Apartments Try to Stay Afloat

By PRABHA NATARAJAN

The rapid reversal of fortunes in commercial real estate is taking down yet another sector: apartment complexes.

Owners and developers of multifamily buildings are trying to stay afloat as the deteriorating economy and escalating job losses create difficulties in raising rents and shortfalls in projected revenues from these buildings.

While sharp declines in retail and office sectors of commercial real estate have commanded attention in recent months, some analysts say deterioration in the multifamily sector is quickly catching up.

A downturn in this sector also drags in housing mortgage giants Fannie Mae and Freddie Mac, which are already hurting from losses in subprime and other risky home loans. Together, the two mortgage giants have nearly $200 billion of these loans on their books.

"On a broader scale, these loans are performing well relative to other segments in the market," said David Cardwell, vice president of capital markets at the National Multi Housing Council, a Washington group representing apartment owners. "But conventional wisdom on apartments is that it follows the trend in jobs. It takes a few months for job losses to trickle into the rental market, as people double up in apartments or move in with their folks."

Last week, the government reported that the U.S. jobless rate rose 0.4 percentage point to 7.2% for December. Less than a year ago, the rate stood at just 5%.

Much of the multifamily sector's problems center on troubles in converting apartments to condominiums, as is the case in Miami, or on the challenges in converting rent-controlled units to market-rate apartments, as in New York's Manhattan.

In Florida, California, Arizona and Nevada, the flood of unsold condominiums entering the apartment market and is lowering rents in those areas, Barclays Capital analysts say. That has resulted in lower revenues for owners, which in some cases is making it more difficult to keep up with mortgage payments.

Meanwhile, in New York, aggressive revenue projections and poor underwriting have dragged some recently sold large properties into trouble.

For instance, the $222.5 million loan taken by Rockpoint Group and Stellar Management to purchase the Riverton Apartments was transferred to special servicing in August as the buyers warned of an imminent default of the loan. By December, they had fallen behind in their mortgage payments. The 1,228-unit rent-controlled complex in Harlem is converting to market-rent units at a much slower pace than expected, according to a Moody's Investors Service report.

At the time of the loan securitization in 2007, reserves of $48.3 million were set aside for any shortfalls in debt service and property renovation. By September, the reserves had fallen to $10.8 million.

Similarly, at the Peter Cooper Village-Stuyvesant Town property on Manhattan's East Side, only 37% of the units were converted to market rents as of September, compared with 28.5% at the time of the loan securitization, according to Moody's. In 2006, at the time of the purchase by Tishman Speyer and Blackrock Realty Advisors, nearly half of the apartments were expected to be converted by 2008. The loan's $590 million reserve had dwindled to $200 million by September, which is expected to be depleted by the end of the third quarter of this year.

In November, the delinquency rate on securitized loans to apartment and condominium properties rose to 1.9%, a sharp jump from the 0.9% at the start of the year, according to Real-point LLC, a Horsham, Pa., rating firm that analyzes commercial-property mortgages and financing. Realpoint will have December data available at the end of this month.

Delinquent multifamily loans now add up to $3.17 billion and make up nearly 45% of the delinquencies affecting the nearly $1 trillion commercial mortgage-backed securities, Realpoint research shows.

At Fannie Mae, serious delinquency rates on multifamily loans doubled to 0.21% in October 2008 from 0.1% in January.

Write to Prabha Natarajan at prabha.natarajan@dowjones.com

Printed in The Wall Street Journal, page C11

 

 

 

Downturn Ends Building Boom in New York

By CHRISTINE HAUGHNEY

Published: December 26, 2008 New York Times

Nearly $5 billion in development projects in New York City have been delayed or canceled because of the economic crisis, an extraordinary body blow to an industry that last year provided 130,000 unionized jobs, according to numbers tracked by a local trade group.

 The setbacks for development — perhaps the single greatest economic force in the city over the last two decades — are likely to mean, in the words of one researcher, that the landscape of New York will be virtually unchanged for two years.

“There’s no way to finance a project,” said the researcher, Stephen R. Blank of the Urban Land Institute, a nonprofit group.

Charles Blaichman is not about to argue with that assessment. Looking south from the eighth floor of a half-finished office tower on 14th Street on a recent day, Mr. Blaichman pointed to buildings he had developed in the meatpacking district. But when he turned north to the blocks along the High Line, once among the most sought-after areas for development, he surveyed a landscape of frustration: the planned sites of three luxury hotels, all stalled by recession.

Several indicators show that developers nationwide have also been affected by the tighter lending markets. The growth rate for construction and land development loans shrunk drastically this year — to 0.08 percent through September, compared with 11.3 percent for all of 2007 and 25.7 percent in 2006, according to data tracked by the Federal Deposit Insurance Corporation.

And developers who have loans are missing payments. The percentage of loans in default nationwide jumped to 7.3 percent through September 2008, compared with 1 percent in 2007, according to data tracked by Reis Inc., a New York-based real estate research company.

New York’s development world is rife with such stories as developers who have been busy for years are killing projects or scrambling to avoid default because of the credit crunch.

Mr. Blaichman, who has built two dozen projects in the past 20 years, is struggling to borrow money: $370 million for the three hotels, which include a venture with Jay-Z, the hip-hop mogul. A year ago, it would have seemed a reasonable amount for Mr. Blaichman. Not now.

“Even the banks who want to give us money can’t,” he said.

The long-term impact is potentially immense, experts said. Construction generated more than $30 billion in economic activity in New York last year, said Louis J. Coletti, the chief executive of the Building Trades Employers’ Association. The $5 billion in canceled or delayed projects tracked by Mr. Coletti’s association include all types of construction: luxury high-rise buildings, office renovations for major banks and new hospital wings. Mr. Coletti’s association, which represents 27 contractor groups, is talking to the trade unions about accepting wage cuts or freezes. So far there is no deal.

Not surprisingly, unemployment in the construction industry is soaring: in October, it was up by more than 50 percent from the same period last year, labor statistics show.

Experience does not seem to matter. Over the past 15 years, Josh Guberman, 48, developed 28 condo buildings in Brooklyn and Manhattan, many of them purchased by well-paid bankers. He is cutting back to one project in 2009.

Donald Capoccia, 53, who has built roughly 4,500 condos and moderate-income housing units in all five boroughs, took the day after Thanksgiving off, for the first time in 20 years, because business was so slow. He is shifting his attention to projects like housing for the elderly on Staten Island, which the government seems willing to finance.

Some of their better known and even wealthier counterparts are facing the same problems. In August, Deutsche Bank started foreclosure proceedings against William S. Macklowe over his planned project at the former Drake Hotel on Park Avenue. Kent M. Swig, Mr. Macklowe’s brother-in-law, recently shut down the sales office for a condo tower planned for 25 Broad Street after his lender, Lehman Brothers, declared bankruptcy in September. Several commercial and residential brokers said they were spending nearly half their days advising developers who are trying to find new uses for sites they fear will not be profitable.

“That rug has been pulled out from under their feet,” said David Johnson, a real estate broker with Eastern Consolidated who was involved with selling the site for the proposed hotel to Mr. Blaichman, Jay-Z and their business partners for $66 million, which included the property and adjoining air rights. Mr. Johnson said that because many banks are not lending, the only option for many developers is to take on debt from less traditional lenders like foreign investors or private equity firms that charge interest rates as high as 20 percent.

That doesn’t mean that all construction in New York will grind to a halt immediately. Mr. Guberman is moving forward with one condo tower at 87th Street and Broadway that awaits approval for a loan; he expects it will attract buyers even in a slowing economy. Mr. Capoccia is trying to finish selling units at a Downtown Brooklyn condominium project, and is slowly moving ahead on applying for permits for an East Village project.

Mr. Blaichman, 54, is keeping busy with four buildings financed before the slowdown. He has found fashion and advertising firms to rent space in his tower at 450 West 14th Street and buyers for two downtown condo buildings. He recently rented a Lower East Side building to the School of Visual Arts as a dorm.

Mr. Blaichman had success in Greenwich Village and the meatpacking district, where he developed the private club SoHo House, the restaurant Spice Market and the Theory store. He had similar hopes for the area along the High Line, where he bought properties last year when they were fetching record prices.

An art collector, he considered the area destined for growth because of its many galleries and its proximity to the park being built on elevated railroad tracks that have given the area its name. The park, which extends 1.45 miles from Gansevoort Street to 34th Street, is expected to be completed in the spring.

Other developers have shown that buyers will pay high prices to be in the area. Condo projects designed by well-known architects like Jean Nouvel and Annabelle Selldorf have been eagerly anticipated. In recent months, buyers have paid $2 million for a two-bedroom unit and $3 million for a three-bedroom at Ms. Selldorf’s project, according to Streeteasy.com, a real estate Web site.

“It’s one of the greatest stretches of undeveloped areas,” Mr. Blaichman said. “I still think it’s going to take off.”

In August 2007, Mr. Blaichman bought the site and air rights of a former Time Warner Cable warehouse. He thought the neighborhood needed its first full-service five-star hotel, in contrast to the many boutique hotels sprouting up downtown. So with his partners, Jay-Z and Abram and Scott Shnay, he envisioned a hotel with a pool, gym, spa and multiple restaurants under a brand called J Hotels. But since his mortgage brokers started shopping in late summer for roughly $200 million in financing, they have only one serious prospect for a lender.

For now, he is seeking an extension on the mortgage — monthly payments are to begin in the coming months — and trying to rent the warehouse. (He currently has no income from the property.)

It is perhaps small comfort that his fellow developers are having as many problems getting loans. Shaya Boymelgreen had banks “pull back” recently on financing for a 107-unit rental tower the developer is building at 500 West 23rd Street, according to Sara Mirski, managing director of development for Boymelgreen Developers. The half-finished project looked abandoned on two recent visits, but Ms. Mirski said that construction will continue. Banks have “invited” the developer to reapply for a loan next year and have offered interim bridge loans for up to $30 million.

Mr. Blaichman cuts a more mellow figure than many other developers do. He avoids the real estate social scene, tries to turn his cellphone off after 6 p.m. and plays folk guitar in his spare time.

For now, Mr. Blaichman seems stoic about his plight. At a diner, he polished off a Swiss-cheese omelet and calmly noted that he had no near-term way to pay off his debts. He exercises several times a week and tells his three children to curb their shopping even as he regularly presses his mortgage bankers for answers.

“I sleep pretty well,” Mr. Blaichman said. “There’s nothing you can do in the middle of the night that will help your projects.”

But even when the lending market improves — in months, or years — restarting large-scale projects will not be a quick process. A freeze in development, in fact, could continue well after the recession ends.

Mr. Blank of the Urban Land Institute said he has taken to giving the following advice to real estate executives: “We told them to take up golf.”

This article has been revised to reflect the following correction:

Correction: December 31, 2008 
An article on Saturday about the end of the building boom in New York City referred incorrectly to the family relationship between the developers William S. Macklowe, whose planned project at the former Drake Hotel is in foreclosure, and Kent M. Swig, who shut down the sales office for a condominium tower on Broad Street after his lender, Lehman Brothers, declared bankruptcy. Mr. Swig is Mr. Macklowe’s brother-in-law, not his son-in-law.

From the museum to the iPhone, the new cartographers have arrived -- and they're transforming what "going digital" really means.

By training, they aren't really cartographers at all. They're architects, designers, and machine-learning specialists who are mining human behavior to build maps that are more about people than places. Like traditional cartography, the new maps combine science, technical skill, and aesthetics to display information spatially, but the information they display is radically different. And the map itself--dynamic, thematic, changeable--has become an instrument of discovery. That's why everybody from epidemiologists seeking to understand how an infectious disease is spreading to advertisers wanting to know where an ad will reach the most eyes is interested in their ability to reveal previously invisible patterns and relationships.

There is more and finer information available now, a planetload of accessible, aggregatable, and anonymous location data out there, much of it originating from the spread of mobile phones, GPS systems, and other wireless products with "device discovery" functionality. "We have this condition where digital technology is becoming increasingly smaller and distributed in the environment," says Carlo Ratti, director of SENSEable City Laboratory and associate professor of the practice of urban technologies at MIT. "In a certain sense, this is the first time ever we can describe a city in real time."

 

Geographical maps are the preferred canvas on which to visualize all these digital bread crumbs, but they are anything but static. "It's not just latitudes, longitudes, and streets, but, Who are these people hanging out in this place?" Tony Jebara, chief scientist at Sense Networks, explains. "These ideas go back. Shakespeare said, 'What is the city but the people?' And instead of saying here's the city and the street grid, you let the people define the city." There are also simply more people creating and editing maps. Online mapping tools like Google Maps have spawned endless interactive mash-ups that do everything from rate a neighborhood's walkability to calculate cab fares.

The best maps, of course, are functional and pretty.

 

There's a staggering amount of data powering these pretty maps, which depicts ongoing population changes across the earth. Each spike's highest or lowest point, depending on whether a city is growing or shrinking, represents the projected difference in population between 1990 and 2015. These figures were given life by Laura Kurgan, an architect and director of the Spatial Information Design Lab at Columbia University. Kurgan visualized the data by displaying longitude and latitude on the x-axis and animating the y-axis to show population for a particular year. The urban areas projected to grow the most: Beihai, China; Ghaziabad, India; and Sanaa, Yemen.

Population shifts: Cities

Detail from "Native Land: Stop, Eject," Cartier Foundation, Paris, November 21,2008, to March 30, 2009. Project team: Diller Scofidio + Renfro, Mark Hansen, Laura Kurgan, Ben Rubin. In collaboration with Jeremy Linzee, Robert Pietrusko, Stewart Smith, Aaron Meyers. Visualization of CIESIN Gridded Population of the World, 1990-2015.

 

The founder and creative director of Stamen Design in San Franciso, Rodenbeck has carved out a niche as a multidisciplinary designer with a serious technological bent. Recent projects range from a dynamic hurricane-tracking map for msnbc.com to a series of live interactive maps visualizing activity on the Web site digg.com. Much of his and his studio's emphasis is on creating interactive environments where users can explore data and discover patterns themselves.

ArtScope, San Francisco Museum of Modern Art

The museum asked Stamen Design to create a "map" for wandering online among thirty-six hundred works from its permanent collection. Stamen produced this giant, interactive matrix - or canvas, or "slippy map." We had a long back-and-forth about what we were going to name the thing," says Chad Coerver of SFMOMA. "Is it a browser? Is it a map? An online gallery? The fact that we had a difficult time coming to a consensus is probably the best indication that we've gotten our hands on something new and interesting." As a user moves the cursor over a piece, it enlarges and information about it appears on a side panel. You can find it at sfmoma.org/artscope.

 

An architect and civil engineer who practices in Turin, Italy, Ratti studies technology's effect on how people interact with their cities. Or in his own words, "How to marry concrete and silicon." In 2003, he established the SENSEable City Laboratory at MIT, where he is an associate professor of the practice for urban technologies. His lab's current work includes a New york City trash-tracking project in which trash will be digitally tagged with "smart dust" and tracked to its final destination, revealing inefficiencies in the waste-disposal system.

Real-Time Rome

Rattie overlaid live, aggregate data from existing mobile-phone and transportation networks during the course of two days onto a basic map of Rome. The result: a picture of the city as a pulsing organism.

 

A graduate of the Media Lab at MIT, Jebara combines computer science, statistics, and graphic design to create new ways for humans and computers to interact. He is now the director of Columbia University's Machine Learning Lab, which explores how to take massive amounts of existing GPS data and reduce it to more user-friendly forms. Jebara is also the chief scientist at the technology company Sense Networks, which has developed a proprietary analytics engine called Macrosense that collects huge streams of location data in real time for its consumer application, Citysense.

Citysense

A free mobile-phone application, Citysense locates people with similar interests in the same locale. By collecting various sources of GPS data, Citysense produces a visual description of the flow of people around a city. (It is available for Blackberry users in San Francisco and will be rolled out in new York and Chicago in 2009. An iPhone version is expected in December.) Citysense 2.0, out next year, will be able to build a model of a user's interests and where he or she spends time, and then "sense" where others with similar interests are at any moment. It will also place the user into a color-coded tribe, e.g., bankers are green, metalheads are red. You look at your phone and see a concentration-density map of where they're congregating.

Keep up the old chin

1) Keep up the entrepreneurial spirit. Being an entrepreneur has more risks, but also more rewards then traditional big business. Understanding and reacting to business drivers is what small business owners do every day. Big business has a harder time reacting. They tend to hunker down. Small businesses have been the growth engine that has pulled the US Economy out of previous downturns.  16 of the 30 corporations that make up the Dow Jones industrial average got their starts during the recession.

 

Disney (1923-24 recession)

Hewlett-Packard (Great Depression)

Microsoft (1975 recession)

MTV (1981 recession)

IPOD (2001 recession)

 

2) Tap into your existing customers for more revenue.  Existing clients are the best source for more business. Provide value to them.  Be the best you can be. Continue to build your brand and trust with them.  E-Newsletters are a great way to show your value and stay top of mind.

 

Thank you.

Nancy Ploeger-President 

Manhattan Chamber of Commerce
1375 Broadway, Third Floor · New York, New York 10018 

Standard & Poor Lower Ratings For Stuyvesant Town and Peter Cooper Bonds

Tishman Speyer Properties is in a pickle. After making the biggest real estate deal ever when it purchased Peter Cooper Village and Stuyvesant Town in Manhattan, the company took out bonds to cover the cost of 5.4 billion dollars.

However in the meantime the property values have dropped 10 percent on the two landmark communities and efforts to gentrify the communities and reduce the amount of rent controlled apartments faces tough community opposition.

The net result, less potential earnings and the companies reserve funds have been being spent forcing Standard & Poor to cut the bond ratings.

So now Tishman Speyer is caught in a pickle. They are facing higher costs on their bonds and have an impaired cash position so investments in Peter Cooper and Stuy Town will have to be cut back.

Was this New York’s greatest real estate boondoggle? MetLife is looking very smart right now getting this price and getting out of a Manhattan real estate market that is heading south.

And there was an immediate reaction in the real estate world: Tishman Speyer Properties, which controls Rockefeller Center, the Chrysler Building and scores of other properties, abruptly pulled out of a deal to buy the former Mobil Building, a 1.6 million-square-foot tower on 42nd Street, near Grand Central Terminal, for $400 million, two executives involved in the transaction said.

Commercial properties are not the only ones facing problems. On Friday, Standard & Poor’s dropped its rating on the bonds used in Tishman’s $5.4 billion purchase of the Stuyvesant Town and Peter Cooper Village apartment complexes in 2006, the biggest real estate deal in modern history. Standard & Poor’s said it cut the rating, in part, because of an estimated 10 percent decline in the properties’ value and the rapid depletion of reserve funds.

The rating reduction shows the growing nervousness of lenders and investors about such deals, which have often involved aggressive — critics say unrealistic — projections of future income. via  NYTimes.com.

How did Wall Street get into this mess?

The unexpected 228-205 defeat of the housing bailout in Congress Monday threw a curveball across Wall Street. It contributed to a large sell-off on Wall Street, where the bailout had already been "priced" into the market. The Dow shed just over 6 percent, the 18th largest drop in its history. But given the dire warnings about financial chaos that would result unless there were a bailout, this seems fairly modest.

Let's be clear: This is a Wall Street crisis, not a national economic crisis. The overall economy, while a bit weak, is still growing. Some politicians are comparing the current environment to the Great Depression. But in 1932, when the federal government last moved to bail out the banking sector, economic output had fallen 45 percent and unemployment was a staggering 24 percent. Today, economic output is actually up and unemployment is a historically modest 6.1 percent. 

The overall economy doesn't even face a liquidity crisis in the current turmoil. Consumer, commercial/industrial, and real estate loans are all up over last year. Main Street is doing fine. The liquidity crisis is confined to Wall Street, between and among investment banks, insurance and securities firms, and hedge funds. There is the possibility that the contagion could spread, but in a global capital market, this is hardly certain.

It is the intersection of several underlying trends that have brought us to this point, not a breakdown in any specific part of the financial sector. The fundamental flaw with the bailout approach is that it ignores these trends and simply seeks to shore up the finances of certain Wall Street institutions. 

Mortgage-backed securities (MBSes) are the principal source of pain in the current environment. Investment houses would bundle individual mortgages from several banks together into a bond-like product that would be sold to individual investors. Mortgages have historically been seen as among the safest investments. In an era of rising house values, "safe" became "guaranteed returns."

One of the major factors pushing investors into these securities was the Federal Reserve's weak money policy. Immediately after the terrorist attacks of 2001, the Fed began a sustained period of easing interest rates. Its efforts went so far that, at one point in 2003, we had effectively negative interest rates. Institutional investments needed a place to park money and earn some kind of return. Mortgage-backed securities became a favorite investment vehicle. Under traditional models, they were very safe and, because of Fed policy, even the most conservative fund could earn better returns than they could on treasury notes. 

In the early years of this century, mortgage-backed securities exploded. Their growth provided unprecedented levels of capital in the mortgage market. There was a lot more money available to underwrite mortgages. At the same time, investment houses were looking to replace the healthy fees earned during the dot com bubble. MBSes had fat margins, so everyone jumped into the game.

The additional capital to underwrite mortgages was a good thing...up to a point. Homeownership expanded throughout the decade. Over the last few decades, the American homeownership ratehas been around 60 to 62 percent. At the height of the bubble, homeownership was around 70 percent. It is clear now that many people who got mortgages at the height of the bubble should not have. But Wall Street needed to feed the MBS stream.

At the same time, Fannie Mae and Freddie Mac were going through a crisis. In 2003 and 2004, an accounting scandal was revealed. The two public-private partnerships were cooking the books to show phantom profits. The Bush administration and its allies on the Hill pushed a strong bill to reform how these institutions operated. The measure came very close to passing, but Fannie and Freddie cut a deal. They would refocus on expanding mortgages for low-income borrowers if the feds kept out of their operations. The bargain worked. Virtually all the Democrats and a few Republicans backed the two companies and the reform effort failed.

Fannie and Freddie then went on a subprime bender. They made it clear that they wanted to buy all the subprime or Alt-A mortgages that they could find, eventually acquiring around $1 trillion of the paper. The market responded. In 2003 subprime mortgages made up less than 8 percent of all mortgages. By 2006, they were over 20 percent. Banks knew they could sell subprime products to Fannie and Freddie. Investments banks realized that if they laced ever increasing amounts of subprime mortgages into the MBSes, they could juice the returns and so earn bigger fees. The rating agencies, thinking they were simply dealing with traditional mortgages, didn't look under the hood.

Unfortunately, after several years of a housing boom, the available pool of households who could responsibly use the more exotic financing products had dried up. In short, there were no more people who traditionally qualified for even a subprime mortgage. However, Fannie and Freddie were still signaling that they wanted to buy these products. At the same time, activist groups were agitating for more lending to low-income families. Banks realized they could make even more exotic loan products (e.g., interest-only loans), get the activists off their backs, and immediately diffuse their risk by selling the mortgages into MBSes. After all, Fannie and Freddie would buy anything.

Everything worked as long as housing prices continued to rise. The most pessimistic scenarios on Wall Street showed a leveling off of housing prices; no one foresaw an actual decline in prices. Suddenly, though, there weren't enough buyers. In hot real estate markets, builders raced to bring inventory to market that they thought was inexhaustible. But at this point everyone (essentially) who could possibly qualify for a mortgage had received one. At the same time, the first wave of the more exotic mortgages began to falter. Interest rates on adjustable rate mortgages moved higher—the Fed was finally tightening the money flow—and mortgages that were initially interest-only were close to resetting, with monthly payments jumping to include principal. A not insignificant number of these mortgages moved into default and foreclosure. 

The overall numbers moving into foreclosure were small. Someone simply looking at housing stats could be forgiven for wondering what all the fuss is about. Nationally, the number of mortgages moving into foreclosure is just around 1 to 2 percent, suggesting that 98 to 99 percent of mortgages are sound. But the foreclosed mortgages punched way above their weight class; they were laced throughout the MBS market.

Then the MBS market collapsed. The complexity of these financial products cannot be overstated. They usually had two or three "tranches," different baskets of mortgages that paid out in different ways. Worse, as they moved through the system—being bought and sold by different firms—they were sliced and diced in varying ways. A MBS owned by one firm could be very different when it was sold to another.

No one fully understood how exposed the MBS were to the rising foreclosures. The market for them dried up. No one traded them. The market became effectively "illiquid." American accounting standards, however, required firms to use "mark-to-market" to value their assets. This means that you value your assets based on what you could sell them for today. Because no one would trade MBSes, most had to be "marked" at something close to zero.

This threw off banks' capital requirements. Under U.S. regulations, banks have to have a certain percentage of assets to back up the loans they make. Lots of banks and financial institutions had MBS assets on their books. With these moving to zero, they didn't have enough capital on hand for the loans that were outstanding. They rushed to raise capital, which raised fears about their solvency and compounded into a self-fulfilling prophecy.

We should pause here to note that two simple regulatory tweaks could have prevented much of the carnage. Suspending mark-to-market accounting rules (you could use a 5-year rolling average instead, for example) would have shored up the balance sheets. And a temporary easing of capital requirements would have provided banks breathing room to sort out the MBS mess. Although it is hard to fix an exact price for these in this market, they aren't worth zero.

Alas, the Fed and the Treasury decided simply to provide the capital to meet the regulatory requirements. They moved into crisis mode, making a series of tactical moves to deal with specific, present challenges. The first misstep, in March, was to force a hostile takeover of Bear Stearns. The Fed put up $30-40 billion to back JP Morgan's takeover of the investment bank. In the long term, it probably would have been better to let the bank fail and go into bankruptcy. That would have set in motion legal proceedings that would have established a baseline price for MBSes. From this established price, banks could sort out their balance sheets.

It is worth noting that immediately after the collapse of Bears Stearns, rumors quickly circulated on the Street of trouble at Lehman Brothers. Lehman went on a PR offensive to beat back those rumors. The company was successful, but then did nothing over the next several months to shore up its balance sheet. Their recent demise was largely their own doing. 

The collapse of the MBS market now started to pollute other financial products. (The Fed moves did nothing to deal with the MBS market, but simply provided temporary means to cope with it.) Credit default swaps and derivatives, both of which amount to hedges against the risk of bonds defaulting, came due. Suddenly, stable firms like AIG were overexposed. Insurance companies regularly sell these swaps, as an insurance policy against bonds defaulting. Traditionally they are fairly conservative investment products. These developments threw off the accounting in one division of AIG, threatening the rest of the firm. Given a few days, AIG could have sold enough assets to cover the spread, but iron-clad accounting regulations precluded this. So the government stepped in. 

The one-two punch of Lehman's failure and the government's $85 billion bailout of AIG on September 16 seriously spooked the Street and the Bush administration. With Fannie Mae and Freddie Mac already in government receivership, there were fears that the MBS weakness would spread through the entire financial system. There was a big sell-off on the Dow. The next day, the government announced there would be a bold rescue plan. The marketrebounded. Details emerged over the weekend. On Monday, the Dow had another sell-off. But, the most important signal was the rise of oil. The spot price for October delivery of oil jumped $25 a barrel. Some of this was covering trades, but a sizable amount of this appreciation was probably a "flight to quality," a place to park money while everything was sorted out. It was also a signal that the government's plan might not work.

The original plan crafted by Treasury would authorize the department to spend up to $700 billion to buy MBSes and other "toxic" debt and thereby remove them from banks' balance sheets. With the "bad loans" off the books, the banks would become sound. Because it was assumed that the MBS market was "illiquid," the government would become the buyer of last resort for these products. There is a certain simple elegance to the plan. 

Except that no market is truly illiquid. It just isn't liquid at the price you want to sell. This summer,Merrill Lynch unloaded a bunch of bad debt at 22 cents on the dollar. There are likely plenty of buyers for the banks' bad debt, just not at the price the banks would prefer. Enter the government, which clearly intends to purchase MBSes at some premium above the market price. That was the nature of the bailout that failed on Monday.

Congressional leaders have vowed to bring a new proposal for a vote, possibly as soon as Thursday, proving yet again that Washington is fertile ground for really bad ideas. But with the market rebounding—as of this writing the Dow was up almost 300 points—and public opposition hardening, signs are emerging that banks are starting to clean house. The crisis may have already peaked. Of course, Congress' ability to further screw this up can't be overstated.

Mike Flynn is director of government affairs at the Reason Foundation

Some Luxury Properties See Slowdown as Jittery Buyers Head for Exits

Wall Street's Woes Hit Highest End

New York

For months, as housing values were falling for midsize ranch houses in Stockton, Calif., and Las Vegas high-rises, sales of high-end properties in financial centers like London, New York and San Francisco continued to percolate along.

But that was before last week, when turmoil in the credit markets brought down Lehman Brothers Holdings and imperiled thousands of high-paying jobs. While those rare properties priced at $20 million or more are still holding up, there are signs that the crisis is exacerbating a downturn that was already plaguing properties in the $2 million to $10 million range, a market often sought by Wall Street workers.

Since last Thursday, there have been 200 price cuts on properties listed at less than $10 million on Manhattan's Upper East Side or Upper West Side -- a 17% jump from the week before. Deanna Kory, a broker with New York-based Corcoran Group who's handling nearly two-dozen properties priced between $2 million and $10 million, says her showings are down by about 40% in the last two weeks compared to the same time last year. A slew of new buildings set to open in the next year will only increase supply.

The impact is reaching beyond Manhattan. On Massachusetts's North Shore, where the average sale price of luxury homes is about $3 million, Lanse L. Robb says he's lost more than $15 million in listings and transactions in the last week. First, prospective buyers for a $4 million waterfront home canceled their showing. Then two clients spooked by the financial meltdown held off listing their houses or looking for new ones.

One buyer who was poised to put an offer on a $15.7 million. 10-acre oceanfront estate in Manchester-by-the-Sea suddenly stopped returning Mr. Robb's calls. "I still haven't heard back," says Mr. Robb, of Christie's Great Estates affiliate LandVest. "It's total silence."

In San Francisco, a buyer in the market for an $8 million to $10 million property told Mark Allan Levinson last week to hold off on the search because his stock portfolio had just taken a big hit. "People are still buying, but they're not quite as bullish," says Mr. Levinson, of Sotheby's International Realty in San Francisco.

 

Last Wednesday, a New York City buyer haggling over the purchase of a $1.9 million apartment used last week's turbulence to win an additional $100,000 discount. Arguing the situation had dramatically changed, the buyer contended that the market was headed for a steep decline. "He had lowballed the price to start with," says Anne Snee, a broker at Corcoran. "But given what's going on, I'm not sure that [the sellers] didn't make the right decision."

So far, the strongest part of the high-end market are the few "trophy" properties -- penthouses and other apartments with one-of-a-kind features that rarely come up for sale. "There are always people with money. Somebody's always on the other side of these crises," says David Ogilvy, a broker in Greenwich, Conn., who this year sold a $30 million house -- the second-most-expensive house ever sold in the area.

In New York on Tuesday, 50 people perused a 5,500-square-foot duplex penthouse on an in-demand Park Avenue block. Put on the market that very day, the 10-room cooperative apartment once owned by Broadway playwright and director Moss Hart and actress Kitty Carlisle boasts high ceilings, stunning city views and a $20 million pricetag.

According to Katherine Marshall, the broker whose family owns the unit, five prospective buyers have already returned to check out the apartment a second time.

Leighton Candler, a broker with Corcoran, says she has seen solid buyer interest in her top-shelf listings, which include a $46 million penthouse at 778 Park Ave. Previously owned by Manhattan socialite Brooke Astor, the apartment features 14 rooms, six terraces, five wood-burning fireplaces and city views.

Ms. Candler is also selling a $46.5 million penthouse at 1020 Fifth Ave., with a 40-foot grand salon and views of Central Park and the Metropolitan Museum of Art. It has been owned by the same family since it was built in 1925.

Just a few weeks ago, San Francisco saw one of its priciest listings ever, a 20,000-square-foot penthouse topping the St. Regis Residences. Encompassing two floors and featuring four terraces as well as a two-story waterfall, the still-unfinished unit has an asking price of $70 million.

So far, places like New York and San Francisco are still faring better than many other areas of the U.S., particularly areas of Southern California and Florida. "I think everyone is taking a hit," says Suzanne Perkins of Sotheby's in Santa Barbara, Calif., where prices have fallen 20% in the last year. "I still have buyers in the $20 million range, but they're looking for deals and they're looking for sellers who will negotiate."

In the run-up to the real-estate boom, brokers sometimes slapped headline-grabbing asking prices on highly desirable homes just to drum up interest and create buzz. Now, many of the tricks brokers are using to sell properties at the high-end are the same ones used with their more modest counterparts. The first and foremost: persuading the seller to list the home at an attractive price.

In Miami, Nelson Gonzalez of Esslingler Wooten Maxwell Realtors says he recently had to tell a client who wants to put his house on the market for $25 million to $30 million that it's really worth about half that amount. "I'm not willing to just put it on the market at the seller's pricing. I'm putting things on the market that are priced so they will sell," says Mr. Gonzalez.

Amid the financial crisis, agents say many buyers are also more reluctant to buy splashy properties for reasons other than the cost. "I don't think anybody is going to be bidding for at least the next several weeks," says Kirk Henckels of Stribling Private Brokerage. "You'd feel pretty silly walking into a cocktail party today and saying you bought an apartment today."

The Real Story

Lavish New York City Condo Project Contends With Lenders' New Demands

By ALEX FRANGOS
August 20, 2008; Page C1

To see how difficult the condominium-development market has become, consider the plight of 100 Eleventh Ave., which was designed to be one of the hottest addresses in New York.
Developers Craig Wood and Curtis Bashaw hired cutting-edge French architect Jean Nouvel to design a 23-story building that features a shimmering facade with thousands of unusually shaped windows looking out on the Hudson River. High-end buyers such as Blackstone Group's incoming chief financial officer, Laurence Tosi, and fashion photographer Mario Testino plunked down deposits to purchase apartments, according to documents and people familiar with the project. The pick seemed like a coup when Mr. Nouvel won the Pritzker Prize this year, the top award in modern architecture.
But like many other real-estate developers, Messrs. Wood and Bashaw have learned that there are no sure things in the current credit climate. Some $50 million over budget and nearly a year behind schedule, their company, Cape Advisors Inc., is under the gun to refinance its construction loan in the midst of pouring concrete, or it risks the possibility of having to halt work next month, according to several people familiar with the project.
A Cape spokeswoman says that there is "huge interest" from potential investors. The developers could strike a deal with new investors as early as Friday, according to two people familiar with the deal. But that unnamed capital source is expected to get a 25% return, slashing into profits Cape hoped to see from the project, these people say.
The developer's predicament comes at a time when the biggest condominium construction lenders of the boom times -- like iStar Financial Inc. and Corus Bankshares Inc. -- are under the gun themselves, facing skyrocketing defaults and plummeting stock prices. In this eat-or-be-eaten world, lenders are squeezing developers like Cape Advisors that have stumbled, several people familiar with the market say.
Indeed, iStar Financial is forcing the developers to refinance a $110 million first-mortgage construction loan with much higher rates, according to people familiar with the project. IStar is asking that the interest rate go from three points above the London interbank offered rate, a common benchmark interest rate, to six points above Libor. The bank is also asking for a $6 million fee to reprocess the loan.
An iStar spokesman, Andrew Backman, declined to comment on this specific project, but in a statement said in general the lender works with troubled borrowers to "find an appropriate resolution for any issues," and that may include "an appropriate extension fee and a new 'market interest rate' which will compensate us for these concessions."
Messrs. Wood and Bashaw declined to comment. People close to the company play down the problems and note that the project has presold 70% of its units for $190 million, or $2,300 a square foot, considered high even in New York.
Making matters worse, however, the Manhattan real-estate market, once seen as an island separated from the national housing decline, has shown signs of weakness. Inventory of condos and co-ops are up 37% in July from the year before, according to Miller Samuel Inc., a market-research firm. Jonathan Miller, Miller Samuel's chief executive, says market prices are "moving sideways," and he is concerned about how the market will perform in 2009.
But internal project documents reviewed by The Wall Street Journal paint a troubled picture. Cape Advisors, like many real-estate developers, failed to keep costs down amid construction problems and sprung for even more lavish fixtures and finishing touches midway through development. Units that lack full river views and that face a women's prison are proving a tough sell.
Cost overruns were "less relevant when sales prices were going up every week and Wall Street bonuses going up and the pool of buyers growing," says Ronnie Levine, a managing director at Meridian Capital Group, a brokerage that arranges financing for real-estate projects. But in today's credit-constrained environment, even a high-profile project in the less hard-hit Manhattan market is struggling to raise cash.
Cape Advisors acquired the small plot of land in December 2005 for $47 million. It sits next to architect Frank Gehry's swooping IAC/InterActiveCorp's headquarters building and among trendy art galleries. Most apartments will have Hudson River views; the women's prison is on the other side.
Well-heeled buyers include R. Martin Chavez, a partner at Goldman Sachs Group, Inc., who is slated to purchase the top floor for $20 million. A limited-liability company attached to shipping heir Michael Recanati purchased eight apartments over two floors to join into a single $24.5 million manse, according to the documents.
Insiders also took pieces, including three brokers with the Corcoran Sunshine Marketing Group, the brokerage handling the building. A spokesman for Mr. Recanati declined to comment. Mr. Chavez didn't return calls. Blackstone's Mr. Tosi didn't return requests for comment. A spokesman for Mr. Testino, the photographer, declined to comment.
But the documents show how costs escalated quickly. Foundation work found mudlike pudding instead of bedrock, causing a 10-month delay. The cost of concrete swelled from a budgeted $8.3 million to $14.3 million. The developers upped the ante on the interior design, tripling the price for flooring to $3.1 million.
Mr. Nouvel's intricate facade proved complicated and is currently being assembled in China and expected to cost $14 million, $1 million more than budgeted. The marketing budget increased from $1 million to $4 million. Because of design changes Mr. Nouvel is now expected to charge $1.3 million instead of $600,000. The fee for the local architects, Beyer Blinder Belle, went from $700,000 to $2.7 million. Mr. Nouvel, the lead architect, declined to comment.
In total, the budget has swelled to $205 million from $151 million, and the target opening of Dec. 1, 2008, has been pushed back six to nine months. As costs mounted, Cape Advisors in the spring tried to raise money by replacing its $110 million construction loan from iStar Financial with a $126 million loan from condo specialist lender Corus Bank. But the Corus deal didn't gel, forcing Cape to look for more equity from outside investors. Cape has put in $19 million in cash as equity in the project, according to documents. Representatives for Corus declined to comment.
Buyers, who had once expected to take ownership by year's end, now aren't slated to move in until summer 2009. Their deposits are in escrow. The sales contract will make it difficult to pull out without litigation. However, if delays push the closings into 2010, the buyers could have greater recourse to pull their deposits, according to people familiar with the project.