October is a strong month on Manhattan’s real estate calendar. Following the Jewish High Holy Days—which this year come “late” on the heels of seasonal summer doldrums—the fall is generally anticipated to be a sharp selling period. Usually after Labor Day, there’s a welcome rush of new offerings.
As I write this column for October publication, on a glorious last Sunday in August, the economic news continues to be uncertain. There are new worries about the stability of recent commercial real estate loans. In late August, came reports that Harlem’s Riverton Houses might not be able to make a September mortgage payment. The seven building complex of more than 1,200 rental units stretching from 135th to 138th Streets between Madison and Fifth was sold to investors in 2005 for a reported $130 million. But values have not escalated at the rate expected, and rents apparently are not covering operating costs and debt service.
Additionally, there are prolonged concerns from banks and financial institutions about plunging earnings, rising layoffs and shrinking bonuses. As summer winds down, there is news that Lehman Brothers will downsize and lay off 1,500 employees or approximately 6% of its workforce—following nearly 6,000 pink slips previously handed out since June 2007.
While many in the financial industry are fretting about job security, still other financial professionals are questioning their earning potential. With the exception of star traders and dealmakers, these professionals are expected to bring home 25-40% less in bonus earnings than last year—according to Alan Johnson, president of Johnson Associates, a company that tracks Wall Street compensation.
What impact will this have on our local market?
Those employed in financial services related businesses have comprised upwards of 25% of Manhattan buyers. As a result of job losses and declining income, there will be fewer buyers and less money to spend this quarter. The silver lining in this cloud, however, is that for the remaining 75% of the buyer audience, there will be less competition for choice properties.
In the not too distant runaway market of the recent past, when bonus money was explosive and when lending standards were lax, it was the financial professionals who stepped up in competitive bid situations and won most of the overbidding scrambles. For the most part, today many are sitting on the sidelines, fearful and anxious about their own personal futures, and paralyzed to make a real estate trade.
The uncertainties of the current financial environment are also impacting other aspects of our local market. Not only must buyers demonstrate with reams of documented verification that they qualify for a loan, they must also demonstrate to a co-op board that they can withstand the vicissitudes of fluctuating bonuses and shrinking equity portfolios. Some boards dismiss bonus income entirely, while others discount it by about a third.
Joining financial professionals as the weak link in today’s market are first time buyers. Despite a surplus of one bedroom apartments, these buyers are often unable to take advantage of discounted prices because it’s harder for them to get financing. Lenders are requiring not only stellar credit scores, but larger down payments.
Tightening credit has also curtailed new development projects. With fewer institutional lenders, it’s extremely difficult to get financing especially for ground-up residential condo projects. As a result, construction has slowed—but that’s good news for our market, not bad, since the building slowdown allows for the absorption of available inventory.
Recently, I counseled sellers who said they were reluctant to list in a buyer’s market. It’s all about the spread, I explained. As long as they were able to buy and sell in the same market, what mattered was the difference between the two transactions. How much over what was realized from the current sale could be added to the next purchase? The sellers weren’t convinced, and we are continuing that conversation.
This season is as good as any other for buyers and sellers to get on with life and the business of buying and selling Manhattan real estate. Time waits for no one, while families expand and relocate, children grow and closets become overcrowded. For the immediate user, the current market offers significant opportunities. Investors, on the other hand, are forewarned that this is not the climate to flip a commodity for a quick profit. Those, however, who have a long term perspective of at least five years, will realize significant appreciation.
Although interest rates remain historically low, credit is expected to stay tight through the next four quarters, so the challenges will continue. To attract the attention of today’s buyers who are more disciplined with their decision making, sellers need to demonstrate restraint when pricing and reason when negotiating. Then we can look forward to increased activity with balanced trading at stable prices in this last quarter of 2008.