from 4.87% to 4.86%.
· Oil up for the week from $71.14 per barrel to $72.51. Gold up from $612.10 per oz. to $622.00.
· The dollar was up versus the yen from 115.78 to 117.30 and the Euro was down against the dollar at $1.2756 from $1.2830.
· Stocks were down for the week (S&P500 down 0.55%, Dow Jones down 0.86% and Nasdaq down 1.09%).

Will the Empire Hotel Be Going Condo??

The Empire Hotel Returns

The Empire Hotel will Not be going Condo but instead will be returning to 44 West 63rd Street as (Gasp!) "The Empire Hotel". The Hotel is currently under renovation and scheduled to reopen January 2007. The retail will include "a dry grocer" (probably a clothing store), P.J. Clarke's Restaurant, a luxury spa and second floor steak house.

"Ten hotels closed for full or partial condominium conversions from April 2002 through 2005, accounting for a total of 2,415 guestrooms, or roundly 3.8% of the 2005 room inventory. These conversions reflect the strength of the Manhattan condominium market. We note that the condominium conversions were primarily limited to upscale residential neighborhoods, mainly around Central Park, where land and buildings are in short supply and condominium prices are high. These properties were all upscale or luxury in nature. Given the limited number of upscale/luxury lodging facilities available for condominium conversion, as well as the strength of the Manhattan lodging market, fewer conversions should occur in the next few years. The Empire Hotel, which was originally acquired for conversion to residential use, is currently being renovated and is slated to reopen as a mid-scale hotel by January 2007." 2006 Hotel Market Overview [HVS International]
"The property was erected in 1892 and had 375 hotel rooms. In was acquired in 1999, when it was known as the Radisson Empire Hotel, by Ian Schrager in a deal that also included the Barbizon Hotel on Lexington Avenue and 63rd Street. Schrager, one of the city’s more active hotel developers, eventually sold the property to the Chetrit Group that announced plans in 2005 to convert the building to 125 condominium apartments. " [CityRealty]