Poster child - Toll Brothers' Maxwell Place

While the ultimate prize title should go to the W Hoboken Residences, there are only about forty units in that development adjoined with the hotel services chain. It will be a topic of future posts, I'm sure.

Many of the property value-related questions I get are related to the Maxwell Place (new construction) and Hudson Tea (gutting renovation) buildings at the north end of town. While Toll is building MP from scratch, they simply bought and took over the HT site, among several other land and building development deals (incl. 700 Grove, Harborside Lofts, Hudson Tea expansion, etc.).

MP interests me because it is a shining example of marketing gone rampant; during what was probably... the... very... top... of the market. It used to be that a river/city view added a 15% (or so) premium to your Hoboken property. Somehow, Toll has magically enhanced that valuation premium to a 100% or so - or the unit base cost is wrong! Hmm... and all this at prices above those closed at pre-construction prices - near the market top - with their 1025 Maxwell building. Four buildings are slated for erection. 1125 Maxwell is currently under construction and has undergone some schedule delays so far.

Now there's a great methodology for defining unique! Stack high-density structures next to one another and market them all as part of a "luxury waterfront" development. No doubt, the tax roll is welcomed; but at what cost in the city's original negotiation? The city's building inspector just happened to call the 1025 development home at the time as well, so the state decided to take over that slight conflict of interest. What's Governor Corzine's line here? Inquiring minds want to know!

I've got nothing against the trendy and upcoming north end of the city, but there's a reason it was developed last. Remember those three principles? Well, ferries and a shuttle van don't exactly comfort my rushed style to commute in the morning - unless I was working in the western part of Midtown! None of my querying friends could admit to that need. The view of course, is spectacular; if you get enough time from your commute connections to enjoy it. Okay, that takes care of the location thing. Let me explain.

Although I'll discuss the current pricing basis later, cost of ownership needs to assess maintenance fees and property taxes as well; the first being of Toll design and the second coming from our starved coffers at city hall. Well, we all know what homebuilders are challenged with in the financing world so the current 1125 delays should come as no surprise. Many have argued that the changeover to state oversight is to blame. I doubt it. I would just as easily argue that it was rushed through without proper due diligence during the city's oversight of the matter and the current rate is the norm. Call me cynical, but somehow the Toll and Hoboken council relationship would have probably grown some deep roots given the company's sudden stature in town.

Since some 1025 data is available, one can see that maintenance fees are already steep - without most of the amenities that 1125 will bring to the promised facilities. Current 1025 fees run around $0.58 per month per square foot of unit space. That will include maintaining parking amenities assuming one parking space per unit. So a 1,500 square foot condo at 1025 is paying about $870 per month for maintenance alone. And what are the odds that those fees will go up again, given the construction business woes? Somebody's going to pay for it and I doubt that Toll is going to get charitable with their current revenue trends.

Note: Toll Brothers lost money in their current quarterly reports. And those results are more likely part of a new trend rather than a quarterly aberration.
Disclosure: I have recently bought shares of TOL for accounts I manage or advise. Those accounts were short homebuilder stocks until last week. Don't confuse my positive sentiment of TOL stock with my forecast on Toll property values. There is no relationship there and it would take a longer story!

That leaves the 1025 folks carrying the load since any potential 1125 buyers are still subject to any of their closings. Two things are going wrong on the 1125 front. First of all, recent credit standards will likely eliminate a fair portion of originally interested buyers. Don't feel sorry for them. They probably shouldn't have been buyers in the first place if that's the case. Secondly, the combination of increased layoffs in this demographic and increasing unit inventory (yes, even in Hoboken) may result in either more 1125 delays or insufficient buyers.

All along, Toll has given the impression of holding their pricing while all around them crumble. If I'm an analyst, I like their stock - but I would hate to own at their developments, given the crunch scenario. Such a strategy will only continue to funnel greater costs through to the current and future owners. Unfortunately, that's the part of free market theory that always works well. Toll management is smart since the "Plan B" option is always available to them later, rather than sooner. What does that tell you about my thoughts on the buyers so far? No comment. But "pre-construction" is not a desired option in a buyer's market, not even in the great city of Hoboken, given it's proximity to NYC. In fact, chances are that the second half of this industry tsunami is going to hit Hoboken HARDER than most due to the quiet impacts being lashed out in NYC's financial services sector. Hobokenites make up a great portion of those once upwardly mobile professionals.

The property tax front doesn't help the above scenario. State coffers are already putting greater stress onto local budgets, but the City of Hoboken is going big (broke), or not at all. Hoboken's own budgetary crisis is going to lead to sizable tax increases from property owners; especially new ones like MP. Inflation is going to look very tame in comparison. That same 1,500 sq ft unit is already paying about $13,000 per year, with increases of about 10% to come soon - that's my own forecast.

While all these DEflationary forces are at work, unit values have to act. Get the picture? But by how much are current sellers dreaming? The listings I have observed so far don't even justify comment; and the market interest supports my cynicism. I will provide some of this data after doing some homework but first glance tells me that sellers are taking cues from each other, rather than the market. I suspect that the brokers and the developer have influenced this course with their own reselling and pricing policy.

Such a marketing strategy would buy time under historical lulls but this is not a repeat of history. Simply put: when free credit buyers are removed from the equation, the first leg of the pricing stool has been pulled out from under it. Flippers flocked to this development opportunity during its offering period and current resale listings indicate a substantial number of eager owners willing to rent (conserve cash flow) or sell at a profit. Human nature in capital markets trading reflects an equally hesitant desire to take a loss in real estate. The inevitable is never a happy outcome. We have a saying... "bulls make money, bears make money - pigs get slaughtered!" This is where emotional attachment clouds the mind and a home is viewed as something more than just an investment. Well it is; yet the due diligence required is compromised by exactly such decision paths.

The average homeowner lives in their property for about four years; even less in Hoboken given the younger demographics. The new Hoboken buyer (last two years) has an average financing ratio of 86%; this includes a sizeable count of established families here with more conservative financing ratios in that number. So leverage is a bit thin for the newbies on the block, with little room for loss (easily above 90%). More families are seen here and the schools have no capacity to service them, but the majority of those families are nowhere to be seen once the kids reach kindergarten or grade school age. That's an unfortunate review of our application of taxes in the school system here.

Sub-prime was definitely alive and well in Hoboken. Hence, my strong feelings about the oncoming undertow here, not unlike many parts of the country these past two years.

As mentioned earlier, I will have many posts dedicated to our poster child Maxwell Place.