Residential’s Bad, but Commercial Real Estate’s Worse in NYC

Published January 17, 2010

“Yikes! What a year.” That’s how Stuart Elliott, editorI in chief of The Real Deal, a New York City-based monthly real estate news magazine and daily Web site, opened his first Editor’s Note of 2010, reviewing NYC’s 2009 real estate market. Things could have been worse, however, Elliott noted.

For more perspective, we spoke with Elliott about the real estate situation in New York City.

Heartland: What’s worse in New York City, the residential or the commercial market? 

Elliott: The commercial market. There’s a stat out there that says building sales have dropped 92 percent from the previous year. That’s about three or four sales for every 100 you had last year. And as far as prices, there have been so few transactions that it’s hard to tell how far prices have fallen in the commercial market. But generally prices have fallen somewhere in the range of 70 percent.

With office leasing, there’s a lot more vacancies than there were before, and also the rent for office space has dropped something like 30 percent in the last year.

Heartland: With prices so low, isn’t this a good time to buy?

Elliott: It is a good time to buy, but when it’s a down market there’s a lot of fear. People think if prices go down they may just go down even more. Another huge thing right now is the credit market. The ability to borrow money is just really limited. Banks froze up back in mid-2007, and since then there hasn’t been that much availability of money out there to borrow.

Heartland: In March 2009, Fannie Mae began requiring commercial properties be 70 percent sold before Fannie would help with financing. What has this requirement done?

Elliott: It’s definitely destructive to sales, but you could make the counterargument that it might be dangerous to finance those sales anyway. It definitely leaves developers in the lurch.

Here in New York you have condo towers that are having real trouble selling, that are mostly vacant. But it’s definitely worse in other cities such as Miami, Las Vegas, and Detroit.

Heartland: Why has New York City not suffered as badly as those cities?

Elliott: In Miami and Las Vegas you’re seeing a lot more investors buying. In New York there are a lot more people who buy as an end user; they buy the apartment to actually use it, to live in it. I think the more investors you have, the more volatile and unstable a market you have.

If you look at Detroit, the economic base there is terrible with the [problems with the] car companies. Wall Street is the economic driver of New York City. While it’s been hit, it hasn’t been hit as hard as the economic driver in Detroit.

Also, New York doesn’t have the same sort of sprawl as other cities. You look at places like Phoenix that just keep building out and out; you have a massive oversupply of housing. In New York there’s excess housing but not quite at that level.

That definitely insulates the city. There could be more declines coming in New York, however.  

Heartland: To what extent has government policy helped or hurt the situation? 

Elliott: During the Great Depression, government didn’t step in and try to fix things very quickly. This time the federal government has stepped in considerably. You could say that it’s possibly been successful. It’s staved off things for now.

But I think the thing people are worried about is seeing how the federal government is issuing so much money that long term you could have serious problems for the United States. Come 2018, 2019 this could really come back to bite us.

A specific example of harmful government intervention is the Home Valuation Code of Conduct (HVCC). They tried to fix an appraisal law that sort of contributed to the subprime bust, by reforming that whole industry. They actually made things worse.

An example of successful government intervention has been the first-time homebuyers tax credit. That’s helped a lot of first-time buyers come out and make purchases.  

Heartland: What fundamentals have to addressed for the situation to improve?

Elliott: I think unemployment is a fundamental. That would need to get better for the market to improve. It’s hovering around 10 percent in New York. That’s pretty high.

Foreclosures are another big issue. Those are expected to get higher before they get lower.

Companies need to be expanding and leasing more. As the economy gets stronger, companies will get stronger. That’s another fundamental.

Banks loaning money more readily, that’s another fundamental thing. I think the credit markets have to unfreeze for there to be more economic activity and home-buying.

Heartland: What will it take to unfreeze the credit markets?

Elliott: Banks with problem loans where the borrowers are not able to pay have not really been confronting the problem. They call this “extending and pretending,” “delay and pray,” and “kicking the can down the road.”

I think once banks start dealing with these bad loans on their books and sell them off, get a balance sheet that makes sense without all these hidden problems in it, then I think there will be a more solid basis on which to move forward and people will feel more comfortable lending money.

Brien Farley ([email protected]) writes from Genesee, Wisconsin.