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Rentals, Investing

[REIS Report] US Apartment Vacancy Rate 7.8%, 23 Year High

October 7, 2009 | 10:56 pm | |

[click to expand] source: Calculated Risk

On Thursday (in about an hour) we are releasing our 3Q 2009 Manhattan Rental Market Overview. In the meantime, the REIS report is a wake up call to the economic realities of the apartment market in New York and the US.

The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.

This is the seventh straight quarter where less space has been rented. Net effective rents (face rent less concessions like free rent and payment of commissions) has fallen sharply since the Lehman bankruptcy. REIS sees vacancy rates peaking in a year and rents declining through 2011.

Why? Rising unemployment and 7.2M jobs lost in the recession so far.

New York vacancies jumped to 11.4 percent in the third quarter from 6.6 percent a year earlier, and the city’s effective rents tumbled 18.5 percent, Reis said.

The drop in rents is about twice the decline New York experienced in 2002, following the Sept. 11, 2001, terrorist attacks. Rents fell 9.3 percent that year, Calanog said.

That’s why landlords are aggressively focused on tenant retention. The New York balcony BBQ conversation is dominated by “how much the landlord knocked off the rent to get me to renew.”

Pollyanna has moved out.


[Under The Mattress] Private Equity Is Absent From FDIC Housing Market Solution

October 6, 2009 | 12:20 am | |

There was a recent article in Fortune that outlined the bias of the FDIC against private equity (hat tip: Bank Lawyer’s Blog), to the point where a foreign bank beat out a consortium of U.S. investors including Blackstone Group and TPG.

The common perception is the private equity always behaves like this fascinating article about the fall of Simmons called “Profits for Buyout Firms as Company Debt Soared” subtitled: Flipped – how private equity dealmakers can win while there companies lose.

I highly recommend the above NYT article, and the video series, although anti-private equity.

Like homeowners under water with their mortgages, corporations can also be in the same predicament. And like the mortgage lenders who pushed bad mortgages, private equity also burdened perfectly good companies with excess debt.

Just as with the housing market, the good times ended when the economy fell into recession and the credit markets froze. Simmons is now groaning under a huge amount of debt at a time when its sales are slowing. And this time there is no escaping by finding yet another buyer willing to shoulder its entire burden.

Whatever the approach, high leverage is vulnerable economic swings. Private equity serves a role just like mortgage lending does. We are currently in vilify everyone mode.

However, I’m not sure that the FDIC is being prudent for good reason. Perhaps they are hoping to find money under the (Simmons) mattress.


Moody’s Overcorrects – 10 Years To Go Before Housing Recovery

September 21, 2009 | 1:11 am | |

I feel like Moody’s, in their report on the housing recovery, is overreaching.

They suggest that housing won’t recover for a decade.

Moody’s Investors Service threw cold water on optimistic projections of a V-shaped recovery in the battered U.S. housing market, predicting it could take more than 10 years to get back to boom-level prices.

They define “Recovery” as getting back the 40% peak to trough decline of the past several years.

MY KEY POINT – Their 10 year recovery benchmark is predicated on returning to credit-on-steroid-fueled-housing-levels which I believe most people now realize was not actually real. Therefore, the 10 year projection is based on a false premise and unfairly negative. For example, if housing prices remain flat for the next 5 years, don’t you think most will feel like housing has recovered (even if flat doesn’t = recovery by definition)?

It is strange to see Moody’s so ultra negative on a market aftermath that they help create since everything was AAA a few years ago. (Sorry, but I am annoyed).

Their key points:

  • It will take ten years to get back the 40% peak to trough that was lost
  • The downturn will over correct, meaning a longer time to get back.
  • Foreclosures and oversupply
  • Hard hit states will be the last to recover

While we are being dire – here’s a nice global recession map.

Click to expand

And map the US recovery – which states are recovering (after all, like real estate, all recessions are local).

[Rating Agencies] SEC New Rules Try Reduce Conflict of Interest

September 21, 2009 | 12:30 am |

Here’s a great piece in WaPo by Steven Pearlstein that outlines the trouble with rating agencies.

One thing you learn from booms and busts is the importance of gatekeepers — those professionals who are supposed to safeguard the system and keep markets honest. When gatekeepers are compromised or fall down on the job, confidence evaporates and markets collapse.

And its been wrong for a while…

starting in the mid-1970s, following a number of high-profile bankruptcies, people decided it was important to make credit ratings publicly available to all investors. Companies that issued bonds began paying for the ratings themselves, and it didn’t take long before agencies figured out that it was better for business if their ratings were a bit higher and their analysts were a bit slower to issue downgrades

Finally, after more than a year

the SEC rolled out a bunch of new rules and proposals meant to purge conflict of interest and ineptitude from the credit-ratings agencies—that group of companies whose greatest hits include considering Enron investment-grade until four days before it went bankrupt and, most recently, the “AAA-rated” CDO.

In 2005, I had lunch with a bunch of investment bankers and they spent most of the meal ripping the incompetence of the rating agencies – how they couldn’t keep up with the new financial products and the disrespect for their “hand in the cookie jar” arrangement.

As it stands now, you can’t really build investor confidence in the secondary mortgage market until you (substantially) remove self-dealing. Rating agencies were paid by the banks whose paper they rated. Crazy.

The Commission approved a series of proposals designed to strengthen its oversight of credit ratings agencies, enhance disclosure and improve the quality of credit ratings. The proposals would improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.

And thats not all – California is going after the agencies themselves.

The three top agencies — McGraw-Hill’s (MHP, Fortune 500) Standard & Poor’s, Moody’s (MCO) Investors Service and the Fitch unit of France’s Fimalac — raked in huge fees in exchange for assigning high ratings to “complicated financial instruments, including securities backed by subprime mortgages, making them appear as safe as government-issued Treasury bonds,” Brown’s office said in a statement Thursday morning.

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[92Y Tribeca] The New World of New York City Rentals with

July 27, 2009 | 10:57 pm | | Public |

I’m really looking forward to this one.

Lockhart Steele, blogfather of Curbed invited both me and CEO Dottie Herman of Prudential Douglas Elliman to talk rental market at the 92Y Tribeca this Thursday.

The New World of New York City Rentals with [92Y Tribeca]

I hope you can join us.

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Case-Shiller Index: 18.7% Becomes 18.1% = Market Falling, Just Not As Much

June 30, 2009 | 2:54 pm | |

Here’s a cool WSJ interactive map on the results and here is the official CSI press release.

The general media coverage focus on the April S&P Case Shiller numbers talks a lot about the 3rd consecutive month of the ease in the rate of price declines. But the jobs outlook slipped, sapping consumer confidence.

An interesting, and in my view, likely housing double dip may be seen in the Case Shiller Index caused by performance differences in the bottom and and top half the the market.

Here’s the 20-city breakdown:

While the Case Shiller Index isn’t a tool to price specific property or markets, it shows macro trends and does a lot to set consumer housing market psychology.

Here’s Shiller’s interview on Fox Business today (I was interviewed by the same anchors about 30 minutes later on the issue of HVCC) talking about his new trading tool for housing. Mike at Altos Research does a brilliant job explaining how the new ETF works.

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[The Housing Helix Podcast] Noah Rosenblatt,, Real Estate Broker, Day Trader

June 25, 2009 | 11:00 pm | Podcasts |

I speak with my good friend Noah Rosenblatt, creator of the award winning Manhattan real estate economics blog, Manhattan real estate broker and former day trader.

Check out the podcast.

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

[Vortex] Commercial Grade: A Quarter Century of Cap Rates (a commercial appraiser’s dream!)

June 15, 2009 | 6:00 am |


Guest Appraiser Columnist:
John Cicero, MAI, CRE, FRICS

John provides commentary on issues affecting real estate appraisers, with specific focus on commercial valuation. He is a partner of mine in our commercial real estate valuation concern Miller Cicero, LLC and he is, depending on what day of the week it is, one of the smartest guys I know.
…Jonathan Miller

Bob Knakal, Chairman of investment sales brokerage firm, Massey Knakal Realty Services, recently released an excellent commentary on a 25-year history of the New York City multifamily market. Using actual sales data from 1984 to the present (including cap rate data from 2005 to 2008 compiled by my firm, Miller Cicero, LLC).

In addition to examining historical cap rates and gross rent multipliers over time, the report analyzes cap rates relative to mortgage rates and the yields on 10-year T-bills. An excerpt:

From 1994 through 1999, we saw slow steady declines in cap rates, with slightly positive leverage and risk premiums within a range of 100 to 250 basis points…Throughout the 25 years of this analysis, this period was the most stable-and I attribute this stability directly to the very disciplined lending practices of debt providers.

It’s actually fascinating (at least for a commercial appraisal nerd like me!) to see how many NYC multifamily property was routinely purchased with negative leverage (i.e. at cap rates below mortgage rates. In fact the past five years has been the biggest period of negative leverage buying since the mid 1980’s. However, with the more stringent underwriting now in place, the NYC multifamily market seems poised for another (surprisingly rare) period of positive leverage.

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[Miller Cicero] 1Q 09 Manhattan Building Sales Report Is Available For Download

May 22, 2009 | 5:57 pm | Reports |

Our commercial advisory firm just released the Manhattan Building Sales Report prepared in conjunction with Massey Knakal, a leading commercial real estate brokerage firm.

My commercial valuation partner John Cicero, MAI in our firm Miller Cicero oversees the report preparation. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales.

The format has changed to quarterly and the expanding series will be more borough-specific.

An excerpt:

The first quarter of 2009 property sales market in Manhattan is characterized by a dramatic slowdown in sales activity. This is the first period tracked that truly reflects the market mentality created in September 2008 with the collapse of Lehman Brothers, the federal bailouts of AIG, Fannie Mae and Freddie Mac, and the ensuing paralysis of the credit markets throughout the fall. (In contrast, our last market report for the second half of 2008 included numerous sales that were negotiated pre- September)…

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal Manhattan Building Sales Report [1Q09]

Report Methodology [Miller Cicero]

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[Seeing only 70% of the Risk] Fannie Mae Crushed Condo New Development Sales

March 22, 2009 | 11:40 pm | |

The future of condo new development sales activity across the US appears in serious trouble, yet it doesn’t have to be that way – and its all due to a new government agency, Fannie Mae.

Back in September 2008, when the wheels were coming off the economic wagon, the US Treasury bailed out the former GSEs Fannie Mae and Freddie Mac (and AIG). It was the end of an era where both enterprises served two masters: the US taxpayer (exposure to risk) and its shareholders (profits and share price), to simply serving the former.

The mandate of promoting home ownership at all costs (literally) by these institutions had run amok which is one of the reasons why we are in this mess. While the GSEs served a noble purchase of providing standardization and liquidity to the mortgage market to promote home ownership, somewhere along the way, the link between value and risk was lost because systemic risks were not clearly understood. To be fair, they were simply one part of a giant problem, yet a key part because Fannie Mae set the tone for the mortgage industry and that message was grow at all costs and lend by exception.

Now that Fannie Mae is effectively a government agency, it is getting reacquainted with the religion of risk, and it’s become a quick student by adopting policies that are prudent, but very damaging to the collateral they are trying to protect. It is of great concern because the rules are being changed in the middle of the game, making weak markets worse by stranding thousands of would be buyers and owners. Many new development projects are stalled or have had only a handful of sales since the September tipping point.

Effective March 1, Fannie Mae:

The government-backed mortgage-finance company stopped guaranteeing mortgages in condo buildings where fewer than 70% of the units have been sold, up from 51%. In addition, the company won’t back loans for sales in buildings where 15% of current owners are delinquent on association fees or where more than 10% of units are owned by a single-entity.

Prudent, yet devastating to the existing inventory of newly developed condos across the country – a robotic like ruling that may likely stop most sales activity in new developments if buyers can’t qualify for mortgages. This will simply damage the entire collateral classification (new development condo) and push many existing loans underwater.

Of all the new changes (which are not unreasonable if the housing market wasn’t in crisis) the increase from 51% to 70% pre-sale requirement for a mortgage to qualify for purchase by Fannie Mae makes it nearly impossible for buyers to qualify for a mortgage in a new development unless it is nearly sold out. All the projects that came online late in the cycle could be damaged by this hard core – its a catch-22 really. How does a project claw its way from say 20% sold to 70% sold? All cash lenders and those that ignore Fannie Mae are few.

The policy will result in a higher rate of foreclosures for entire developments as well as individual homeowners who no longer qualify.

In other words, if you helped make the mess, you need to help clean it up, not make it worse. And of course, get a bonus.

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[Miller Cicero] New York City Income Property Market Report Second Half 2008 Is Available For Download

March 21, 2009 | 7:56 am | Reports |

Our commercial advisory firm just released its New York City Income Property Market Report for the second half of 2008 for Massey Knakal. My commercial valuation partner John Cicero prepares the report. It’s the only report of its kind that covers the New York City commercial market.

Here’s what he says:
The Massey Knakal Income Property Report that I prepare on behalf of the brokerage firm was just released for the second half of 2008. The report is the only one of its kind that tracks cap rates, income multipliers, price per square foot and number of sales for the New York City multi-family market. As this report included only those sales (above $500,000) that closed from July 1 through December 31, it includes sales closed before and after the market turn in mid-September, when Lehman collapsed and the credit markets seized.

An excerpt:

The number of sales dropped 45% from the second half of 2007 to the second half of 2008. Relative to the prior year the greatest declines were in Manhattan and Northern Manhattan, both down 54%, and the Bronx, down 60%. Year over year there were 37% fewer sales in 2008. This suggests a turnover rate of 1.9%, down from 3.0% in 2007 (of the categories tracked).

Massey Knakal will distribute nearly 300,000 hard copies of the report over the next few months.

Massey Knakal New York City Income Property Market Report [2H08]

Report Methodology [Miller Cicero]

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Too Big to Fail Meets Too Failed to be Saved

March 12, 2009 | 11:27 pm | |

It’s becoming apparent that several of the large institutions that are in the vortex of bailoutdom are teetering: namely AIG and Citi. They were deemed too big to fail, bit now we are wondering if they are too far beyond saving.

I am struggling with this concept and am rambling here, but now is the time to fix things for the long term benefit. I am sick of quick fixes.

The Too Big to Fail policy is the idea that in American banking regulation the largest and most powerful banks are “too big to (let) fail.” This means that it might encourage recklessness since the government would pick up the pieces in the event it was about to go out of business. The phrase has also been more broadly applied to refer to a government’s policy to bail out any corporation. It raises the issue of moral hazard in business operations.

The top 5 banks are showing significant signs of weakness.

Citibank, Bank of America, HSBC Bank USA, Wells Fargo Bank and J.P. Morgan Chase reported that their “current” net loss risks from derivatives — insurance-like bets tied to a loan or other underlying asset — surged to $587 billion as of Dec. 31. Buried in end-of-the-year regulatory reports that McClatchy has reviewed, the figures reflect a jump of 49 percent in just 90 days.

The industry never thought macro enough to consider systemic risk – as in “What happens if it all goes wrong?” Seems pretty basic.

The Federal Reserve appears to be trying to reform its ways and perhaps even the concept of too big to fail. Fed Chairman Bernanke just spoke to the Council on Foreign Relations

Until we stabilize the financial system, a sustainable economic recovery will remain out of reach. In particular, the continued viability of systemically important financial institutions is vital to this effort. In that regard, the Federal Reserve, other federal regulators, and the Treasury Department have stated that they will take any necessary and appropriate steps to ensure that our banking institutions have the capital and liquidity necessary to function well in even a severe economic downturn. Moreover, we have reiterated the U.S. government’s determination to ensure that systemically important financial institutions continue to be able to meet their commitments.

…while former Fed Chairman Greenspan has been attempting to re-write history.

David Leonhardt, in his piece “The Looting of America’s Coffers” said:

The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

Last week, Sheila Bair of FDIC told 60 Minutes she would like to see Congress attempt to set boundaries for banks to remain as banks. In other words, they grow beyond a certain level, they become some other entity but can’t be bailed out if something goes wrong. Perhaps this implies a higher risk which is understood by investors, forcing the institution to decide whether it can afford to be bigger.

Let’s get our act together real quick or we also too big to fail?

Aside: Why make billions, when you can make millions? – Austin Powers

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