Property Grunt

Monday, December 22, 2008

A blizzard of falling knives

This is what you are going to be dealing with in the current real estate market.

The residential market is crashing

"Both residential and commercial real estate markets have softened substantially since the last report, most notably in Manhattan," said the edition of the Federal Reserve Board's "beige book" that came out earlier this month.

The report, which looks at market conditions in various cities eight times a year, found that "the prices of Manhattan co-ops and condos are reported to have fallen by 15 to 20 percent since mid-summer, though it is hard to get a clear handle on prices due to thin volume. Much of the recent activity is reportedly from desperate sellers."

Jonathan Miller, president of appraisal firm Miller Samuel, which provided data for the Fed's analysis based on contract prices after a series of confidence-shaking bank failures and federal bailouts, said the drops are somewhat unsurprising. Prices historically fall after sales volume slows, and volume has ebbed considerably in recent months.

Indeed, sales have been off about 28 percent for the first three quarters of this year, versus the same year-ago period, Miller said.

"A drop in transactions always precedes a drop in prices, because it leads to [an] increase in inventory," he said. "It's really a canary in the subway."

And no sector of Manhattan seems immune, including high-end units, or those priced upwards of $10 million, which had previously propped up the market's average prices, brokers said. Prices of resales, as opposed to new development, which had shown some resistance to price dips, now also seem to be slipping, brokers added

It looks the same for the commercial market.

Almost 16 million square feet is currently listed as available in large blocks in 68 office buildings in Manhattan, according to Colliers ABR, a commercial brokerage firm. That is nearly double the space available a year ago, both in terms of the number of large office blocks — which in New York usually means 100,000 square feet or more — and in terms of total square feet.

Those figures are widely expected to go much higher, said Robert L. Sammons, the managing director of research for Colliers ABR. He said it was difficult to get a handle on exactly how much space financial companies alone might put back onto the Manhattan office market over the next year or so.

“Honestly, I don’t think any of these financial firms know how this is going to play out,” he said. “They are trying to figure out how many people they will need on staff, and in some cases how they are going to stay in business.”

Pending layoffs in the financial industry certainly account for some of the space on the market. But there are other factors. Some companies are moving into new headquarters — which were first planned years ago — while others are disposing of real estate that they came into through acquisitions.

And Bernard Madoff pretty much dropped a load of napalm on a fire that was already raging.

"The level of devastation, both financial and on a human level, is astounding,” said Robert J. Ivanhoe, a lawyer who is representing 10 developers and investors who lost $5 million to $50 million each with Mr. Madoff.

Indeed, at an industry fund-raiser at the Grand Hyatt hotel in Manhattan last weekend, much of the chatter over sushi and crudités was about money feared lost with Mr. Madoff, according to people who attended. And a Manhattan psychotherapist who counsels real estate leaders and bankers said most of the patients he has seen this week have close friends and relatives who lost money with Mr. Madoff.

The victims include executives at the global commercial brokerage CB Richard Ellis, most prominently Stephen Siegel, a major Bronx landlord who is chairman of worldwide operations at the brokerage and whose wife, Wendy, helped organize Saturday’s fund-raising dinner.

Brian S. Waterman, a principal at Newmark, also invested with Mr. Madoff. So did the Rechler family, which has been a major owner of office buildings in the region. Scott Rechler, the head of RexCorp, one of the family’s largest firms, called the family’s exposure “limited.”

Jerry Reisman, a lawyer based in Garden City, N.Y., said he was representing six commercial real estate investors and developers in the area who lost a total of $150 million to Mr. Madoff. They met Mr. Madoff through contacts at country clubs in the tristate area, he said.

“They knew him from golfing in the Hamptons. They knew him from the locker rooms,” Mr. Reisman said. “He was considered a wizard.”

Mr. Reisman said his clients were especially concerned because they counted on Madoff investments to complete some of their real estate projects, pledging their investments as collateral for projects. Those developers fear that when their banks realize that their investments with Mr. Madoff have disappeared, they will demand new collateral from other sources, Mr. Reisman said.

Finding those alternative lenders will be difficult given the financial crisis — and given that many other real estate investors have been hurt by the Madoff case.

“Many of these developers, their resources are all with Madoff,” Mr. Reisman said.

There are widespread concerns that some developers will have trouble completing projects currently under construction. Edward Blumenfeld, who runs Blumenfeld Development Group, had invested heavily with Mr. Madoff and considered him a friend. Gary Lewi, a spokesman for Mr. Blumenfeld, said he still planned to complete a shopping complex in East Harlem that is to include a Target and a Costco, as well as several other projects where construction is “in the ground.”

Some members of the real estate industry are receiving the news with a mix of schadenfreude and sadness for their peers. Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises.

“People used to brag how they were getting these great returns when everybody else was struggling,” he said. “They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool.”

The impact is already spreading to the residential real estate business. Brad Friedman, a lawyer representing about 100 investors primarily in New York and Florida, said several clients have already said they plan to put their apartments on the market. They depended on their Madoff investments to pay their mortgages and co-op fees.

“With that source of money frozen, they’ve got no cash,” Mr. Friedman said. “They can’t pay the electric bill. They can’t pay the mortgage.”

Other buyers have already backed out of deals because they had invested with Mr. Madoff and can no longer finance their purchases. Michele Kleier, a prominent Upper East Side broker, had buyers pull out of purchases on two $2 million apartments because they had lost money to Mr. Madoff. The first buyer put in an offer at 3 p.m. last Thursday, the day of Mr. Madoff’s arrest, only to withdraw it by 5:30 p.m.

The second set of buyers had visited an apartment three times, requested the financial information about the co-op and had the broker notify Ms. Kleier that they would be making an offer on Monday morning. On Monday, she learned that the buyers had backed out because their money was tied up with Madoff funds.

The real estate market has gone beyond the falling knife stage and is now in the knives being chucked everywhere stage and there is no incentive for anyone to put their hands out. Even people with a lot of liquidity are going to want to head to the bomb shelters and wait it out.

I realize I am sounding redundant hut I recommend that everyone at this point retreat and hole up while closely observing the market to see what is out there. Even if you see a good deal, approach with caution because it is not enough to be just a good deal particularly with commercial properties. With the economy tanking and signs that we are dealing with a depression, there is not going be a huge demand for commercial space due to massive layoffs and bankruptcies.

For those of you who want to buy a home for yourself, I would really wait at least a year. Depending on your career, you might not have a job to pay for the mortgage and maintenance. And chances are the ones who have to sell maybe in dire need to liquidate due to being let go. Sellers that are still uneducated with the current market are going to get a very harsh lesson in this downturn.

Renters, start looking at other places to live because your landlord might raise the rent out of desperation. If that occurs, renters have the advantage of other options and right now there are plenty.

Sellers, you're f**ked. Unless you are willing to make some serious changes in your prices or are willing to wait for the next cycle which probably won't occur until Obama runs for re-election, you are pretty much in between the proverbial rock and the place known as hard. If you want to get the most for your money in this market and have a healthy tolerance for aggravation, I will give you 4 letters. F-S-B-O. Look into it.

What really freaks me out about this situation is that there is usually a segment of the population that is ready to suck up the distressed properties and other forms of debt when the market goes pop. These parties usually offset the imbalance and at least keep everything rolling even during a down market. It does not appear those players are rising to the occasion.

This will explain why.

Property markets frozen
Commercial real estate buyers not biting at current prices

"I don't think this is a blip. We've gone far past a blip," said Randy Reiff, senior managing director for J.P. Morgan in New York. "We're in a protracted, massive restructuring of our capital markets. Even the lenders who are out lending are slowing down right now. And that is only the people who are accustomed to high-risk, opportunistic investing who don't believe they have to buy at the bottom."
"The only people talking are those facing the situation where they have to refinance maturing debt or hand back the keys" to the lender, he said.

Reiff's warning about falling knives was stated in October of 2008. The knifes are still flying and at this rate we will probably be dealing with machetes for quite awhile.

2009 is going to suck ass.