Hoboken RE Has Just Begun Plunge

While there is light at the end of the tunnel on the national RE picture, the effect of the credit crisis on investment banking activities has just begun; Lehman being the latest employer to expunge jobs quietly.

The affluent in Hoboken's demographics differ widely from that of our leading metropolis. Ours is totally employee-driven (or new money) wealth while the big city has a diversity of well-established (or old money) sources that originate nationally and internationally.

This core however is often marketed as a similar source for Hoboken's buying power in issues such as RE - and is frankly, a joke.

There is no such correlation except in a marketer's imagination on stroking the west bank consumer's ego.

Unfortunately, the drawbacks of the city impact us exponentially since it is the sole source of that employee-driven wealth - namely Wall Street and it's investment banking activities.

As the city council ponders layoffs, consider the EXTENT of the impact from the credit crisis on Hoboken's so-called affluent demographic.

As I write this, RE brokers and flippers are proudly celebrating closings at the second MP building at 1125.

Firstly, I'm not sure who those owners are that they would be so comfortable in closing their piece of an unfinished puzzle. Secondly, they should ponder the combined impact on valuations from the already dormant units at 1025. Their defiant approach to this crisis is only denial.

Buyers will continue to wait it out until they can see the whites of their (sellers) eyes. While I don't expect the recent economic optimism on the inflation and growth front to ease interest rates, I don't see it helping the reduction of inventory either. The combined effects of the above-mentioned employment hit (focused on Hoboken's upper echelon) and continued growth in RE inventory extends this valuation cycle much further than Hobokenites think. My current thinking on 2-3 years will likely extend to 3-5 years as prospects here worsen despite any national optimism.

Are cash buyers stupid? Not likely.

The mortgage front is one of several leading indicators given that my theory on the RE malaise lies in the state of credit availability and qualification. The only outlet that provides liquidity then, is a cash buyer. They would actually demand an even greater discount to "market asking" prices.

The Washington Post noted that the MBA mortgage application index for last week was 34 percent below its year ago level. This figure understates the decline in new mortgages for two reasons:
- subprime lenders are under-represented in the MBA index. Since the decline in mortgages occurred disproportionately in the subprime segment of the market, the MBA index will not fully reflect this decline. Also, since many subprime lenders have cut back their lending or gone out of business, some of these borrowers may now be showing up at banks who are included in the MBA index.
- the MBA index measures applications, not mortgages. Mortgage applications are far more likely to be turned down now than a year ago, which means that the same number of applications corresponds to fewer mortgages this year than last year.

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/21/AR2008082103539.html

MP Cost of Carry - Failing

While this blog continues to sound like a rant, it is merely exposing the "emotional" or "psychological" barriers to real estate investing. Much like any market, buyers hang on to hope without any logic or justification from the grade 5 Math that would convince them otherwise.

Rental markets are degrading quickly in the NYC/Hoboken area. There is a fundamental basis for this: those who would otherwise splurge on space without regard for return are now sharing or even moving back home. I am talking about couples, not just singles, who find themselves in this humbling situation. It is a testament to my thesis on why credit destruction has made this real estate correction UNLIKE previous ones. I provide this link to a recent Wall Street Journal article on rental building portfolios.
http://online.wsj.com/public/article_print/SB121919861213655575.html
Companies like Archstone-Smith came into Hoboken on the heals of a hot, low-vacancy trend not long ago, only to find themselves mispriced in their expectations. This revealed a lot about Hoboken's fundamentals; it is a young, eccentric demographic and mostly limited in its debt capacity. So when credit reins are tightened, true net worth is the only survival credential.

Although I spoke very briefly about the W Hoboken Residences in an earlier post, I revert to it here because a private company like Applied Companies with a vast apartment building portfolio is very vulnerable. Applied is the W's developer but only about 40 residential units are being offered (on a 99-year lease since the land is owned by the Port Authority). As I mentioned to a realtor friend, being private under such market conditions is a huge detriment. Only time will tell since a private company like Applied releases no notes on its financial condition. Stay tuned on that one!

Back to the topic at hand on renting and the price-to-rent ratio.

I don't choose to pick on any particular MP owner - because I regard all their options in dire straits - but let me note the investment predicament by example:
One of the larger units at 1025 MP measures 1,920 sq ft and is a 2 bedroom plus entertainment room plus den layout. These are NOT four bedrooms since a bedroom requires a window and closet by technical and legal definition. This unit had its closing in January 2007 for just under $1.1 million. Pretty good deal right?

Roughly a year later, the unit was seen listed (in April 2008, possibly earlier) for rent at a price of $6,250 per month. Since then, it has been fishing for a bite at prices of $6,000, then $5,900, and now $5,500 as cost of carry erodes all advantages of "holding out" for EXPECTED return on the investment.

The unit remains empty. And there are many in the same situation in the same building. Company is not a desired benefit under such conditions!

The problem here is that the trend is worsening. So unless the owner pulls a Merrill Lynch trick and sells out at MARKET (to start afresh), it will keep chasing the dropping ball since there is no end in sight for Wall Street's (and therefore Hoboken's) woes. See my earlier posts on implications and the cycle that we find ourselves in.

If the owner had listed the April 2008 rent at $5,000, $25,000 of income MIGHT have been recuperated - not to mention continued occupancy.

Let's see if they know what they're doing!

Builders Scraping the Bottom for Buyers

August 21, 2008 4:11 p.m. EDT

ANALYSIS

Builders Tout Down Payment Aid Before Window Shuts On Program

By DAWN WOTAPKA
Of DOW JONES NEWSWIRES

NEW YORK -- Home builders, painfully aware the end is near for seller-funded down payment assistance programs, are aiming for a sales spike before the government-enacted Oct. 1 deadline.

But industry watchers say any increase will be temporary, not enough to jump-start the moribund building sector. What's more, not all of those contracts are expected to close, possibly boosting cancellation rates later this year.

Even so, builders -- which have come to count on sales from the controversial programs that essentially let sellers fund buyers' down payments -- will take what they can get.

"They're all advertising, 'Hurry up,'" says John Fioramonti, senior managing director of Meyers Builder Advisors, a real estate consulting firm. "They're talking it up and pushing it as hard as they can."

On its Web site, Standard Pacific Corp. (SPF) alerts buyers that "once in your lifetime, the right door opens .. very briefly." Hovnanian Enterprises Inc. (HOV) warns those wanting a no-money-down deal that they "need to act now!" Neither builder was immediately available for comment.

Such dramatic words might push some buyers into action, but JPMorgan analyst Michael Rehaut warns any sales uptick is unlikely to last.

"People on the investor side will recognize it for what it is," he said, "more of a temporary boost."

That's bad news for a sector already weakened by the prolonged housing slump that left builders with depressed bottom lines, saddled with unsold inventory and scrambling for buyers who are either too afraid or unqualified to buy a new home.

Many contracted buyers, meanwhile, have abandoned deals, raising cancellation rates in the last few quarters. Though some builders' cancellation rates have slipped recently, industry watchers expect them to climb as buyers who rush to ink deals before Oct. 1 change their minds or encounter financing issues.

The seller-funded down payment assistance ban is part of the sweeping Housing and Economic Recovery Act, which President George W. Bush signed earlier this summer. Critics, including the Federal Housing Administration, have long complained that such programs contributed to the real estate downturn because they help people buy homes with little or none of their own money while giving some purchasers keys to residences they can't afford. That, the critics maintain, fuels defaults.

Nehemiah Corp. of America, a nonprofit that sellers reimburse for funding buyers, disputes that. It is working to save DPA, though that is an uphill battle.

Under the new law, lenders must approve borrowers' credit before the deadline, so buyers closing after Oct. 1 can still tap the assistance.

"We're talking final credit approval has to be done before Oct. 1," said Lemar Wooley, a Housing and Urban Development Department spokesman.

That's why some builders have set September deadlines. The longer a deal is in backlog, the more likely it is that credit will have to be reapproved, endangering the DPA.

"Limited alternative mortgage finance options would be available to that buyer," Rehaut said. "That order would be likely canceled and lost."

After the deadline, experts expect new-residence sales to remain depressed -- possibly falling more -- stressing home prices and increasing impairments, which have already topped $24 billion industrywide.

It's hard to estimate just how much sales could suffer: Builders don't know how many buyers couldn't afford a house without the assistance.

"There's no way of knowing how many are taking advantage of it just because it's there," Fioramonti said.

Industry giant Lennar Corp. (LEN) has said one-third of the mortgages it originated used the assistance, compared with as many as 20% of the overall loans in Ryland Group Inc.'s (RYL) backlog, Rehaut has noted.

"Once DPA is eliminated, we think it will result in the exiting of at least 10% of demand in the current market," he said.

That will undoubtedly be painful for the industry. But Centex Corp. (CTX), one of the nation's largest builders, labeled the change a likely positive "over the long term."

"The end of DPA will probably pressure industry sales in the near term, but over time our buyers and the market will adjust," said Cathy Smith, the builder's chief financial officer, in an earnings call last month. "We continue to believe that a return to more normal qualification standards is a very good thing long-term, even if it carries with it a little short-term pain."

Centex declined to comment for this story.

---By Dawn Wotapka, Dow Jones Newswires; 201-938-5248; dawn.wotapka@dowjones.com

Hoboken's Current Tax Crisis Actually a Cakewalk

A major cost of carry for real estate is the property tax portion among the payables. In Hoboken, we are looking down the barrel of a bazooka! The city's fiscal irresponsibility combined with the state and federal budgetary levels is going to make the eventual assessments - over a few years - on Hoboken properties astronomical. The implication is directly fed into property price impact. Look forward (not current or behind) in assessing valuations. This issue alone will place (at least) a 15% haircut on $1 mio+ condos in the city.

I will discuss some asking price expectations at our favorite poster child for real estate in Hoboken in an upcoming blog. You will quickly discover that RE.ality is nowhere on sellers' minds. The result? Real estate agents being laid off and offices being moved or just closed outright.

Bloomberg reports that: "Wall Street's mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services," Mayor Michael Bloomberg said.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a "safe harbor,'' protecting against penalties for underpayment.

"It will be a number of years before Wall Street starts paying taxes again,'' the mayor said at a press conference yesterday in Manhattan. "They will carry forward all of those losses.''

Financial firms posted $501 billion in writedowns and credit losses worldwide since the start of last year, a figure the World Bank predicts may rise to $1 trillion as the credit squeeze sparked by the subprime market collapse worsens. The tax drain is particularly serious in New York, where Wall Street accounts for 20 percent of state revenue and about 9 percent for the city, state Comptroller Thomas DiNapoli has said. (emphasis added).

Local Layoff Indicator Points to Prolonged Unemployment

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Big blocks of space go begging Theresa Agovino
Published: August 10, 2008 - 5:59 am
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Last Tuesday, nearly 70 brokers gathered in the new marketing center for 120 Park Ave. to hear about the building's virtues. While the brokers sat munching omelets and muffins they were told about the premier location, wraparound terraces, private parking garage and branding opportunities that come with the nearly 440,000 square feet of available space in the building.

“This is a rare opportunity for a corporate headquarters on Park Avenue,” says Paul Glickman, a vice chairman of Cushman & Wakefield Inc.

On Park Avenue, options are indeed limited. But on the storied street and beyond, the number of large blocks of vacant office space is soaring, with tenants spoiled for choice as they have not been in years.

As of June, there were 54 blocks of large space—defined as 100,000 square feet or more—available in Manhattan. That figure is up 35% from the year-ago period, according to Colliers ABR Inc., which also reports that in June there were 15 totally empty buildings, eight with large blocks of space. A year earlier, there were only six vacant properties, four with large blocks of space.

Large blocks can be leased at 909 Third Ave., 3 Columbus Circle and 345 Park Ave. Empty buildings include 545 Madison Ave. and 224 W. 57th St. and the old New York Times Building at 229 W. 43rd St.

Meanwhile, several real estate brokers estimate that there are only 15 to 20 tenants scouting for such large spaces. That imbalance between supply and demand in the large-space market is expected to push rents lower in the long term and make tenants more reluctant to rush into new leases in the near term.

“Last year, I'd be saying to clients, "You really need to get this done,' “ says Nicola Heryet, senior managing director at Colliers, who has two clients that are each seeking more than 100,000 square feet of space. “Now, you certainly don't want to lose a good opportunity, but there isn't the same pressure.”

Available space is multiplying for several reasons. Struggling financial services firms are dumping space on the market as they lay off employees. For example, Lehman Brothers is relinquishing about 167,000 square feet at 399 Park Ave. and 100,000 square feet at 605 Third Ave. Meanwhile, iStar Financial shed roughly 107,000 square feet at 1095 Sixth Ave.

Additionally, Bank of America, The New York Times Co. and others have moved into new buildings, leaving a swath of space in their wake.

In other cases, new owners have cleared out and refurbished buildings in the hope of charging higher rents. That's exactly what LCOR did after purchasing 545 Madison Ave. two years ago. The developer stripped the building down to the steel and rebuilt it as a sleek modern tower that the landlord hopes will appeal to high-paying hedge funds and private equity firms. To help lure tenants to the building, LCOR has prebuilt two office suites and is considering constructing another, says Lisa Kiell, a managing director at Jones Lang LaSalle, who is marketing the building.

Ms. Kiell says that the fact that small tenants can have their own floors in a luxurious boutique building is key to the property's allure. “Such tenants aren't important in a big building,” she says. The asking rents in the building, which will be ready in October, are between $110 and $150 a square foot.

Rents coming down

The trouble is that many other buildings in the area are chasing the same clientele, including 510 Madison Ave., which is being developed by Macklowe Properties and is set to open in October.

The big question is whether rents will buckle under the pressure of so much supply and a demand depressed by a sagging economy and skittish tenants. While the data published by most firms show rents holding fairly steady, some brokers insist that when incentives such as free rent and more generous construction allowances are factored in, rents are already down 15% to 20% from last year.

That is a challenge for the new owners of 120 Park Ave., among others. Brokers were impressed by the amenities at the former headquarters of the world's largest tobacco company, Altria Group Inc. But some say the asking rents of between $100 to $120 a square foot are too pricey.

That could be a problem as marketing for the building begins. Global Holdings Inc. bought the building earlier this year after Altria announced plans to leave the city. Altria retained only four floors in its home of the last 24 years on the corner of Park Avenue and East 42nd Street.

Mr. Glickman says the building will give a company an opportunity to have a major presence in New York. He also points out that a big tenant would be allowed to put its logo on the tower, not to mention enjoying large floor plates and high ceilings.

Mr. Glickman insists such attributes merit the asking rent, even in a crowded market.

TAgovino@crainsnewyork.com

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Entire contents © 2008

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Old Realtors Need New Tricks - MP Reseller Listings

As if the Internet never existed, several duplicate listings on the same units are beginning to surface. What's the catch? They post different asking prices or rents!

This is a method of days gone by when third-party brokers who had a captive or exclusive buyer line-up would want their pound of flesh and pad the asking prices. If there were any ethics left in this business, this would be a case for anti-trust regulators.

Who's the loser here? The (re)sellers! Buyers with any ounce of intelligence can research these situations quickly and easily. They never come back to those properties since the funny business is a sign of ethical problems or the nature of the listing agreement.

If any of you need clarification on any unit of interest, don't hesitate to ask. It's a matter of RE transparency in Hoboken.

NJ Stands Out - Subprime Mortgages in Foreclosure

Today, the Federal Reserve Bank of New York issued a paper entitled "A Look at New Jersey’s Subprime Mortgages in Foreclosure," ranking New Jersey 5th among states in subprime mortgages in foreclosure (per 1,000 housing units), exceeding the U.S. ratio. Hudson county ranks 5th in these categories within the state. Four pages worth reading:
http://www.ny.frb.org/newsevents/news/regional_outreach/2008/facts_trends.pdf

Just what Hoboken's tax roll ordered! New York City rate of layoffs increases, NJ state budgets are under pressure and the City of Hoboken is selling off land to balance budgets - badly, at that!

Where and how does property value fall into place here in Hoboken?
It's the AFFORDABILITY stupid!