Warburg Blog

Warburg Realty Market Review

It has been a unique and eventful first quarter in the New York City real estate market. We began January with the market completely in the doldrums, as the stand off between buyers and sellers which characterized the last quarter of 2008 continued. Buyers were mostly waiting and watching from the sidelines, while sellers had yet to accept that the prices of 2007 were simply no longer attainable. The only deals being made were for studio, one, and small two bedroom apartments, where demand remained slow but consistent.

January was a slow month. While a few marquee deals were done in the upper end of the market, the market required capitulation. And little by little the capitulation began. Sellers began reducing prices. Buyers were still not forthcoming, but a handful began looking again. Hope re-entered the national vocabulary with the Presidential inauguration, and while deal volume was still at between 50% and 60% of what it had been a year before, there was a sense that the market was stirring.

With February, deals began to be made more briskly. While many buyers were still waiting on the sidelines, convinced that the market would bottom later in the year, an increasing number subscribed to the belief that the market was down “enough”: enough to make it possible for them to afford the property they had hoped for but given up hope of owning, enough to make them comfortable not searching for a bottom they knew would be visible only in retrospect.

These buyers purchased from sellers who had also had “enough”: enough months on the market, enough waiting for the elusive buyer who would pay 2007 prices for their properties. These sellers realized that in this environment no buyer is careless with money. Every buyer is offering 20%, even 30% below the asking price and sellers need to respond. Those sellers who accepted the new reality – that New York, a seller’s market for so many years, had become a buyer’s market – made deals.

The top of the market remained slow in February. Most buyers in the $10,000,000 and up range do not have to buy. They can usually stay where they are, at least for a while. And so they did, indicating a willingness to wait out the prices they saw as excessive. In February, the mid-sized apartments, five to seven rooms, began trading again after months of inactivity. The buyer for those units bid low, and sometimes stayed with his first bid, either responding slightly or not at all to the seller’s counter. And some of those buyers got those apartments for 15% or 20% below the asking, at prices not seen since 2003 or 2004.

Warburg saw February 2009 deal volume at 90% of February 2008. Then, in the first week of March, the stock market plunged again. Buyers rushed back to the sidelines, and deals struck in late February were re-negotiated down before the buyers would sign. With no sense of urgency, buyers sat on contracts for weeks without signing, waiting to see what would happen next.

As the market rose in the second half of March, so did buyer activity. The February national real estate numbers came in unexpectedly strong. At all levels of the market, prices are being reduced and sellers acknowledge the reality that everything is highly negotiable. In response, buyers are making offers. And they are making deals. The process is arduous.  Financing remains difficult to come by.  It is a two steps forward, one step back environment, but now, after months of paralysis and months of confusion in the wake of the Lehman collapse, at least the market is moving forward.

Warburg Realty in Tribeca hosts an evening of Sculptures & Assemblages with Artist Mark Gordon.  Come join us at 100 Hudson Street @ Leonard Street for the evening.

The stock market goes down. The stock market goes up. The head of the Fed opines that our current troubles will pass, soon enough but not too soon.  A few things seem clear: no one really knows what will happen next. And…life goes on.

The question for people considering real estate purchases is – when?  Should I do it now? Should I do it a month from now? Six months from now? All I can say is – this too shall pass. if you can find what you want today at a price you think is attractive (and there are some EXTREMELY attractive prices out there) then now is a good time to act.

Historically, real estate has been an excellent long term buy with a unique advantage: you can live in it.  Especially at today’s prices it is very attractive as a trust or long term portfolio investment.  Or you can just move in.  Everyone is staying home more these days. So home might as well be as nice as you can make it.

Following is a preview of my upcoming Manhattan Market Watch to appear in the April issue of Mann Report.

“The reports of my death are greatly exaggerated,” wrote Mark Twain in 1897 when his obituary was mistakenly published nearly 13 years before he died. Fast forward more than a century later, Ted Kennedy told well wishers to please “hold the eulogies” as he celebrated his 77th birthday in late February. In a similar vein, we respectfully request that the press refrain from sensationalizing the current new realities of the Manhattan residential marketplace. Our market is not dead, nor it is “cratering” or “rotting” as Barron’s February 23rd cover story would have us believe. Real estate values continue to decline, coming off highly inflated levels, and transaction volume is down considerably, but following last year’s most unusual 4th quarter of near inactivity amid grim global financial news, hints of optimism have been surfacing steadily in the first months of 2009.

A Tale of Two Markets

Essentially, any reporting about the Manhattan real estate market must distinguish between two diverging product streams: new developments and resales. A boom environment of too easy financing and too much leveraging led to explosive, unchecked growth of too much new condominium product too fast. It is this part of the market that is hurting the most.

A changing economic environment is causing hardships for many. Unable to meet a lender’s financing schedule, many development projects are in limbo, either stalled in mid construction, cancelled or reconfigured as temporary rentals. For those projects nearing completion, it remains to be seen how this market will fare when these condos begin issuing their 30 day advance notices to close. Faced with falling values, will their buyers—who went to contract well before Wall Street’s meltdown—close at the contracted price, negotiate a settlement or walk away from substantial down payments? With as much as 10-25% deposits at risk, some purchasers may have lost jobs, others may be facing future layoffs, and still others may no longer have their previously promised financing in place.

Cracks in the new condo market were apparent even before January 2008. In a deteriorating economic climate, an oversaturated inventory of similar over priced commodities simply could not be absorbed. Purchasers were stymied by demanding banks with restrictive approval requirements for borrowers as well as the properties they were financing. Pressured by lenders to jump start sales, some distressed condo developers are considering using auctions to generate activity. According to reports, five mid range to high end projects, as of this writing unidentified, will be auctioned in April at minimum reserve prices 40-45% below January ‘08 published prices. Successful in other parts of the country, particularly in South Florida, auctions—both live and sealed bid—are expected to stimulate sales activity at struggling condo projects and also set some much needed pricing benchmarks.

And on the Other Hand

Unlike the near inertia with new development products, there’s discernable activity and contracts are being signed in the resale market for both co-ops and condos throughout the city. Despite mounting financial uncertainties and increasing layoffs with new stock market lows in an ever bearish market, the first eight weeks of 2009 saw an uptick in deal making. Tempted by falling prices and new entry levels, buyers have been circling favored properties, making bids, negotiating with realistic sellers and signing contracts. The market is challenging to be sure, and probably still seeking a bottom, but buyers and sellers are moving to contract.

Using the Realplus search engine to count the number of contracts signed during the first eight weeks of 2009, I focused on the upper East and West sides—a key market indicator—and came up with the following snapshot.

By degrees, deals are being made—albeit unhurriedly. Five days ago as of this writing, Fed Chairman Ben Bernanke told Congress that it was “reasonable” to predict the recession will end this year and that 2010 “will be a year of recovery.” We look forward to more glimmers of decent news.

Most people assume that the board of directors runs the building. Actually the responsibilities for maintaining the building are usually divided between the board of directors and the managing agent. Both parties perform their functions with the advice and help of many support professionals. Typically the board establishes the policy and expenditures; and the managing agent or property manager actually runs and manages the procedures in the building. It’s important that the manager understand the philosophy and culture of the building in order to be able to implement the style the board desires.

For example, the board will make decisions about the rules and expenditures of the building. The managing agent is concerned with not only carrying out these requirements, but performing the administrative work as well, such as collecting maintenance, carrying charges and sending out notices.

Selecting Vendors

The managing agent is responsible for selecting and prescreening vendors including architects, engineers, heating suppliers, insurance and repair personnel. Their credentials are then presented to the board who will select the vendor.

Most management firms work off site, but there are companies who work on-site. The advantage of an on-site representative is that the shareholder can easily go into their office to discuss any topics and concerns. Of course, the building needs to be able to provide the space for the on site representative and not all buildings have available space for them. In some cases a small management firm will operate out of a building they manage and pay the building rent because they are also managing other buildings as well as the on-site one.

Some buildings are self-managed. This requires a good deal of work, expertise and dedication from the shareholders. Frequently this works well in a small building where the shareholders feel a strong sense of ownership and run it as though it were a private home.

Most boards of directors have a regularly schedule monthly meeting to deal with subjects as well as an annual meeting to elect directors and officers. The agenda for these meetings is usually prepared by the managing agent with input from the board. Both parties will have issues, which need to be discussed and examined in order to decide on the procedure. Many buildings also have standing and ad hoc committees who meet at different schedules and report to the board. Committees are assigned specific tasks.

Affairs of the Board

Typically the building’s attorney will attend both the monthly and annual meeting to assist with any legal issues. Also the attorney is very helpful in determining policy on topics which are not necessarily legal, but political in nature.

Architects and engineers are consulted on a per job basis. Their expertise is required to keep the building in good physical condition and as well as approve any structural changes the board or shareholders wish to make. They also insure that any of these changes will meet the required New York City building codes.

One of the most difficult things for a board to do is to assess the managing agent’s performance. One aspect must be that the individual manager understands the character of the board and the clientele they are serving. It requires sensitivity and good listening skills. Another concern is availability.

The managing agent’s work flow widely varies and cannot be controlled or anticipated, such as emergencies or the amount of purchase or rent applications which can change markedly from month to month. The same amount of staff has to deal with these issues making it difficult to juggle the work load well. When evaluating the managing agent some of the factors the board should consider are obviously cost. Is the manager or management firm producing adequately given the fee they’re charging? Savings are another issue to consider in cost.

A knowledgeable managing agent can save the building substantial amounts of money by hiring well priced, but good consultants. An experienced managing agent knows how to find these vendors. Is the managing agent sufficiently available when things need to be discussed? Are they courteous to the shareholders as well as the board? Are they helpful and efficient in processing purchase and rental applications? If they take too long to process a purchase application, the purchaser has to reapply for a mortgage creating additional expense and sometimes a higher rate of interest.

Whatever style the board has when choosing a managing agent or property manager, it’s important to interview a few companies and thoroughly check their references. Remember to ask specific and in depth questions about the company’s style and responsiveness when checking references.

Lenore Barton is a contributor to The Cooperator and an associate broker at Warburg Realty.

Who Really Runs the Building?
Who’s in Charge
By Lenore Barton
http://cooperator.com/articles/1884/1/Who-Really-Runs-the-Building/Page1.html