By VIVIAN S. TOY
Published: January 28, 2007
RENÉE MIZRAHI suspects that the first real estate agent she worked with deliberately didn’t tell her that a building was only 49 percent owner-occupied.
Her bank subsequently refused to give her a mortgage, and she lost the apartment.
Her second broker was worse. He stood her up at an apartment showing, she said, and he lied about the building’s financial requirements and about having put in her bid for the co-op. Then when she told him that she didn’t want to work with him anymore, he kept calling her — she has caller ID — and hanging up without leaving a message. “So he was like stalking me,” Ms. Mizrahi said. “What a nightmare!”
She is now working with a broker, referred by a friend, with whom she feels comfortable, but her bad broker experiences have nonetheless made her wonder if any broker can really be trusted. “I just want to work with someone who shows up when they say they will and who will tell me the information I need,” she said. “Why is this so hard?”
Ms. Mizrahi is not alone in her hard-earned broker wariness.
A Harris poll conducted last year that ranked occupations in terms of prestige placed real estate brokers at the very bottom of a list of 23 professions. (Firefighters and doctors were at the top.)
Brokers themselves seem well aware that their business isn’t always held in very high regard. The National Association of Realtors has an advertising campaign called “Someone You Can Trust,” which stresses that Realtors are subject to mandatory ethics training. “Not many professionals can claim that on their résumé,” the ads read.
Svetlana Choi, a senior sales associate at Bellmarc Realty, estimated that at least a quarter of her clients are skeptical when they first come to her.
“I just try to draw them out and relate to them in a way that lets them know that I’m not the enemy,” she said. “I’m not trying to snow them. I’m really just trying to be helpful.”
So why do people often have trouble trusting a broker?
To start with, brokers are salespeople, so buyers with suspicious minds would naturally suspect brokers of trying to sell them something they don’t necessarily want or need. But brokers also admit that some real estate agents help to perpetuate stereotypes with classic bait-and-switch schemes and by putting their own desires to close a deal over a client’s best interests. The fact that brokers themselves sometimes find it hard to trust one another only compounds the level of suspicion in real estate.
There are two major sources of broker-to-broker mistrust. The first is the fear that one broker may be trying to poach another’s client. The second is that a seller’s broker may be deliberately avoiding phone calls or refusing to submit an offer because he or she wants to avoid having to share the commission. The cynicism may well stem from the fiercely competitive marketplace and the fact that there are more than 28,700 brokers and sales agents in Manhattan alone and 66,700 in all five boroughs.
Erik Serras, a sales agent at Pari Passu Realty in Manhattan, said another agent recently stood outside an open house that Mr. Serras was holding just to hand out his business card. “It was the equivalent of ambulance chasing, and it sheds a negative light on the industry on the whole,” he said. “There are just too many untrained agents out there doing things that are unethical and unprofessional, and once a client is exposed to that, the damage is done because it’s easy for people to generalize.”
Ann Rothman, a Bellmarc agent, said that some people were quick to judge brokers because they “just have a queasy feeling about real estate.” She added that she sometimes finds herself saying, “I do real estate, so yes, I sell used cars, and people are going to think the speedometer has been changed.”
But Ms. Rothman tries to be philosophical about it. “Any person in a service business is going to be up against that,” she said. “Even if you go to a doctor or a dentist, there are going to be people who think they’re only doing a procedure because they have their kid’s college education or a trip to finance.”
When she comes across skeptical clients, Ms. Rothman said, “I’ll bring it up, and I’ll say, ‘What’s the problem here?’ ” That seems to work, she added, citing as proof an entire family of doubting buyers. “They all have a distrust gene,” she said, “but they keep referring other family members to me.”
Another instance when a broker might appear to be evasive is at an open house. When brokers hold open houses, they represent the sellers, but they also routinely use the events as an opportunity to pick up other clients. So if a potential buyer walks in and doesn’t seem right for that particular apartment, the broker can offer to help the buyer find something else. But under the unwritten rules of the game, the broker does not have to disclose whether there are any other open houses in the same building, particularly if the events are being held by competing firms.
These kinds of situations can easily lead to mistrust on the part of sellers and buyers alike.
Managers at real estate agencies say that the only way to minimize misunderstandings is to train new agents to be highly professional and to establish and enforce industry standards. To that end, the Real Estate Board of New York has established a list of 17 resolutions aimed at addressing ethical questions in residential real estate.
The resolutions cover issues as basic as the definition of an “exclusive” and the need to have backup brokers available when the exclusive broker is not available. They also try to cut down on typical broker squabbles by declaring it improper to foist a business card on someone else’s client and asserting that brokers should give co-brokers and their customers at least 20 minutes’ grace time if they’re late for an appointment.
Diane Ramirez, the president of Halstead Property and a governor of the real estate board, said, “Some of these things may seem silly, but it creates a framework of proper decorum.”
The board and its policies have evolved to make it clearer that “we are an industry that works for our sellers and buyers, and that should be our primary goal,” Ms. Ramirez said. “That’s the only way to dispel the distrust that comes in, not because it’s earned but because of what our reputation may have been.”
The real estate board also has an ethics committee that handles complaints filed by brokers against other brokers. Stephen Kliegerman, Halstead’s executive director for development marketing and a former chairman of the ethics committee, said the committee handles only a handful of cases each year, but he added that most complaints do not get to the board because agency managers tend to resolve complaints among themselves.
One of the biggest current complaints involves brokers who post listings on their Web sites for the exclusive properties of other brokers. “They’ll advertise a property they don’t represent, or sometimes the property doesn’t even exist,” Mr. Kliegerman said. “So when the buyer calls, it’s a bait-and-switch — the broker knows nothing about the property and winds up trying to take them to something completely different.”
He said the ethics committee is developing a new resolution to deal with the problem. “This kind of thing happens daily, and it taints the consumer’s impression of the entire broker community,” he said.
Consumers can file complaints about real estate agents with the Department of State in New York, the Real Estate Commission in New Jersey and the Department of Consumer Protection in Connecticut.
The New York Department of State can punish agents for infractions ranging from practicing without a license to a catchall category labeled “untrustworthiness and incompetency.” The latter can include things like lying about the school district for a particular address or misleading a buyer about future development in the area.
If the number of complaints filed in New York in recent years is any indication, brokers may actually be becoming more trustworthy. From 2001 to 2005, the last year with complete statistics, the annual number of complaints declined from 1,589 to 1,176.
The complaint category that showed the sharpest drop and that accounts for most of the decline was in “agency disclosure,” indicating that real estate agents have gotten better at disclosing whether they are a seller’s broker or buyer’s broker and what that means in terms of where their loyalty lies.
Of the completed cases from 2005, 109 real estate agents were fined, 3 had their licenses suspended, and 14 had their licenses revoked. Fines can run as high as $1,000, and suspension periods are determined on a case-by-case basis.
But most ethical breaches probably never reach either the real estate board or the Department of State. Ms. Rothman of Bellmarc recalled a case in which she represented a buyer who made an all-cash, full-price offer on an apartment, only to have the seller’s agent stall and falsely claim that the sellers wanted time to consider the offer.
“I later found out that he was waiting for a customer of his own to make an offer and he never even told the sellers about my offer,” she said. She filed a complaint with the other agent’s manager, and her buyers eventually got the apartment.
When training new agents, larger real estate companies stress the need for proper broker etiquette, both with clients and with other brokers.
Vasco Da Silva, the director of sales at Halstead’s Riverdale office, says Halstead’s broker boot camp tells agents when they should keep their business cards in their pockets, advises them to turn off cellphones while showing an apartment and instructs them never to talk about an apartment inside an elevator if there are other people around.
“We go through a logical step-by-step process, and it’s all about winning a customer’s loyalty and trust,” he said. “You don’t get it with your first meeting, so what you have to do is win your customers over with service and with confidence in your ability.”
In its training, Bellmarc urges new agents to be as straightforward as possible and to avoid pushing an apartment on a reluctant customer. “If someone doesn’t want an apartment, you don’t want to try to talk them into it,” said Janice Silver, an executive vice president at Bellmarc. “You can’t say, ‘But it’s fabulous — here’s why you should buy it.’ ”
Instead, she trains agents to ask simple questions like: Do you like this apartment? Can you see yourself living here? Do you want to buy this?
“Don’t be pushy, but be very direct,” she said. “Because if they don’t like the apartment, you should move on and not waste everybody’s time.”
Some brokers say their colleagues should not try to hide a property’s blemishes. Jill Sloane, a senior vice president at Halstead who is Ms. Mizrahi’s new broker, said she once represented a seller whose apartment came with a 33 percent flip tax, and she made a point of including that in her advertising materials.
“There was no point in hiding something like that because buyers would eventually find out about it anyway,” she said. “It’s just not worth the damage it would do to your reputation to be deceptive.”
Patricia Warburg Cliff, a senior vice president of the Corcoran Group, agreed. “If I know that there’s a bus that idles under the living room window, I have to get it out first thing,” she said. “Because if a buyer finds out about it midway into a transaction, you have egg all over your face, and the seller isn’t served because they’re not out to swindle someone.”
Sometimes, even when a transaction provides a happy ending for everyone, a buyer can still be left with lingering doubts about the broker and his or her motives.
Take Rob and Lauren Mank, who are now happily living in an Upper West Side apartment they bought last year. Mr. Mank said they had no qualms about their agent, a buyers’ broker, until final negotiations, when she pushed them to offer the full asking price, which would have meant raising their bid by $45,000. They ultimately went up by $35,000 and got the apartment because two competing buyers did not raise their bids.
“I felt like it was very high pressure and her loyalty to us was compromised by her desire to do the deal,” he said. “It left us with a bad taste.”
But Ms. Mank said she didn’t believe there was any malice involved and noted that without a crystal ball, there is no way of knowing if they could have gotten the apartment for less.
“Maybe you’re always going to want to blame someone for some infraction because you’re always going to feel taken advantage of in some way,” she said. “It’s a delicate and intimate situation because it’s your home and it’s your finances — the whole thing is just so fraught.”
Monday, January 29, 2007
San Francisco
Average annual home price appreciation (1949-2006)*:4.2%
If developers were allowed to go all out with building on San Francisco's Treasure Island, Presidio and the Marin Headlands across the Golden Gate Bridge, the price of housing would fall close to the cost of construction. But those pristine natural amenities are the product of one of the most anti-development political cultures in the country - and a perennial magnet for the highest earners.
Los Angeles
Average annual home price appreciation (1949-2006)*: 3.7%
Along with San Francisco, Los Angeles was the first major metro in the United States to become "filled up” during the 1960s and 1970s because of geographic constraints and political restrictions on building. Three-quarters of new construction is now in-fill development, and much of it is high end. The gentrification is pricing out middle and lower income families, who are moving in-land.
Seattle
Average annual home price appreciation (1949-2006)*: 3.2%
The newest graduate to join this elite class of super-expensive cities, Seattle is the least likely to hold its place. New zoning laws approved by the city council this year lift restrictions on building heights in the downtown core, and promise to generate $100 million worth of affordable housing.
Boston
Average annual home price appreciation (1949-2006)*:3.0%
Boston had the strongest wage growth of these cities through the tech bust and jobless recovery. Over the next five years, it will have the highest per capita income, next to San Francisco.
New York City
Average annual home price appreciation (1949-2006)*: 3.0%
The force with which middle class households here are getting replaced by wealthier ones was reflected in the recent hysteria over the Tishman Speyer group's $5.4-billion acquisition of 110 apartment buildings in lower Manhattan, the largest real estate deal in recent history. The apartment blocks are home to thousands of rent-controlled tenants who should have been priced out of the city years ago - and fear they now will be by market rents under the new owner.
*National average: 2.3 percent
Average annual home price appreciation (1949-2006)*:4.2%
If developers were allowed to go all out with building on San Francisco's Treasure Island, Presidio and the Marin Headlands across the Golden Gate Bridge, the price of housing would fall close to the cost of construction. But those pristine natural amenities are the product of one of the most anti-development political cultures in the country - and a perennial magnet for the highest earners.
Los Angeles
Average annual home price appreciation (1949-2006)*: 3.7%
Along with San Francisco, Los Angeles was the first major metro in the United States to become "filled up” during the 1960s and 1970s because of geographic constraints and political restrictions on building. Three-quarters of new construction is now in-fill development, and much of it is high end. The gentrification is pricing out middle and lower income families, who are moving in-land.
Seattle
Average annual home price appreciation (1949-2006)*: 3.2%
The newest graduate to join this elite class of super-expensive cities, Seattle is the least likely to hold its place. New zoning laws approved by the city council this year lift restrictions on building heights in the downtown core, and promise to generate $100 million worth of affordable housing.
Boston
Average annual home price appreciation (1949-2006)*:3.0%
Boston had the strongest wage growth of these cities through the tech bust and jobless recovery. Over the next five years, it will have the highest per capita income, next to San Francisco.
New York City
Average annual home price appreciation (1949-2006)*: 3.0%
The force with which middle class households here are getting replaced by wealthier ones was reflected in the recent hysteria over the Tishman Speyer group's $5.4-billion acquisition of 110 apartment buildings in lower Manhattan, the largest real estate deal in recent history. The apartment blocks are home to thousands of rent-controlled tenants who should have been priced out of the city years ago - and fear they now will be by market rents under the new owner.
*National average: 2.3 percent
It’s a broker’s market, real estate bigs claim
by amy zimmer / metro new york
JAN 29, 2007
BARUCH COLLEGE. There were no charts outlining low mortgage rates or predicting changes in Manhattan apartment prices at a seminar held here last week entitled “Why Buy Now.”
Instead, the standing room only crowd of real estate brokers — some sat on the floor with their Shearling and fur coats folded next to them — listened to industry leaders dole out professional advice. To succeed in a city with a glut of brokers — the state has licensed more than 66,000 in the city — the players suggested the rank-and-file should be up to date on the market, professional and well-dressed.
“Our industry has never been known for its professionalism,” said Hall Willkie, president of Brown Harris Stevens, explaining the importance of appearance and phone etiquette.
“Consumers now have so much at their fingertips and you have to be ahead of them. You have to know more,” added Diane Ramirez, president of Halstead Property.
“This is not going to be a buyers’ market or sellers’ market,” said Pamela Liebman, president and CEO of the Corcoran Group. “It’s a broker’s market. You need to play multiple roles. You’re a therapist, a friend.”
She told the group about the benefits of a new internal listings service her company makes available to brokers via BlackBerry. When one of her brokers received a listing while on a ski trip in Aspen, he slid to the side of the slope and was on the phone with his client within five minutes.
John Crafton, a 29-year-old broker at the boutique firm Barak Realty, could relate to the BlackBerry story. He is available to clients at all hours, sometimes showing apartments at 2 a.m.
“I work 20 hours a day, seven days a week,” said Crafton, a former producer at Bad Boy Records who turned to real estate because there’s no “long-term wealth” opportunities in music. “I’m seven months into this and I’m already marketing $5 million in terms of exclusives.”
Damion Williams, a broker with NY Living Solutions — who calls himself an “affordable luxury specialist” — bemoaned the number of brokers in town, saying many people get into real estate as a hobby.
“The industry is obviously oversaturated with brokers, but not necessarily quality brokers,” he said. “You can have 900 brokers at a firm where 850 turn out to be idiots.”
Why buy now?
All agreed that “now” was always the time to buy in New York. “People will say, ‘You’re in real estate so of course you’re going to be Pollyanna-ish,’ but numbers are numbers,” said Dottie Herman, president and CEO of Prudential Douglas Elliman. “You’d be hard-pressed to make a case against New York.”
Portal prep
Brokers are gearing up for a big change to their industry. The Real Estate Board of New York plans to unveil a Web site this spring enabling the public to see up to 15,000 exclusive listings for Manhattan and Brooklyn to which only its members have access.
Smaller firms balked over the original fees proposed to join the service — $3,500 for small firms and $7,000 for large ones. Though that has been tabled for a more equitable fee structure, which has yet to be announced, some firms are still worried their listings will be overshadowed by larger firms.
Yet Barak Dunayer, of Barak Realty, believes the site could be a real boon.
“This is going to give boutique firms equal exposure,” he said. “Right now, the big firms get all the traffic on their Web sites because they have millions of dollars to optimize them.”
He also said it will be cheaper to advertise on REBNY’s site than on the New York Times’ listings — which REBNY hopes to eclipse. But, Dunayer added, “It’s going to take a lot of time and money to make the site the one and only destination.”
JAN 29, 2007
BARUCH COLLEGE. There were no charts outlining low mortgage rates or predicting changes in Manhattan apartment prices at a seminar held here last week entitled “Why Buy Now.”
Instead, the standing room only crowd of real estate brokers — some sat on the floor with their Shearling and fur coats folded next to them — listened to industry leaders dole out professional advice. To succeed in a city with a glut of brokers — the state has licensed more than 66,000 in the city — the players suggested the rank-and-file should be up to date on the market, professional and well-dressed.
“Our industry has never been known for its professionalism,” said Hall Willkie, president of Brown Harris Stevens, explaining the importance of appearance and phone etiquette.
“Consumers now have so much at their fingertips and you have to be ahead of them. You have to know more,” added Diane Ramirez, president of Halstead Property.
“This is not going to be a buyers’ market or sellers’ market,” said Pamela Liebman, president and CEO of the Corcoran Group. “It’s a broker’s market. You need to play multiple roles. You’re a therapist, a friend.”
She told the group about the benefits of a new internal listings service her company makes available to brokers via BlackBerry. When one of her brokers received a listing while on a ski trip in Aspen, he slid to the side of the slope and was on the phone with his client within five minutes.
John Crafton, a 29-year-old broker at the boutique firm Barak Realty, could relate to the BlackBerry story. He is available to clients at all hours, sometimes showing apartments at 2 a.m.
“I work 20 hours a day, seven days a week,” said Crafton, a former producer at Bad Boy Records who turned to real estate because there’s no “long-term wealth” opportunities in music. “I’m seven months into this and I’m already marketing $5 million in terms of exclusives.”
Damion Williams, a broker with NY Living Solutions — who calls himself an “affordable luxury specialist” — bemoaned the number of brokers in town, saying many people get into real estate as a hobby.
“The industry is obviously oversaturated with brokers, but not necessarily quality brokers,” he said. “You can have 900 brokers at a firm where 850 turn out to be idiots.”
Why buy now?
All agreed that “now” was always the time to buy in New York. “People will say, ‘You’re in real estate so of course you’re going to be Pollyanna-ish,’ but numbers are numbers,” said Dottie Herman, president and CEO of Prudential Douglas Elliman. “You’d be hard-pressed to make a case against New York.”
Portal prep
Brokers are gearing up for a big change to their industry. The Real Estate Board of New York plans to unveil a Web site this spring enabling the public to see up to 15,000 exclusive listings for Manhattan and Brooklyn to which only its members have access.
Smaller firms balked over the original fees proposed to join the service — $3,500 for small firms and $7,000 for large ones. Though that has been tabled for a more equitable fee structure, which has yet to be announced, some firms are still worried their listings will be overshadowed by larger firms.
Yet Barak Dunayer, of Barak Realty, believes the site could be a real boon.
“This is going to give boutique firms equal exposure,” he said. “Right now, the big firms get all the traffic on their Web sites because they have millions of dollars to optimize them.”
He also said it will be cheaper to advertise on REBNY’s site than on the New York Times’ listings — which REBNY hopes to eclipse. But, Dunayer added, “It’s going to take a lot of time and money to make the site the one and only destination.”
Sunday, January 28, 2007
Where is all this Money?
Easy Cash Uplifting Investors
By MICHAEL STOLER
January 25, 2007
The fuel behind New York's record-setting real estate bonanza is the sizzling market for capital, and both buyers and lenders predict that cheap financing will be available for real estate investors into the foreseeable future. The availability of investment capital set fire to the real estate investment sales market last year, when transactions topped $30 billion. Considering the preliminary sales that are in contract for 2007, I would not be surprised to see the following advertisement: "For sale in New York City, office buildings, rental apartment complexes, hotels, and retail locations, priced from $100 million to $2 billion. Financing available for up to 100% of total purchase price, nonrecourse, interest only, and flexible terms."
Real estate investors are confident capital will continue to flow into New York's office market, where vacancy rates are dropping and rents are on the rise. One of the most active lenders in 2006 was Wachovia Securities. Last year, the bank was the leading lender in the $5.9 billion financing for Peter Cooper Village and Stuyvesant Town, the largest mortgage ever provided for a single property. "Capital is plenty; it also is now a freely tradable commodity," a managing director at Wachovia Securities, Robert Verrone, said. "We only originate financing for what we can sell; so long as we can sell it, we will originate it."
The director of commercial and real estate lending for the New York City division of M&T Bank, Gino Martocci, said the city's office market "compares favorably against alternative investments for banks. Lenders are competing to provide such a significant portion of deal capitalization because they too are flush with capital, have few alternative investment options, and have not seen a significant credit event in real estate in more than 10 years. The net effect is to reduce risk premiums, reduce spread, loosen structures, and increase proceeds."
One of the most active buyers and sellers of office buildings in Manhattan in 2006 was Murray Hill Properties, which, with its joint venture partners, divested 135 W. 50th St. and 450 Lexington Ave., and acquired the building at One Park Ave. and the Brill Building. This year, it is marketing for sale the office building 417 Fifth Ave. A co-founder and principal at Murray Hill, Norman Sturner, said banks — like typical investors — need to put their deposits to work. " New York City being the real estate and finance capital, the banks are comfortable with raising the levels of the capital stack with owners and operators that they had ongoing successful relations in the past. I do not believe that there is a change in the foreseeable future for Manhattan," Mr. Sturner said.
He said the availability of capital is grounded in basic economics. "I have used the analogy before: If tomorrow there were no new diamonds being mined or added to the existing inventory, the price of diamonds would skyrocket. Similarly, there is very little office space being added to the Manhattan commercial real estate inventory, and prices are increasing at extraordinary rates. Rents have begun to increase at the same rapidity to balance the higher prices being paid for assets."
Not everyone is quite so bullish. The head of real estate in North America for HSH Nordbank, James Fitzgerald, likens the current market to a religious experience. "The last shall be first and the first shall be last," he said. "Hoping and praying is never a good business strategy, but that is exactly what some lenders and investors need to do based on their current spending spree. The last ones into this game will be the first one to lose — and lose big." The head of an investment fund who prefers not to be identified said lenders are aiming to offer more capital as a way to inflate their year-end bonuses. "Real estate developers and entrepreneurs will find deals to build and to invest as long as the money flows, the more the better. As long as the debt providers get paid their bonuses at the end of each year for the volume of business they produce, with no consequences for failure of the transaction down the road, then it will take a larger event for the capital to slow down," the source said. In 2006, RBS Greenwich Capital provided more than $12.5 billion in financing throughout the country, including the properties at 350 Madison Ave. and 1441 and 1410 Broadway. The managing director at Greenwich Capital, Chuck Rosenzweig, said the market characteristics have pushed lenders toward new extremes in their practices.
"It is the first time in recent memory that you see a large number of Wall Street lenders comfortable at 90 percent leverage and even higher, as bridge equity has become a product that many firms now offer. This is all a function of liquidity in the market as firms have been able to sell that debt in the capital markets, and place the high yield paper with real estate investment funds and hedge funds," Mr. Rosenzweig said.
One area of concern for many lenders is financing for new condominiums and land loans. A number of lenders have ceased lending in this asset class; most prudent ones stopped lending up to 18 months ago, experts say. Investment capital will be plentiful on the "near-term horizon," Mr. Rosenzweig said, but not for all real estate classes. "There has been a recent pullback from any markets for condominium deals and residential land," he added.
Mr. Martocci of M&T Bank said lenders "have tightened underwriting for new construction residential for sale and condo conversion deals over the past 12 months."
Mr. Verrone of Wachovia supports this assessment. "I don't like condominium loans, and don't do them anymore," he said.
The pause in condominium financing will allow the market to absorb the thousands of residential units in the pipeline, experts say. Currently, there are few defaults in the condominium conversion and construction loans, since the lenders have set up interest reserves for the projects. If a change in valuation of the project has occurred or costs have risen to complete the project, the day of reckoning for potential default may be still be 12 and 24 months away.
Mr. Rosenzweig says the lending climate in the capital markets can change quickly. "It is fair to say that prices for assets right now are very much driven by the cheap cost of debt capital. This liquidity, and the very tight pricing that comes with it, can change due to events that are completely outside the real estate industry, like the Russian debt crisis and the collapse of long-term capital in the fall of 1998. Borrowers understand this and are borrowing very aggressively right now, especially on a fixed-rate basis," he said.
A principal at Stellar Management, one of New York's most active investors, Robert Rosania, said the demand for real estate at historically low cap rates is a factor of the copious supply of money.
"This is not rocket science: With the market fresh with nearly $60 billion of ‘institutional equity' for acquisitions, the light appears to be green. However, anyone who tells you they know precisely what will happen is a liar, because of a thing called ‘event risk,'" Mr. Rosania said.
As long as the market is fueled by high leverage and cheap financing, backed by underlying higher leverage and still cheaper collateralized debt obligations, Mr. Rosania said "the bulls will run in Pamplona."
"When an event of significant enough magnitude occurs, like a credit blow up, a housing dive, asset default, or, God forbid, a geopolitical disaster, then folks will get gored," he said.
Last month, the chairman of BRT Realty Trust, Fred Gould, appeared on my television show and said real estate has become more like the stock market. These days, he said, the concept of cash flow is a lot less important than value, and everything is based on perceived value.
Mr. Fitzgerald of HSH Nordbank, who also appeared on my TV show, said, "Buy low, sell high, trade, trade, today."
" Mr. Gould's comments make sense, but the problem is that unlike the stock market, leverage still plays a most significant role. The liquidity of freely trading shares is not a plausible exit for real estate. All cash buyers may be coming — but not yet — especially when we have so much stupid money out there in the first loss position," Mr. Fitzgerald said.
"Or is it the venture capital formula, Do 10 deals, get three right, and it makes up for the seven losers? I don't know and neither do the investors putting up the dough. Several of my friends run hedge funds and have been complaining how they missed the real estate boat and they need to get in the game. I am sure they will find someone to help them spend their money. Last in, first out; an accounting rule or a prognostication for the coming capital losers in the real estate marketplace."
The practice of mezzanine lending, in which niche lenders accept more risk than a traditional lender but charge a premium to allow an investor to finance up to 100% of a deal, continues to fuel sales. "Mezzanine lenders are prepared to take the capital stacks to 90% or more, knowing that they can take over the properties if a default occurs because most of these lenders have operating subsidiaries that can operate the properties if they cover ownership," Mr. Sturner said.
"Condominium developments and land transactions have a bit harder time finding mezzanine, as a potential decline in value could easily erode the mezzanine player's capital position," he said.
While Mr. Sturner is bullish on New York City — where he says business is improving; employment continues to grow; fixed, long-term money is inexpensive, and the future continues to look bright — I have to concur with some prominent owners and investors who are cautiously optimistic about the capital markets in 2007.
Mr. Stoler, a contributing editor to The New York Sun, is a television broadcaster and senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.
By MICHAEL STOLER
January 25, 2007
The fuel behind New York's record-setting real estate bonanza is the sizzling market for capital, and both buyers and lenders predict that cheap financing will be available for real estate investors into the foreseeable future. The availability of investment capital set fire to the real estate investment sales market last year, when transactions topped $30 billion. Considering the preliminary sales that are in contract for 2007, I would not be surprised to see the following advertisement: "For sale in New York City, office buildings, rental apartment complexes, hotels, and retail locations, priced from $100 million to $2 billion. Financing available for up to 100% of total purchase price, nonrecourse, interest only, and flexible terms."
Real estate investors are confident capital will continue to flow into New York's office market, where vacancy rates are dropping and rents are on the rise. One of the most active lenders in 2006 was Wachovia Securities. Last year, the bank was the leading lender in the $5.9 billion financing for Peter Cooper Village and Stuyvesant Town, the largest mortgage ever provided for a single property. "Capital is plenty; it also is now a freely tradable commodity," a managing director at Wachovia Securities, Robert Verrone, said. "We only originate financing for what we can sell; so long as we can sell it, we will originate it."
The director of commercial and real estate lending for the New York City division of M&T Bank, Gino Martocci, said the city's office market "compares favorably against alternative investments for banks. Lenders are competing to provide such a significant portion of deal capitalization because they too are flush with capital, have few alternative investment options, and have not seen a significant credit event in real estate in more than 10 years. The net effect is to reduce risk premiums, reduce spread, loosen structures, and increase proceeds."
One of the most active buyers and sellers of office buildings in Manhattan in 2006 was Murray Hill Properties, which, with its joint venture partners, divested 135 W. 50th St. and 450 Lexington Ave., and acquired the building at One Park Ave. and the Brill Building. This year, it is marketing for sale the office building 417 Fifth Ave. A co-founder and principal at Murray Hill, Norman Sturner, said banks — like typical investors — need to put their deposits to work. " New York City being the real estate and finance capital, the banks are comfortable with raising the levels of the capital stack with owners and operators that they had ongoing successful relations in the past. I do not believe that there is a change in the foreseeable future for Manhattan," Mr. Sturner said.
He said the availability of capital is grounded in basic economics. "I have used the analogy before: If tomorrow there were no new diamonds being mined or added to the existing inventory, the price of diamonds would skyrocket. Similarly, there is very little office space being added to the Manhattan commercial real estate inventory, and prices are increasing at extraordinary rates. Rents have begun to increase at the same rapidity to balance the higher prices being paid for assets."
Not everyone is quite so bullish. The head of real estate in North America for HSH Nordbank, James Fitzgerald, likens the current market to a religious experience. "The last shall be first and the first shall be last," he said. "Hoping and praying is never a good business strategy, but that is exactly what some lenders and investors need to do based on their current spending spree. The last ones into this game will be the first one to lose — and lose big." The head of an investment fund who prefers not to be identified said lenders are aiming to offer more capital as a way to inflate their year-end bonuses. "Real estate developers and entrepreneurs will find deals to build and to invest as long as the money flows, the more the better. As long as the debt providers get paid their bonuses at the end of each year for the volume of business they produce, with no consequences for failure of the transaction down the road, then it will take a larger event for the capital to slow down," the source said. In 2006, RBS Greenwich Capital provided more than $12.5 billion in financing throughout the country, including the properties at 350 Madison Ave. and 1441 and 1410 Broadway. The managing director at Greenwich Capital, Chuck Rosenzweig, said the market characteristics have pushed lenders toward new extremes in their practices.
"It is the first time in recent memory that you see a large number of Wall Street lenders comfortable at 90 percent leverage and even higher, as bridge equity has become a product that many firms now offer. This is all a function of liquidity in the market as firms have been able to sell that debt in the capital markets, and place the high yield paper with real estate investment funds and hedge funds," Mr. Rosenzweig said.
One area of concern for many lenders is financing for new condominiums and land loans. A number of lenders have ceased lending in this asset class; most prudent ones stopped lending up to 18 months ago, experts say. Investment capital will be plentiful on the "near-term horizon," Mr. Rosenzweig said, but not for all real estate classes. "There has been a recent pullback from any markets for condominium deals and residential land," he added.
Mr. Martocci of M&T Bank said lenders "have tightened underwriting for new construction residential for sale and condo conversion deals over the past 12 months."
Mr. Verrone of Wachovia supports this assessment. "I don't like condominium loans, and don't do them anymore," he said.
The pause in condominium financing will allow the market to absorb the thousands of residential units in the pipeline, experts say. Currently, there are few defaults in the condominium conversion and construction loans, since the lenders have set up interest reserves for the projects. If a change in valuation of the project has occurred or costs have risen to complete the project, the day of reckoning for potential default may be still be 12 and 24 months away.
Mr. Rosenzweig says the lending climate in the capital markets can change quickly. "It is fair to say that prices for assets right now are very much driven by the cheap cost of debt capital. This liquidity, and the very tight pricing that comes with it, can change due to events that are completely outside the real estate industry, like the Russian debt crisis and the collapse of long-term capital in the fall of 1998. Borrowers understand this and are borrowing very aggressively right now, especially on a fixed-rate basis," he said.
A principal at Stellar Management, one of New York's most active investors, Robert Rosania, said the demand for real estate at historically low cap rates is a factor of the copious supply of money.
"This is not rocket science: With the market fresh with nearly $60 billion of ‘institutional equity' for acquisitions, the light appears to be green. However, anyone who tells you they know precisely what will happen is a liar, because of a thing called ‘event risk,'" Mr. Rosania said.
As long as the market is fueled by high leverage and cheap financing, backed by underlying higher leverage and still cheaper collateralized debt obligations, Mr. Rosania said "the bulls will run in Pamplona."
"When an event of significant enough magnitude occurs, like a credit blow up, a housing dive, asset default, or, God forbid, a geopolitical disaster, then folks will get gored," he said.
Last month, the chairman of BRT Realty Trust, Fred Gould, appeared on my television show and said real estate has become more like the stock market. These days, he said, the concept of cash flow is a lot less important than value, and everything is based on perceived value.
Mr. Fitzgerald of HSH Nordbank, who also appeared on my TV show, said, "Buy low, sell high, trade, trade, today."
" Mr. Gould's comments make sense, but the problem is that unlike the stock market, leverage still plays a most significant role. The liquidity of freely trading shares is not a plausible exit for real estate. All cash buyers may be coming — but not yet — especially when we have so much stupid money out there in the first loss position," Mr. Fitzgerald said.
"Or is it the venture capital formula, Do 10 deals, get three right, and it makes up for the seven losers? I don't know and neither do the investors putting up the dough. Several of my friends run hedge funds and have been complaining how they missed the real estate boat and they need to get in the game. I am sure they will find someone to help them spend their money. Last in, first out; an accounting rule or a prognostication for the coming capital losers in the real estate marketplace."
The practice of mezzanine lending, in which niche lenders accept more risk than a traditional lender but charge a premium to allow an investor to finance up to 100% of a deal, continues to fuel sales. "Mezzanine lenders are prepared to take the capital stacks to 90% or more, knowing that they can take over the properties if a default occurs because most of these lenders have operating subsidiaries that can operate the properties if they cover ownership," Mr. Sturner said.
"Condominium developments and land transactions have a bit harder time finding mezzanine, as a potential decline in value could easily erode the mezzanine player's capital position," he said.
While Mr. Sturner is bullish on New York City — where he says business is improving; employment continues to grow; fixed, long-term money is inexpensive, and the future continues to look bright — I have to concur with some prominent owners and investors who are cautiously optimistic about the capital markets in 2007.
Mr. Stoler, a contributing editor to The New York Sun, is a television broadcaster and senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.
Tuesday, January 16, 2007
An MTA land sale could imperil last four blocks of planned park, cut into developers' profits
January 2007
High Line's highest end faces trouble
An MTA land sale could imperil last four blocks of planned park, cut into developers' profits
By Gabby Warshawer
The Caledonia, a luxury building near the High Line, will have 200 condo units and 250 rental apartments. Plans to turn the northern MTA-owned section of the High Line into parkland may get derailed.The High Line, the former elevated rail line that ran though the backs of warehouses from the Meatpacking District through West Chelsea, is being readied for a transformation into a second-story level promenade and park along the old railbed. But last month, the city's transit authority revealed that its planned sale of the Hudson Yards marshaling and maintenance area could also leave the northern portion of the High Line, from 30th to 34th streets along 10th Avenue, vulnerable to demolition, rather than parkland redevelopment.No buyer has yet emerged, but the agency reserves the right to sell off its real estate holdings as it sees fit, and the possibility that four blocks of projected park would be clipped makes developers nervous.An MTA sale to a demolition-minded buyer would not only reduce the final size of the High Line, but could cut into developer profits if their planned projects aren't connected to the expected public space.Construction along the future High Line has been frenzied, and many developers use the pending park as their primary selling point.While optimism dominates talk and plans along the old trackbed, developers are wary of the MTA's plans to sell the northern parcel."I'm very sorry if the park cannot extend the whole way, but if it cannot, it will make the remaining portion more unique," said Andre Balazs, who is developing the Standard New York hotel at 844 Washington Street and a private club on 10th Avenue and 14th Street. "I think the public will be shortchanged if it happens, and I think it would be a shame."Balazs' projects are on the far south end of the future park, so they would not be directly impacted by an abbreviated version of the park. A residential development planned by the Related Companies, however, at 30th Street and 10th Avenue, would rise next to the affected segment.David Wine, vice chairman of the Related Companies, said Related is taking a wait-and-see approach with regards to the MTA's plans."The timing of the MTA's plans for the north end of the High Line is of interest to us because we don't want to do something that doesn't make sense in terms of what they do," said Wine, adding that Related expects the building's units to primarily be rentals.Regardless of what transpires above 30th Street, the overall feeling among industry professionals is that the buildings under construction in the High Line corridor will fare well."It's such a unique area; it's not going to be the next Soho or the next anywhere else," said broker Eric Anton, a senior vice president at Eastern Consolidated who has worked on several deals in the area. "Nowhere else in the city are you going to have this accumulation of art and a unique park. The views are going to be amazing."Wine said the excitement surrounding High Line developments is part of a larger trend of buyers looking along the entire far West Side, and that apartment seekers are now willing to consider buildings all the way from Battery Park City to the Upper West Side. He called the interest generated by another Related tower along the High Line, the Caledonia at 450 West 17th Street, "incredible" and said the building was 75 percent sold as of mid-December."The product and location have captivated people," he said. The Caledonia, which will have 200 condo units and 250 rental apartments, is a joint venture between Related and Taconic Investment Partners. It will feature a ground-floor, 3,500-square-foot Equinox health club, a chain owned by Related.According to Anton, it's luxury buildings like the Caledonia that will do best near the High Line."I'm not so bullish about the smaller buildings that don't have views, but I think the larger buildings that can provide amenities and luxury touches will do well," he said. "If people are going to pay a high price they want amenities."Buyers will have many choices. While a number of projects are still in the planning stages, hundreds of condo units are currently under construction in the area, most of them slated for large, full-service buildings (see below).Aside from the Caledonia, these include an 11-story condo at 520 West 19th Street; a 20-story condo tower at 535-541 West 19th Street; the 11-story High Line 519 on West 23rd Street; a tower planned on 10th and 23rd by Leviev Boymelgreen; and the 14-story Vesta 24 at 231-233 10th Avenue.Anton of Eastern Consolidated said that pricing for residential units along the High Line has been more or less holding steady, while "retail pricing is very good. And hotel pricing is great: The sky's the limit with that."In general, he said, buildings can't come up quickly enough: "There's just tons of demand."High Line developments, north to south30th Street and 10th AvenueSite of future residential tower developed by the Related Companies.Chelsea Arts Tower545 West 25th Street20-story commercial condo being developed by Jack Guttman and Young Woo & Associates.Vesta 24231-233 10th Avenue14-story condo being developed by the Vesta Group.High Line 519519 West 23rd Street11-story condo developed by Sleepy Hudson LLC.10th Avenue and 23rd StreetResidential tower developed by Leviev Boymelgreen.General Theological Seminary TowerNinth Avenue from 20th to 21st streets17-story tower with residential topping seminary developed by the Brodsky Organization.535-541 West 19th Street20-story condo tower being developed by Alf Naman Real Estate Advisors and Cape Advisors.IAC/InterActiveCorp headquarters540 West 19th Street10-story tower being developed by the Georgetown Company.520 West 19th Street11-story condo being developed by Bishopscourt Realty.The Caledonia450 West 17th Street26-story rental/condo being developed by the Related Companies and Taconic Investment Partners.14th Street and 10th Avenue10-story addition to warehouse will become a private club developed by Andre Balazs.The Standard New York844 Washington Street330-room hotel being developed by Andre Balazs.Southern entrance to the High Line820 Washington StreetPlanned Whitney Museum of American Art satellite.
High Line's highest end faces trouble
An MTA land sale could imperil last four blocks of planned park, cut into developers' profits
By Gabby Warshawer
The Caledonia, a luxury building near the High Line, will have 200 condo units and 250 rental apartments. Plans to turn the northern MTA-owned section of the High Line into parkland may get derailed.The High Line, the former elevated rail line that ran though the backs of warehouses from the Meatpacking District through West Chelsea, is being readied for a transformation into a second-story level promenade and park along the old railbed. But last month, the city's transit authority revealed that its planned sale of the Hudson Yards marshaling and maintenance area could also leave the northern portion of the High Line, from 30th to 34th streets along 10th Avenue, vulnerable to demolition, rather than parkland redevelopment.No buyer has yet emerged, but the agency reserves the right to sell off its real estate holdings as it sees fit, and the possibility that four blocks of projected park would be clipped makes developers nervous.An MTA sale to a demolition-minded buyer would not only reduce the final size of the High Line, but could cut into developer profits if their planned projects aren't connected to the expected public space.Construction along the future High Line has been frenzied, and many developers use the pending park as their primary selling point.While optimism dominates talk and plans along the old trackbed, developers are wary of the MTA's plans to sell the northern parcel."I'm very sorry if the park cannot extend the whole way, but if it cannot, it will make the remaining portion more unique," said Andre Balazs, who is developing the Standard New York hotel at 844 Washington Street and a private club on 10th Avenue and 14th Street. "I think the public will be shortchanged if it happens, and I think it would be a shame."Balazs' projects are on the far south end of the future park, so they would not be directly impacted by an abbreviated version of the park. A residential development planned by the Related Companies, however, at 30th Street and 10th Avenue, would rise next to the affected segment.David Wine, vice chairman of the Related Companies, said Related is taking a wait-and-see approach with regards to the MTA's plans."The timing of the MTA's plans for the north end of the High Line is of interest to us because we don't want to do something that doesn't make sense in terms of what they do," said Wine, adding that Related expects the building's units to primarily be rentals.Regardless of what transpires above 30th Street, the overall feeling among industry professionals is that the buildings under construction in the High Line corridor will fare well."It's such a unique area; it's not going to be the next Soho or the next anywhere else," said broker Eric Anton, a senior vice president at Eastern Consolidated who has worked on several deals in the area. "Nowhere else in the city are you going to have this accumulation of art and a unique park. The views are going to be amazing."Wine said the excitement surrounding High Line developments is part of a larger trend of buyers looking along the entire far West Side, and that apartment seekers are now willing to consider buildings all the way from Battery Park City to the Upper West Side. He called the interest generated by another Related tower along the High Line, the Caledonia at 450 West 17th Street, "incredible" and said the building was 75 percent sold as of mid-December."The product and location have captivated people," he said. The Caledonia, which will have 200 condo units and 250 rental apartments, is a joint venture between Related and Taconic Investment Partners. It will feature a ground-floor, 3,500-square-foot Equinox health club, a chain owned by Related.According to Anton, it's luxury buildings like the Caledonia that will do best near the High Line."I'm not so bullish about the smaller buildings that don't have views, but I think the larger buildings that can provide amenities and luxury touches will do well," he said. "If people are going to pay a high price they want amenities."Buyers will have many choices. While a number of projects are still in the planning stages, hundreds of condo units are currently under construction in the area, most of them slated for large, full-service buildings (see below).Aside from the Caledonia, these include an 11-story condo at 520 West 19th Street; a 20-story condo tower at 535-541 West 19th Street; the 11-story High Line 519 on West 23rd Street; a tower planned on 10th and 23rd by Leviev Boymelgreen; and the 14-story Vesta 24 at 231-233 10th Avenue.Anton of Eastern Consolidated said that pricing for residential units along the High Line has been more or less holding steady, while "retail pricing is very good. And hotel pricing is great: The sky's the limit with that."In general, he said, buildings can't come up quickly enough: "There's just tons of demand."High Line developments, north to south30th Street and 10th AvenueSite of future residential tower developed by the Related Companies.Chelsea Arts Tower545 West 25th Street20-story commercial condo being developed by Jack Guttman and Young Woo & Associates.Vesta 24231-233 10th Avenue14-story condo being developed by the Vesta Group.High Line 519519 West 23rd Street11-story condo developed by Sleepy Hudson LLC.10th Avenue and 23rd StreetResidential tower developed by Leviev Boymelgreen.General Theological Seminary TowerNinth Avenue from 20th to 21st streets17-story tower with residential topping seminary developed by the Brodsky Organization.535-541 West 19th Street20-story condo tower being developed by Alf Naman Real Estate Advisors and Cape Advisors.IAC/InterActiveCorp headquarters540 West 19th Street10-story tower being developed by the Georgetown Company.520 West 19th Street11-story condo being developed by Bishopscourt Realty.The Caledonia450 West 17th Street26-story rental/condo being developed by the Related Companies and Taconic Investment Partners.14th Street and 10th Avenue10-story addition to warehouse will become a private club developed by Andre Balazs.The Standard New York844 Washington Street330-room hotel being developed by Andre Balazs.Southern entrance to the High Line820 Washington StreetPlanned Whitney Museum of American Art satellite.
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