Stimulus Package effect on New York Real Estate Market

The financial meltdown is drowning New York’s real estate market.

The nearly decade-long construction boom has ended abruptly. The city’s residential market, which seemed immune to the market turmoil as the average price of a Manhattan apartment has continued to rise, is about to see a sudden drop. The accelerating number of job losses is sending commercial vacancy rates up and rental rates down.
“I think it’s going to be like being pushed over a cliff,” said Louis Coletti, president of the Building Trades Employers’ Association. “2009 is shaping up to be a horrific year.”

Mr. Coletti’s organization puts the value of cancelled development projects at $5 billion and he thinks that figure will continue to rise.

Those invested in the future of the city’s real estate industry are armed with ideas to throw at the problem, ranging from tax incentives to streamlining government bureaucracy. Their primary hope, however, is that President-elect Barack Obama’s proposed $800 billion stimulus package will stop the decline.

“New York City must be ready to engage the federal infrastructure dollars,” said Mary Ann Tighe, chief executive for the New York Tristate region at CB Richard Ellis Inc. “It will go a long way toward something positive happening in a difficult period.”
In the meantime, the numbers are bleak.

Permits for new residential buildings fell 74% in November, according to the U.S. Census Bureau. A report by brokerage firm Prudential Douglas Elliman and real estate appraiser Miller Samuel Inc. noted that the number of apartments for sale in Manhattan rose 39% in the fourth quarter, pushing the inventory up to 9,081 apartments, the third highest level in a decade. The report for the first quarter is likely to show a decline in average prices of at least 15%, said Jonathan Miller of Miller Samuel.

With financial firms contracting and shedding space, commercial office leasing hit a seven-year low in the fourth quarter, falling 19%, to 19 million square feet, from the year-earlier period, according to a Cushman & Wakefield Inc. study. The plunge in activity pushed Manhattan’s overall vacancy rate to 8%. Average commercial rents fell $5, to $79.81 a square foot, the largest quarterly decline in memory.

The financial industry alone lost 17,800 jobs in the last 16 months, and as employment continues to drop, so too will rents. It’s the law of supply and demand at work. “The more people, the more requirement for space,” thus boosting rents, said Barry Gosin, chief executive officer of Newmark Knight Frank. The reverse holds true, of course.

To spur activity, Mr. Gosin recommends reinstating tax incentives for converting commercial space to residential use in lower Manhattan. The program — credited for revitalizing the financial district in the first part of this decade — would take commercial space off the market and boost slumping rents.

On the residential side, the city could liberalize the recently tightened 421-a tax exemption program to spur residential projects elsewhere in the city.

“This is a longer-term solution to a longer-term problem,” said Andrew Singer, chief executive of The Singer & Bassuk Organization, a real estate consulting firm, about revamping the 421-a program. The hope is that when banks start financing projects again, developers armed with a tax advantage could get back to work more quickly.

A reorganization of the New York City Department of Buildings sits at the top of Ms. Tighe’s to-do list. Reforming the commercial mortgage-backed securities market makes the cut, too.

If there’s no plan for dealing with problems that arise as those mortgages come to term, pain in the commercial sector could lead to the same wave of foreclosures that have crippled the residential market. Providing financing for commercial mortgages is “a critical step toward avoiding a major, major hit across the country,” said Steven Spinola, president of the Real Estate Board of New York.

While disagreement exists on the effectiveness of these programs, everyone believes the best hope for New York’s real estate and construction industries lies in the Obama stimulus plan and its hundreds of billions of dollars for infrastructure.
“There is the expectation that these investments will create thousands of jobs,” said Michael Della Rocca, president of the North American operations of Halcrow, a leading infrastructure firm. Mr. Della Rocca sees a twofold benefit from Mr. Obama’s stimulus package. In the short term, federal funding will stimulate jobs and spending on raw materials. In the long term, financing infrastructure projects will bolster confidence in the city among potential investors looking for places to do business.
“It’s necessary to do fundamental maintenance and operations,” said Mr. Della Rocca. But he argued that the government must also strategically dole out federal funds to projects like the Second Avenue Subway and East Side Access, which may not have as many immediate benefits but will create more jobs and more revenues in the future.

Mr. Spinola said that while the city may be down, it is certainly not out, and conditions remain a far cry from the 1970s. “The bottom line: People still want to be in New York,” he said.

Source: http://www.crainsnewyork.com/