NY Times: A Bonus Bounce?
A: Now I am not one to start plugging the NY Times or other broker-influenced mass media outlets to re-inforce what I discuss here on UrbanDigs, but this article clearly provides real examples of what I have been saying for a while now: The Improvement Was Progressive in Nature. The main reason I do not like to plug these broker sourced reports is because a) I feel it is too salesy and gives the impression that you have an agenda outside of unbiased reporting on the Manhattan real estate markets, and b) because I really don't trust many other broker reports other than what I see out there and the contacts I know for many years whose trust was earned. But this story is just another example of what is happening out there. I do NOT think it is sustainable, and I see it maintaining itself for a few months more.
The NY Times reports on..."The Bonus Bounce":
Take the recent bidding on a one-bedroom condo with a terrace on East Ninth Street.How else do you explain this and the many examples I listed in my "Manhattan Markets: Things Just Keep Moving Along" five days ago? As I stated in that discussion:
The property was first listed in June 2009. “We were holding open houses diligently every other week,” said the broker, Tristan Harper, a senior vice president at Prudential Douglas Elliman. But the traffic was almost nonexistent. “Zero to five parties, max,” Mr. Harper said. The seller took the property off the market for the December holidays, then put it back on in early January in hopes of benefiting from a bonus bounce. At the first open house, 18 parties showed up, 30 to 40 percent of them from Wall Street. Mr. Harper was stunned.Within a day he had an offer. It was under the asking price of $1.049 million, but the owner was able to negotiate for a little more.
While the place was in contract, the seller received a significantly better offer — above the asking price — from two men. One of them worked on Wall Street.
Then the original bidder matched that offer with all cash. In the meantime, a third offer came in, but the specter arose of all three bidders’ fleeing if a bidding war ensued, so the seller never really entertained it. The first bidder won, at a price slightly over asking.
"What is interesting is following listings that had a hard time selling even as sales surged in June, July and August of 2009 following the plunge in sales volume from the adjustment we had. The main reason is that bids did not improve as much back then as they did to today's marketplace following the March lows...This is why you are starting to see properties that have been on the market for 3+ months, start to go to contract. Some are cutting prices to get there, some aren't, and others are going over ask."How many examples and how many brokers need to tell the same story before people deny that this is actually happening out there? What people mis-interpret are my discussions on real time changes in the market with a future prediction of sustainable sales growth and price appreciation that I never even said! People read, see the reports, and interpret that I am jumping on the bandwagon even though I discuss my bigger picture macro concerns quite clearly and often here on this site. Let the other guys say things like, "It’s more the value now,” he said. “Real estate has bottomed out, and it’s time to step in.", as stated in the NY Times piece above.
Then you got those out there that rely solely on the quarterly reports that prove time and time again to be lagging and inconsistent across the brokerage firms. I addressed the lagging nature of these reports in the clearest way possible on Tuesday! They are a snapshot in time of deals closed and captured by public record that were signed into contract some 2-7 months earlier - sometimes more! But, if you want to see hard core evidence of the improvement on a quarter to quarter basis, something I don't put much weight into due the seasonality of this market, look no further than Streeteasy's Q4 2009 Market Report released 4 weeks ago:
Significant findings in Q4 2009I rather look at existing Co-op and Condo resales over New Dev sales for a better indication of this improvement. The average sales price data is clearly showing you the increase on a quarter to quarter basis - something worth discussing when explaining what is happening out in the Manhattan markets on relative basis! People want to know what is going on, where we came from 3 months ago, 6 months ago, 12 months ago and 2 years ago! Each of those increments would warrant a slightly different response from me in the short term and a more extreme answer for the longer term. On a year over year basis, YES prices are down! On a quarterly basis, prices seem to have been improving in terms of where bids are coming in right now! This improvement was progressive in nature over time starting with the height of fear in February & March of 2009. I can't explain it any other way and I hope by now you know that I am bearish when there is a reason to be bearish and will adapt when there is a reason to adapt! In the end, I refuse to deny the change that I see happening over time but will do my best to leave 'perma' out from in front of any bullish or bearish views.CLOSING PRICES CONTINUE TO DECLINE FROM A YEAR AGO. Overall average and median prices, which include condo and co-op resales and new developments, have continued to decline from a year ago, about 7.8% and 10.0%, respectively. However, since last quarter, price gains were made in overall average and median prices, about 5.5% and 2.0%, respectively.
The overall average price was $1.327M while the overall median price was $765K.
Condo resale median prices decreased slightly by 0.4% since last quarter to $890K, and decreased by 3.5% since last year. Average price ($1.482M) is up 2.3% for the quarter but down 5.9% since last year.
Co-op resale median prices increased by 6.3% to $612K compared to last quarter but are down by 1.3% since last year. Average sales price ($954K) increased by 9.1% since last quarter but decreased by 12.3% since the prior year.
New Developments median sales price decreased by 6.1% since last quarter to $1.12M and by 4.6% since last year. Average sales price ($1.9M) increased by 6.4% since last quarter and by 10.5% since last year.
For Manhattan Residential Real Estate, I considered myself 'less bearish' since November 2008 when I started to see bids and contracts signed in this market start to reflect the uncertainties and harsh realities that the severe credit crisis brought upon us! On June 4th, 2009 I re-iterated these feelings based on the rising volume of contracts signed I started to see.
UrbanDigs Twitter - Worth A Spot On New Site???
A: Let me know what you guys think of this Twitter thing. When I started talking at the real estate conferences years ago, Twitter started to really gain steam and I questioned why it would succeed. "Micro-blogging", everybody said - the coolest new thing! Now people can see you talk about shaving, dressing, going out for coffee, whatever! My first thought is, r u kidding me? Who the heck cares about that sh*t - don't we all have better things to do with our lives? Now you hear about a mom twittering after their son drowns, celebrities twittering about their lover's passing, athletes twittering about big trades, and marriage proposals. But does this service have a sustainable place in this virtual world? And more importantly, does it have a place on UrbanDigs when the new site launches????
You can follow UrbanDigs on Twitter by clicking here...but do you really care to?
This is what I am grappling with and I'm 50/50 on the worth of this thing. Is this technology just a passing fad or the real deal? Does it deserve a spot on the new UrbanDigs when we launch in 7-8 weeks? If anything, I can probably see myself tweeting (is that the right term?) about more in the field Manhattan real estate situations as they unfold; that may be useful for some readers. Lost deals, monthly production/signed contracts, changing trends, losing a bidding situation to a higher offer, board turndowns, etc..sometimes I find it hard to write discussions once a day when working with as many clients as I do. So does Twitter fill in the gaps when I have no time to blog? Or is it useless, like I first thought 3 years ago when I first learned of the micro-blog service?
Please do share your opinions and any other suggestions of improvements you want to see for the new site! I'm building it for you guys to add transparency to this market, so do speak up!! Thanks!
US Dollar Hits 6-Month High
A: When bearish sentiment on anything gets too extreme, crazy things can happen. And this is exactly what is going on in the US dollar relative to other major currencies. Signs of the dollar carry reversal continue: volatility rising, equities/commodities selling off, and the dollar rising. The dollar is now at a 6-month high. Keep an eye on that upward trend as the dollar does what nobody expects it do: continue rising!
US DOLLAR INDEX via Bloomberg:
Discussed ten days ago as China started to cutback bank lending and raise capital requirements - a signal of what a withdrawal of stimulative policies may do to world markets:
"...expect continued volatility especially if the dollar does something nobody expects it to do: continue rising! Quietly, the greenback is at a 5-month high against the Euro and I wonder if this is the beginning of the carry trade unwind, as traders close out short term debt positions funded with cheap dollars? "Equities are down 2%, Gold is down 4%, Oil is down 5% and the US Dollar is gaining ground against 15 of the 16 major counterparts; especially against the commodity producing nations! This is something to keep our eyes on.
Equity Jitters - Dave's Breakfast
A: Again, lets make sure we separate the concerns over macro fundamentals and future stimulus withdrawal with what is going on out there in Manhattan real estate. Its not a 1:1 relationship and often the two don't correlate. If things out in the field change, I'll report on it. Today equities are jittery over a poor jobless claims report suggesting a continued weak labor market, euro-zone worries resulting in widening CDS spreads and rising gov't bond yields, and as Dave says, talk that the 'era of the great policy reflation is over'. The era of great policy reflation which allowed the system to carry trade their way to where we are today, will certainly see some bumps as stimulus withdrawal results in consequences that were never intended.
TODAY'S MARKET MUSINGS - BREAKFAST WITH DAVE (you can subscribe here):
Says a lot. In regards to capital preservation, after a year long search for yield via a massive dollar carry trade built on short term fed/government policies and guarantees, the end just can't be smooth and orderly. It works until it doesn't anymore. Soon it may become more of a 'Return OF Capital' instead of 'Return ON Capital' story.risk appetite appears to be fading; credit default swaps are widening and government bond yields are soaring in Europe; the era of the great policy reflation is over
No oomph in the service sector ISM report — it came in below expected and the majority of the industries reported contraction
Sticking with the capital preservation/income orientation theme for 2010
No bubble, eh? Toronto’s housing market started the year with a bang with existing home sales jumping 87% YoY in January
A carry trade unwind, sovereign defaults, failed bond auctions, and the unintended consequences from the end of all the fed/gov't guarantees and policies and stimulus withdrawal were all part of my biggest fears outlined in my 2010 Predictions late December:
"I refuse to deny the possibility of unintended consequences of all the fed/treasury guarantees, zirp, liquidity facilities, and the massive debt monetization experiment.This site always had two clear missions:My three biggest fears for 2010 may be: surprising sovereign defaults + failed bond auctions somewhere + the unintended consequence of a massive dollar carry trade unwind that comes with withdrawal of stimulus."
MISSION 1 - Report on the real time, in the field, happenings of the Manhattan real estate marketplace as they change - always trying to keep reports unbiased with bigger picture macro concerns. If there is a reason to be bearish, be bearish, if there is a reason to get less bearish, get less bearish, and if there is a reason to get bullish, then get bullish. 'Perma' should not come before either
MISSION 2 - Discuss bigger picture macro thoughts and concerns that may lie ahead, not behind, us. How do these macro fundamentals potentially impact and ripple down to the Manhattan residential sales market
Both are constant challenges and both may behave counter to each other for a while. After all, if you recall late 2007 and early 2008, it did in a big time way as the secondary mortgage market froze up, credit blew out, and leveraged financial firms started to implode. It took the failure of Lehman in Sept 2008 for Manhattan real estate to really freeze up and fall off a cliff. Up until then, this market held on in the face of adversity leading many bulls to think this market would never get affected and already survived the so called credit crisis. That is proof enough that the two may act very differently at the same time in the face of the same pressures.
Macklowe/EQR Manhattan Multifamily Deal Not Necessarily A Benchmark Transaction
I've had a couple of people ask me about the recent sale of three buildings by Harry Macklowe to Sam Zell's Equity Residential Properties. I love the title of the Wall Street Journal blog post "'Grave Dancer' Sam Zell Returns to Haunt Macklowe", which points out the searing irony that it was Macklowe's top marking purchase of assets from Zell's Equity Office Properties that drove the Manhattan real estate mogul to ruin in the first place, and now he is being forced to cough up some prize New York City multifamily assets to Zell to try to save himself from debtors prison. But I think i the story makes for slightly better copy than the reality of the deal price really reflects.
According to J.P. Morgan analyst Anthony Paolone quoted in the Wall Street Journal's original article on the deal the $475 million price tag for the RiverTower, 777 Sixth Ave and Longacre House, reflect a 30% - 50% discount to what they would have sold for at the peak of the market. The published numbers imply that the purchase price represents about $470,000 per unit and $545 per square foot. Recall that I implied in a recent article on the Stuy Town deal that a bargain for rent-regulated apartments in Manhattan proper would be $200k per unit, but realize that the buildings in this transaction are prime full market rate buildings. According to EQR's 10K it's average rental rate in New York City was $2,748 per square foot (well above rent regulated rates commonly seen).
According to EQR's press release the cap rate for the transaction is 5.52%. If we assume that the apartments being acquired, which are very high-end assets, garnered a premium $3,000 per unit /month in rent, gross Income from the 910 apartments would be around $2.7 million per month or $33MM per year. Factor in a historic vacancy and collection loss rate of 5% and operating costs of 40% (assuming these guys are really good on cost controls due to the leverage of operating 6,246 additional units in New York City according to the last 10K), the properties would be throwing off around $19 million per year from the residential segment (note that the operating expenses implied above should also cover running the retail and parking garages in the buildings). This would leave $7.2MM of NOI attributable to the 23,339 feet of retail space and 50,000 square feet of parking garage or $98 per square foot (I won't split the atom on these numbers but they make sense to me). So the stated cap rate appears not to be based on a fluffy pro forma NOI number, but rather one that would make sense as being based on actual trailing 12 months numbers, or reasonable projections for 2010.
So the question becomes, should a 5.52% cap rate be assumed to be the new "benchmark rate" for midtown Manhattan market rate multifamily transactions? Now I know there are those who will call me an old grandma stick in the mud with no vision, but I have trouble with people buying properties for cap rates below their financing rates. I am pretty sure that financing rates for these assets are around 6% today (I checked with a buddy who is closer to these kinds of deals). To the extent that these assets are leveraged to any degree (say 60% LTV), the implied return to equity would be 2% or less. This is unless the NOI somehow is much higher in the future, due to significant rate increases above operating expense inflation or conversion to condos. Haven't we already been here before and seen what happens when valuations are pushed due to expected upside that is on the come?
So why does Sam Zell's Equity Office do a transaction like this? I believe that the answer lies in its status as a REIT. As a diversified real estate operating company, a REIT can take on debt secured by its properties, but can also take on unsecured debt that has recourse only to the equity of the REIT itself. They get double leverage. In fact, according to EQR's recent 10Q, the firm has nearly $5 billion of debt secured by properties and about $5 billion of unsecured debt. The weighted average rate on its unsecured debt is just 5.32% or less than the 5.52% cap rate on this property. Not only that, the firm's unsecured debt constitutes an amount roughly equal to the firm's $5 billion of shareholders equity. When you include the firm's secured debt, it's debt to equity ratio is roughly 2:1. If they merely buy the asset for cash, using corporate level debt, leverage gives them a significantly better return than the headline cap rate.
So much for the theoretical aspects of this discussion. A buddy of mine who happened to have a discussion with one of EQR's people in their southeast division about a property in that area got right to the source. Being a New Yorker during his conversation with the EQR employee he had to ask about this deal. What he was told, was that the firm was most excited about the fact that they believed that the $545 per square foot they were paying for the properties was well below "replacement cost". To break this down a little, assuming a $400 per square foot high-end construction cost in New York City not including financing costs, they are paying $145 per FAR for the land. Considering the prime locations for these assets, that is indeed a bargain even in today's horrible land market and EQR certainly has the wherewithal to make some selective bets on land value in its portfolio.
When looking at the value of a property transaction as a benchmark for other transactions, one must always factor in whether the buyer had special financing unavailable to the buying public at large. One must also take into consideration whether the sale was made under normal marketing conditions or duress. In the case of Macklowe's sale of these properties, both of the aforementioned factors were at work. Could a better price have been garnered given a longer marketing period? maybe. Is this property worth the same amount to any old commercial real estate investor as it is to Equity Residential Properties, no way. EQR has economies of scale in property management in New York City, a purview that includes land purchases and development and favorable financing not available to just any old player (although available to a handful of other REITs).
All of the above said, it is good to see some assets trading in New York City that look to me to be at decent prices for the seller (despite that seller being somewhat "under the gun"). Such a transaction, which is partially a land bet, implies that a very knowledgeable buyer and local asset manager believes that rental fundamentals are bottoming and will ultimately improve and/or that redevelopment of the properties in question either as condos or ultimately as some higher and better use will be fruitful.
A Co-op Mortgage Recording Tax?
A: One reason why Condominium closing costs are higher than co-ops, assuming the buyer is taking out significant financing for the transaction, is that co-ops enjoy a loophole when it comes to the mortgage recording tax. Well, this loophole may be closed if Governor Paterson gets his way. As I long stated, higher rates + higher taxes are in our future and the city will look to every nook & cranny to squeeze more tax revenue out of city residents to help close record budget deficits.
From The New York Observer (via The Real Deal), "The Bell Tolls For Co-ops":
In the governor's cross hairs are loans for co-ops, which have long been free of taxation while taxes on equivalent condos and houses run between 2.05 percent and 2.175 percent of any mortgage. The budget seeks to allow the city to slap this mortgage recording tax onto co-ops, swinging the tax lasso around a cash source that has been eyed-but untouched-by city officials since at least the days of Ed Koch.Love the 'this is an issue of equity and tax fairness' line...can't we spin it the other way and argue to eliminate the condo mortgage recording tax to be more fair with the co-ops??? Nah, that is not happening!The tax would mark another step in the assimilation of the co-op, an outlier housing type that was once beyond the reaches of many housing rules and laws, and it would bring in, by the mayor's count, at least $50 million annually in revenue for the city. For the Paterson administration, the current lack of a co-op mortgage tax is merely a "loophole" in need of closing. "Ultimately, this is an issue of equity and tax fairness," said Matt Anderson, a spokesman for the state's Division of the Budget.
Recording taxes do not currently apply to co-op mortgages because they are, in actuality, not mortgages at all. Officially, a co-op buyer purchases shares in a corporation that owns a building, not a specific piece of real estate. Thus, a buyer cannot get a mortgage on property, but rather a loan backed by shares of the building.
For UD readers, this will come as no surprise; higher taxes are coming, its in what form and exact rules that are only now coming together.
So, we must ask ourselves how buyers will re-value co-ops on the open market if closing costs do in fact now rise via this mortgage recording tax? In my opinion, I don't think it will be that much of an effect; perhaps a minimal one more as a headline effect that will wear off with time. My thinking is this: The main reason I find buyers to value condo's over co-ops is the legal structure that bypasses a strict board approval process and the liberal rules and guidelines as to how the condo property can be used.
In my opinion, the gap in value between a condo and a co-op is not because the co-op closing costs are 1.8%-1.925% (loans under 500K is 1.8% of the loan amount, loans over 500K are 1.925% of the loan amount) of the purchase price lower! Although that does play a role, I just think there are other forces that play a deeper role as to why buyers value condos higher than coops! Rarely do I find buyers willing to put a premium on a co-op's value solely because the closing costs are lower. So, how much of a penalty will buyer's put on a co-ops open market value if closing costs do rise just under 2% of the loan amount as a one time closing fee? In my opinion, minimal if any that will dissolve with time.
Buyers value condos over co-ops because of the following that doesn't change with this added closing tax, if it passes:
1. Right of First Refusal Board Process
2. Lack of Strict Financial Preset Requirements for Purchase / Secure Financing Most Important
3. Ability to use as Pied-a-terre (2nd home)
4. Ability to Freely Sublet
5. Ability to use Guarantor
6. Ability for Parents to Buy for Children
7. Speculative Investors / Foreign Buyers without Citizenship
etc..you get the point!
Those above noted items is what expands the desirability and affordability of condos over stricter co-ops. The end result is a much wider buyer pool to market condos too! That is not to say co-ops aren't desired, they are, just to point out to you the more important differences that I find from working with buyers that expand the marketability of condominiums! Just my $0.02!!
Understanding The Lag w/ Quarterly Reports
A: Thanks 'jjfashion' for your comments to yesterday's discussion on real time broker status updates to Contract Signed and how the market was faring after the first month of the new year. To hear this guy say it, "To suggest anything other than what is supported by closing data is low integrity unless you disclaim it explicitly...". Now I wont disclaim the quarterly market reports, which happen to consistently vary from one brokerage firm to another, but I will continue to defend how lagging these reports are and how one of the mission's of this site has always been to try to close the gap on what is happening out in the market today and what the lagging reports tell us. In the end, the best information we can get on current market activity and strength is where these contracts are being signed right now and how the pace of contracts signed changes with time!
If you guys know a better way to consistently find out where contracts are being signed today, I'm all ears! The only ones that know this information are the buyer, seller, brokers, attorneys, lender, managing agent that processes the purchase application and the board that will ultimately approve the purchase. It is true that I am just one man and that discussions on this site are taken directly from my business in the field, putting bids in on multiple properties for clients, talking to my colleagues after they go to company sales meetings, talking to sales managers I keep in touch with, and interpreting the real time data I get updates for about 6 times a day directly from one of the distributors of the REBNY broker sharing system. As I stated clearly yesterday and many times before:
"For now clearly buyers and sellers are agreeing somewhere out there - I'm just trying to figure out where!"It's a constant challenge to figure out where deals are being signed today and I love that challenge!
Now, lets move on to understanding the big time lag with these quarterly reports whose data is based on a collection of closings captured by public record - to get there a number of things have to occur and as readers of this site know I focus on WHEN THE CONTRACT WAS SIGNED as the snapshot in time that defines how the market was doing when the deal was made:
LAG #1: Broker Status Updates - The data is only as good as the agent that updates and maintains the listing. As good as Streeteasy, NYTimes, and Broker Sharing systems are, if the agent does not change the status of a listing from ACTIVE to CONTRACT SIGNED, we will not get that update! So the first lag is the one directly from the agent servicing the listing who is in charge of updating their webad using the broker sharing system provided by their employing brokers. Corcoran uses TAXI, Elliman uses LIMO, and Halstead/BHS/Sothebys uses RealPlus. Other firms use OLR. In the end, the updates are supposed to be immediately shared with all REBNY member brokerage firms and their agents. I find there is usually a 1Day - 14Day lag between when a contract was actually signed and when the broker updates their listing to be shared.
LAG #2: Purchase Application - Generally, Co-op purchase applications are a bit more tedious and time consuming than ones for a condo. Since condos have a 'right of first refusal' board process as opposed to a stricter 'review and interview' process for co-ops, I find co-op buyers spend more time making sure all requirements are exactly as requested and the package is as meticulous prepared as possible. This takes time to gather business and personal references, tax returns, all statements to verify assets, landlord/mgmt letter, employment letters, complete purchase application, etc..
LAG #3: Loan Commitment / Aztec Forms - As we all know, the underwriting process is quite different than it used to be; banks actually check everything and verify that you can qualify to secure financing for the transaction. Additionally, recent HVCC code changes require outside appraisals rather in house ones. All in all, the goal is to get that commitment and aztec forms (for coops) as required if there is financing in the deal; which most deals have. Since there is an overlap with LAG #2 during this part of the process, usually the loan docs are the final piece of the purchase application needed to complete the package for processing. I am seeing loans take anywhere from 3 weeks to 6 weeks these days to come in.
LAG #4: Management Processing - Everybody wants the managing agent to process their package fast! But we all dont get what we want. I find it takes anywhere up to 2-3 weeks for management to fully process a purchase application and send it over to the board for review.
LAG #5: Board Review - In a perfect world, the purchase application will be reviewed within days of receipt by the condo or coop board. But this world is far from perfect. Depending on how your board handles purchase applications, you may have to wait for the next meeting for the package to be reviewed. I find this board approval process to generally take anywhere from 10Days-4 weeks upon receipt of the fully completed and processed package. If I get a package reviewed and approved within 10 days of receipt, I find myself lucky!
LAG #6: Closing - After the co-op approves the deal or the condo waives their right of first refusal, the attorneys will start to work on coordinating a closing date. This date must be agreeable by the purchaser, the seller, the buyer's lender/seller's payoff bank, and the managing agent handling the transfer. Either buyer or seller can also delay the closing a bit if that is preferred before one of the attorneys issues a TOE to get things moving. Generally I find that my closings take place about 1-2 weeks AFTER the approval comes in from the board to close the deal.
LAG #7: Public Record - The final lag for the deal to be captured by the quarterly report! This can take anywhere from weeks to months! If public record happens to capture and record the sale right after the cutoff date for quarterly report inclusion, well then it needs to wait for the next quarter's report!
All of these forces contribute to the lag it takes for a listing to be captured for inclusion into the quarterly report that is released to the public and interpreted as conditions that exist today. That is where I try to come in and explain the flaw.
But don't take my word for, MillerSamuel's Methodology site clearly explains this Public Record lag to you:
Quarterly Manhattan Market Overview: A quarterly analysis of co-op and condo sales in Manhattan. Unlike the stock markets, apartment sales data continues to fall in the prior quarter as it becomes available because sales are usually not recorded at time of closing and may lag the closing date by several weeks or months. However, in order for the report to be useful and timely, the report represents a reliable analysis of market conditions during the quarter based on the sales data obtained by the end of the quarter.Bam! Right there, in black & white, disclosed to you the lag of several weeks to months for the closing to get recorded and included in the quarterly reports. That is the nature of the data of the quarterly reports!
But if you want me to make it even easier for you, let's take one of my recent closings as an example; with my client's blessing of course:
67 Riverside Drive - Apt 9A
So, here we have a transaction that was signed into contract October 26th after a 2 week attorney diligence review period that due to the lags mentioned above will not be included into the Manhattan Quarterly Reports until Q1 2010 is released April 2nd, 2010! So, when the report is released in April it will contain this one transaction that was representative of the market conditions in mid October, 2009, some 24 weeks earlier!
Is it possible that where contracts are being signed in March right before the Q1 2010 report is released, have changed a bit from when this deal was signed? The answer is YES! But this is all we got right now and what many are using to analyze and interpret where bids for Manhattan property seem to be coming in today! This is the gap I am trying to fill. Apparently, some people cant take it and say that to ignore these reports as indicative of today's market is to degrade my integrity! Okay then....
Manhattan Markets: Things Keep Moving Along....
A: Trying to keep it real here guys, unbiased and all, and continue to separate my bigger picture macro thoughts and concerns with what is happening out there in the Manhattan residential real estate market right now! In the last week alone, my new backend systems see about 222 new contracts signed telling us that the market continues to move along. This pickup comes after a brief 5-7 week slowdown in signed deals as we entered the end of November and the holiday season. Let's discuss along with a few sneak peak charts from the upcoming new UrbanDigs Analytics!
The data doesn't lie and as always, you have to understand that every property on the market is viewed and valued differently by the prospective purchaser. With that said, I can't deny the action out there and the numbers are showing it.
What is interesting is following listings that had a hard time selling even as sales surged in June, July and August of 2009 following the plunge in sales volume from the adjustment we had. The main reason is that bids did not improve as much back then as they did to today's marketplace following the March lows ---> rather, the improvement was progressive in nature:
"The reflation was slow to start and progressive in nature. It did not all occur at one point in time. Rather, it started in the lower end around May/June and trickled to the higher end over time. It was progressive in nature meaning the improvement in bids occurred as time went on, to where we are today!"This is why you are starting to see properties that have been on the market for 3+ months, start to go to contract. Some are cutting prices to get there, some aren't, and others are going over ask. I can name dozens of these types of apartments from the data I see in my UD 2.0 beta site, but for sake of brevity I will list a few:
490 WEA, Unit 10D ---> 325 Days on market, no price cut since last June, entered contract yesterday
171 West 79th, Unit #41 ---> 150 Days on market, price cut 8% on Nov 1st, entered contract few days ago
625 Park Ave, Unit 1B ---> 449 Days on market, price cut last April, entered contract 3 weeks ago
77 Park Ave, Unit 15E ---> 210 Days on market, price cut 6% on October 10th, entered contract few days ago
925 Park Ave, Unit 11/12 ---> 345 Days on market, price cut 6% in early December, entered contract a week ago
35 Bethune St, Unit 2/3A ---> 40 Days on market erupted into bidding war
1035 Park Ave, Unit 9A ---> 117 Days on market, price chop 11% in late Oct, entered contract less than 2 weeks ago
30 East 76th, Unit 5A ---> 175 Days on market, price cut 6% early November, entered into contract about 10 days ago
...you get the picture. The point is there is action out there. Not everything sells at once and to see weekly contracts signed trends at or above 225 or so is very healthy! Recall that Manhattan averages about 8,000-9,000 closings a year (around 708 contracts signed a month) and it was only the euphoric peak year of 2007 that saw over 13,000 closings (or about 108 contracts signed a month on average). Given the seasonality of our markets and that we are in the active time of year, its healthy to see this level of activity this time of year. This is especially true when considering where we came from and the delayed seasonality effect that we experienced due to our markets adjustment process late 2008 into early 2009.
Now please don't mis-interpret this discussion to mean bids are coming in at peak levels again, they are not - or that every development is saved and no good deals are happening! Rather, we can't deny the progressive improvement in bids over the past 11 months and the fact that desirable properties that are priced right are moving in today's market! I wouldn't expect this pace of sales to sustain itself for that long, maybe a few more months because if sell side optimism starts to outpace buy side confidence, well then us brokers will find deals harder and harder to put together. Time will tell. For now clearly buyers and sellers are agreeing somewhere out there - I'm just trying to figure out where!
Here is a sneak peak into one of the new UrbanDigs charts on Pending Sales for Manhattan Real Estate:
You can clearly see the steep plunge in sales volume around Aug/Sept of 2008 and the bottoming out of that freefall around February/March of 2009! Interesting stuff isn't it! The rise in sales volume after the March lows really gathered steam around June and July of last year and maintained that pace for a few months before adjusting down a bit prior to the holidays. I now have pending sales at the 4,416 units level which means when Q1 2010's report is released in early April you will see a whopping surge when compared to Q1 2009's level!
To feed the curiosity in you a bit more, here is another sneak peak into Total Active Inventory trends for Manhattan going back the past 4 years:
Again, you can see the sharp rise and fall of our inventory levels before Lehman failed and after the March lows when sales volume started to surge. The latest tick up shows the new listings hitting the marketplace in the past 3-4 weeks, as Active Inventory currently stands around the 7,833 level. So, even with the strong sales pace lately we are starting to see inventory levels tick up - telling me that more listings are entering the market and coming back onto the market these past few weeks, then are being excluded due to contract signings or temp/perm removed from the marketplace! In short, YES the market is active and moving, and YES new listings are coming back on!
Transparency is good and you guys are about to get a ton of it in a few months!
Stuy Town - Not The AOL/Time Warner of Real Estate - Worse!
"At the time, it looked like a sound investment."
Clark McKinley, a spokesman for Calpers.
Some of us are still wondering whether mass hallucinations were at work during the bubble years, allowing so many to act so thoughtlessly on such a grand scale. Unfortunately, in many corners the delusions appear to be continuing, like the idea that capping government spending on a 17% sliver of the federal budget which includes only non-international, non-homeland security, non-human services, non-essential...blah blah blah blah blah categories, will actually help fix the nations ruined balance sheet? Next the White House will switch to generic toilet paper and call it an austerity program.
I keep being plagued by the idea, that after a period of reckless profligacy, lessons must be learned, prudence must be rediscovered and tough choices made and vigorously executed to heal the prior transgressions. Yet our society seems unable to actually tolerate even the most preliminary steps in this process, including fessing up to prior bonehead maneuvers.
Example number one being the statement made above by Calpers regarding its investment in the Stuyvesant Town/Peter Cooper Village buyout by Tishman Speyer. I hate to disagree with the world renowned stewards of capital at Calpers, but in my humble opinion this deal was patently absurd from the day it was first proposed. If I had a fedora I would pledge to eat it if Tishman Speyer was actually unaware of how ludicrous the deal was when they first proposed it. But alas despite the sponsor having precious little skin in the game, a fantastical deal price and an incredibly pompous assumption that the seller had no clue as to the upside still embedded in the property, a bunch of Stuy Town losers stepped up to fund this deal which will go down in history as one of the biggest and stupidest real estate deals of all time. Their names and approximate exposure are listed below, courtesy of the Wall Street Journal.
I know, I know, you can't believe it. Why would Tishman Speyer, heretofore an organization of sterling reputation, knowingly invest its hard earned dollars in a deal that was more than likely to fail from day one?
According to news reports the complex of 11,232 apartments was purchased for $5.4B, or $480,000 per unit. As a rule of thumb, savvy (meaning long-term profitable and surviving) investors in New York City rent-regulated buildings like to pay under $100,000 per unit. Granted deals at those prices are very hard to find and this rule of thumb applies more to Brooklyn, Queens, the Bronx or Morningside Heights, than to prime Manhattan locales south of 95th St. On the Island of Manhattan many would probably consider $200,000 a unit to be workable long-term, though not a "value investment" as you would need to eventually turn over all the apartments and do a condo conversion to really make out big. But these kinds of deals have been done pretty frequently.
Now the Stuy Town/Petter Cooper complex includes 80 acres of downtown property, an asset with long-term value for sure. But how likely is it that a massive block of airspace largely dedicated to rent controlled buildings would be upzoned in our lifetime...even in a Bloomberg administration.....not much. But let's just make the analysis a little more sophisticated as opposed to using loosey goosey local benchmarks (though you would be surprised how many transactions are done solely on the former).
I have heard people bat around various theories regarding the cap rate (net income/purchase price) paid for the Stuy Town/Peter Cooper Village complex. Some have said it was as low as 1%, From what concrete data I have been able to find in the media, the NOI on the properties was reportedly $112 million in 2006, which would put the cap rate at 2%. This in and of itself should have raised eyebrows among investors. For investors to accept a paltry 2% going in return on their investment, the return should have been considered absolutely rock solid under any imaginable economic scenario (say even a downturn like the early 1990s) and certainly there should have been a lot of potential upside, but let's dig further.
The return to equity expected in a real estate deal is equal to the cap rate less the cost of debt capital employed (mortgage constant) times the proportion of debt capital utilized. In this deal the capital stack supporting the $5.4B purchase price reportedly consisted of $3 billion of first lien debt, $1.4 billion of mezzanine financing and $1 billion of equity - or what would be termed an 80% LTV to the equity investor.
According to the Rent Guidlines Board's 2007 Mortgage Survey , the average new multi-family first mortgage in New York City during the year prior to the March 2007 survey was 6.27%. Now my guess is that considering the reputation/wealth of the sponsors, the underlying property, and the fact that this was large enough to be a CMBS deal (where rates and terms were typically better than the bank rates used in most NYC multi-family transactions), the Tishman group was able to get a mortgage on similar terms to the average Joe Blow real estate investor. I will also venture that the mezzanine market, which was hotly competitive at that time, was willing to take on the remaining debt for less than 200 basis points in additional yield. So lets call the mezz rate 8% (in the scheme of things it would have mattered precious little if it was 7% or 10%).
The weighted average cost of debt for this deal was likely somewhere around 6.5% - 7%. Applying the "Band of Investments" formula discussed above, results in a return to equity of less than 1%. So unless substantial upside to the NOI existed this was destined to be a loser of an investment. Now I'm not saying that there wasn't a history of significant upsides to the going in returns to equity on New York City real estate deals in the 1990s. There obviously was. But it was the minority of deals that were done with such extreme negative financial leverage I.E. if this deal had been done with all cash at least the participants would have been highly likely to get a 2% return (the cap rate) in most economic scenarios. Instead as we demonstrated, the application of leverage (at a cost well above the cap rate) massively diluted the going in return, requiring an even bigger upside to the existing net operating income and perfect economic conditions to make the deal work at all. Any knucklehead alive should know that this was a poor risk reward scenario. I won't insult Tishman Speyer by implying that they didn't realize this (Speyer guys, if you didn't know this please feel free to contact me for advice on your next deal...I'll charge a reasonable 1/2% of the purchase price as a flat fee - think of how much I could save you). In fact, it is highly likely that the Speyers put so little skin in the deal for precisely this reason. According to news reports, the Tishman Speyer investment fund put in $112 million or just 2.5% of the deal price, with the Speyers personally only putting in $56 million of this amount or about 1% of the deal.
For the record, Tishman Speyer was not the first or the only deal sponsor to look at the ridiculous financing parameters available in the market with no recourse to the borrower and say damn the pricing...let's do the deal. If it works out..... great!, if it dosn't we get most if not all of our money back and then some (through various fund management, property management and in some cases financing fees) and we just hand the keys back to the bank. The well publicized Riverton Apartments fiasco enjoyed many similar features of the Stuy Town deal.
So for all of those fiduciaries supposed to be investing money for teachers, firemen, the people of Singapore and God, shame on you. This was never a good deal for anyone but Tishman Speyer. The sponsor should have realized, however, that although the debt holders may have no monetary claim on them there is always recourse to your reputation in a deal as high profile as this one was.
Just as an aside, according to the underwriters method: Cap rate = LTV X Debt Coverage Ratio X Mortgage Constant - the highest LTV that the banks should have allowed for their first lien under the deal price, NOI and mortgage rates discussed above should have been about 20% to achieve a prudent 1.25x debt coverage ratio. So don't cry for them. They were underwriting to Tishman's optimistic pro formas...not reality and had nothing to gain if Tishman Speyer's business plan worked flawlessy. They were merely going to get their money back and some interest. They took equity risk for a bond return while allowing an imprudent debt coverage ratio. It's a good thing we tax payers have so much cash to spare to bail these bozos out.
Short Term Treasuries Telling Us Something???
A: When 1-Month Treasury yields turn negative it makes me wonder why investors are parking money for the very near term into vehicles that protect the full principal? Its generally a tell tale sign of risk aversion. As money pours into the short term protection of 1-Month Treasuries, yields once again fell to negative for the first time since March 2009. Something worth keeping an eye on although we can't read as much into it when the fed continues to maintain a zero interest rate overnight policy.
You can take a look at the chart to the right showing you the yields on 1-Month Treasury bills for the past year - noticing the move to -0.01%. According to Bloomberg, "U.S. One-Month Bill Rate Negative for First Time Since March":
“There’s some flight to quality with concern around sovereign risk around the globe, like Greece,” said Anshul Pradhan, an interest-rate strategist in New York at Barclays Plc, one of the 18 primary dealers that are required to bid at Treasury auctions. “Secondly, the bill universe is likely to shrink as the Treasury continues to term out debt, tilting the balance further toward demand.”Whether its fear of sovereign default, China's clamps on bank lending, a double dip, a move from accommodating stance by our Fed, Bernanke's renomination, the AIG/Geithner email debacle, etc.. who knows. What's clear is that money for the near term is coming out of riskier assets (after a search for yield for most of 2009) and into the safety of short term treasuries driving yields negative.Greece’s 10-year bonds fell, pushing the premium investors demand to hold the securities instead of benchmark German bunds to the most since the inception of the euro, on concern the nation’s finances will worsen.
Bill rates turned negative for the first time and note and bond yields reached record lows at the end of 2008 as investors sought refuge in government securities after the collapse of Lehman Brothers Holdings Inc. and a freeze in global credit markets.
Treasury sold $10Bln in 4-week bills yesterday with investors only getting their principal investment back in return. Considering where we came from, when fear changes investor attitudes from chasing risk to simply getting their initial investment in full back, it's worth watching as an anti-risk trade might be setting up. This also tells me investors absolutely expect the fed to maintain a ZIRP policy. With a ZIRP policy in place, we can't read too much into short term yields turning negative but it still is something worth watching for in the near term as a risk aversion trade.
Morgan Stanley: 'The Tightening Has Begun'
A: Interesting comments out from Morgan Stanley's European equity analyst Teun Draisma this morning regarding the future reality of tightening policy. The main point of the comments is that tighter policy will 'intensify' as 2010 rolls on, shaping up more like '1994 and 2004'.
From Business Insider, "Morgan Stanley: Sell Into Strength, The Tightening Has Begun":
Morgan Stanley analyst Teun Draisma:As tighter policy comes in, especially in the early stages, the talk will probably go something like this...'well, the fed is confident enough in the recovery that we can start to withdraw stimulative policy'. So the economic strength negates the tighter policy, and perhaps equities rally further. But it will be the pace and effectiveness of the exit strategy that I will keep my eyes on. How does Bernanke, if he is re-nominated, pull off a perfect withdrawal of all stimulative policy measures without disrupting the markets? And the real kicker, does Bernanke's Fed have control over how the markets react to this policy reversal? In other words, will the markets force their hand or overreact like they usually do - perhaps sending rates higher at a much faster pace than the fed would like to see?Sell into strength, as authorities have switched from "all out stimulus" to "let's start some stimulus withdrawal". Tightening measures are coming in thick and fast around the world. We always thought that the start of tightening was not the first Fed rate hike, but could be many other things including higher taxes, less spending, more regulation, Chinese/Asian tightening, or Fed language change. Recent initiatives include Obama's banking initiatives, and several Asian tightening measures. In the next few months this theme is set to intensify, and we expect positive payrolls, a Fed language change, and the start of QE withdrawal. This willingness of authorities to move away from crisis mode is an important change and means that the tightening phase in the broad sense of the word has now started. Thus, indeed, 2010 is shaping up to be like 1994 and 2004, as we expected.
The start of tightening is hardly ever the end of the growth cycle, and normally the accompanying dip needs to be bought, but it typically is a serious double-digit dip lasting 2 quarters or more. The sector rotation has of course already started in October-2009 and is set to continue. As a result we move 2% from equities to bonds in our asset allocation, going to +5% cash, -2% UW equities, -3% UW bonds. We think short-term strength is quite possible, and we have not quite gotten an outright sell signal on our MTIs either, but the 6 month risk-reward of being long is worsening, and we recommend to sell into strength. Our 12 month MSCI Europe target of 1030 implies 6% downside.
Meanwhile. Goldman Sachs says, "It'll Be a Disaster If Bernanke Raises Rates", and calls for a 'gradual exit' from the current accommodative policy:
"On the surface, the backdrop for the Federal Open Market Committee meeting next week looks quite encouraging for members pressing the case for a gradual “exit” from the current accommodative stance.Interesting talk on the draining of over $1trln in excess reserves that banks are currently hoarding and receiving interest payments on. The real inflationists concern is that this money gets lent out, and multiplied by our fractional reserve banking system - something that is not happening at the moment! Keep an eye on how the fed handles that one.We also are not sure that Fed officials will need to raise the discount rate in order to facilitate draining excess reserves. It is unclear whether—and if so when—they will actually decide to undertake such a drainage operation. Our own view is that the volume of excess reserves does not have important effects on the broad financial system and the economy, at least now that the payment of interest on reserves enables the FOMC to raise short-term interest rates without having to match the demand and supply of reserves. Moreover, even if Fed officials do introduce a term deposit facility that is priced attractively enough to mop up a significant share of the current $1 trillion excess, the rate on this facility would likely be well below 0.5% given the current slope of the yield curve. This would make arbitrage unattractive even without a higher discount rate.
The argument that a higher discount rate would be a signal that liquidity conditions have normalized is therefore similar to the phasing out of the other emergency facilities. But against this, it is important to consider the potential tightening in financial conditions if markets view such a step as a precursor to a hike in the funds rate. Especially at a time when the economy clearly needs all the monetary stimulus it can get, this risk should not be overlooked."
2010 will likely not disappoint in terms of volatility and surprises. It's always something from left field that nobody expects that comes out and changes the world as we knew it - its just timing it and predicting exactly what that will be that is a constant challenge! It is very possible that any double dip in our future is a direct result of the fed purposely tightening policy to control unintended inflationary consequences from the massive stimulus applied to stem the severe deflationary episode we just experienced. That, however, could be years away.
VIX Flies As Obama's "Prop Chop" / China Weigh In
A: The volatility index surged about 56% in the past 3 days from 17.58 to 27.31 as markets reacted to what a future world of regulation and lending curbs may look like. As discussed three days ago in "Stimulus Withdrawal: Ain't It A Bitch!", China was a glimpse on Wednesday into how our markets would ultimately react when the 'juice' is talked about being taken away and the first forms of regulation are discussed. As usual, we got way too addicted to a world of free money, accounting gimmickry, liquidity facilities and stimulus packages. With selling volume surging, the dollar rally gathering steam and the VIX rising, I wonder if these are the beginning indicators of a dollar carry trade unwind?
Here is a quick look at the VIX over the past 6 months, focusing on the last 3 days with a spike of about 56% from mid-week; via Bloomberg:
The crazy thing is that people forget about the insane amount of stimulatory policies and programs that were taken to stem this severe episode of debt deflation. They just want their home prices to stabilize or rise, stocks to rise, and things to get better at any cost. The short term fix is what is wanted, without consideration for longer term consequences of such actions. That is what I want people to understand when they look at the equity markets these past few days.
As Jeff alluded to on Thursday, Obama's limits on prop trading in my opinion was the biggest driver, coupled with China's bank lending curbs, to drive the recent equity selloff. The Wall Street Journal reports, "Goldman Seen Hardest Hit By Prop-Trading Limit":
Goldman Sachs Group Inc. (GS) would be the hardest hit if White House proposals to limit so-called proprietary trading become law, analysts said Thursday.According to Reuters:Morgan Stanley (MS), J.P. Morgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) also would be affected, the analysts added.
On a day when Goldman reported a full-year profit of more than $13 billion, President Barack Obama proposed that banks and financial institutions that contain banks should be banned from running proprietary trading operations unrelated to serving customers.
Obama also proposed that banks should not be able to own, invest in or sponsor hedge funds and private-equity funds. The announcement shocked some banking analysts, making them more concerned about regulatory risk in the industry. The proposal to ban the practice, known in the industry as prop trading, comes roughly a week after Obama unveiled plans to levee at least $90 billion in fees on the largest financial institutions. In the U.K., large bank bonuses are being taxed at 50%.
Prop trading accounts for 4.9 percent of revenue at Credit Suisse, 4.3 percent at Deutsche Bank, 4.2 percent at Barclays, 3.1 percent at Societe Generale and 1.4 percent at BNP Paribas, UBS analysts estimated.For Goldman, that percentage is significantly higher; a reported $4.5Bln of revenue was from prop trading in 2009, 10% of their total reported $45Bln in net revnue for the year. The WSJ article mentions that "prop trading could account for up to 20% of Goldman's revenue during a particularly successful quarter...". Ouch, that would hurt and the stock would have to re-adjust to that new reality if the proposal becomes law.
With the equity markets being the discounting mechanism that they are, this is the new world we have to get used to as stocks start to discount future realities. This includes higher rates, higher taxes, more regulation, expiration of liquidity programs, expiration of the fed's debt monetization experiment, and tougher capital constraints to curb lending and make sure this credit boom and bust doesn't happen again; at least for a while. Wall street will have to wait to see how this all plays out before inventing new and improved ways to work and play around the new regulation; something the street is very good at doing.
For now, expect continued volatility especially if the dollar does something nobody expects it to do: continue rising! Quietly, the greenback is at a 5-month high against the Euro and I wonder if this is the beginning of the carry trade unwind, as traders close out short term debt positions funded with cheap dollars? When a positive carry turns to a negative carry, crazy things can happen!
MortgageMan's Update on Mortgage Markets
First and foremost, apologies... Haven't had much time in the past half a year or so to post anything. Much of it had to do with the refinancing boom of 2009 and me taking my mortgage career to the next level and switching lenders.
That said, it is nice to be back and I truly look forward to posting here on a regular basis and reading your feedback.
So lets backtrack a little bit and let me give you a little update as to what has happened in the mortgage market since my last post:
1. RATES: We are hovering around the 5.25% area for the 30 Year, 4.25% on the 5/1 and about 4.50% for the 7/1 Conforming products. The Jumbo 30 year is around the 5.75% range and the 5/1 JUMBO ARM's are in the high 4's.For 2010 many in the mortgage world are seeing the purchase business coming back and refinances dying off slowly. I concur with that outlook. I see a lot of inventory on the market and am starting to see a pickup in inquiries relating to pre-approvals.2. LOAN LIMITS : Might be a bit of old news but the extended loan limits of '08 & '09 were extended to 2010. Take advantage of the High Balance Conforming $729,750 while you can.
3. NEW DEV FINANCING: Still require a 71% presale for New Construction before banks can step in to provide lending. FHA can sometimes go into a building for a spot approval and issue a 51% approval. Also some regional banks (Astoria, Emigrant, Apple) that don't sell the loans off their portfolios may have a lower threshold...This may go down to 51% once HUD declares Manhattan a non-declining market.
4. RESPA GUIDELINES: By far one of the most significant changes of 2009/2010 is the new RESPA regulation imposed by HUD. Basically it boils down to a completely brand new Good Faith Estimate that is supposedly easier to understand and shop around, as well as full disclosure of ALL fees and a limit by the government on banks charging various processing and underwriting fees.
The RESPA guidelines require full disclosure of lender, buyer, seller, and title fees. There is a tolerance of 10% by which certain individual fees can increase on the HUD-1 Settlement Statement (the piece of paper you get at closing listing ALL your fees), from the originally quoted GFE. The GFE can only be changed under very stringent circumstances or instances where it is out of the lender's control. For instance if the rate needed to be extended due to the seller not being able to set a closing on time, and as a result points needed to be charged for the rate extension.
5. LENDING RATES & 10YR TREASURY NOTE: From 2007 to 2009, it seemed that rates weren't affected as much as they were by the TNX or the 10 Year Treasury Note, and at one point in 2007 Noah wrote an article on the comparison of rates and the 10 Year. It showed very little correlation between both.
As a result, many lenders started following Mortgage Backed Securities and trusted it as a gauge for predicting where rates were going. Obviously I am not going to discount that the MBS is not an indicator of where rates are or where they are going, but in the past couple of months I do see some trends relating to mortgage rates and the 10 Year Note once again... Down to a point of where the yields drop and rates move down as well.
I am going to ask Noah to research the 10 Year vs. Mortgage rates and post up his findings here.
More updates to come next week!
Going for the Jugular
Not long ago I wrote a piece entitled "New Yorkers...and the Rest of "The Rich Financiers" Under Attack" predicting that nascent movements to taxing Wall Street bonuses and even financial transactions were an indication of a growing backlash against the street that had potentially negative implications for the financial industry and New York City economy. Initially, not a lot of new movement came on this front, although the U.K. government did go through with its rather onerous tax on banker bonuses.
However, in just a few short weeks since that time, the CEOs of several of the largest banks/brokers were invited to Washington for a second proctological exam and the already controversial "Bank Tax" was proposed. I personally was privy to an anecdote which underscores the very real issues behind the attacks on Wall Street. A trader I know recently lost their job due to the closure of a significant Wall Street hedge fund, where illegal activities have been suggested. Contrary to any fears of radioactivity, this trader was almost instantly hired by a previously bailed out bank to trade for customers and run a proprietary trading book (doing both these activities at once seems problematical to me, but apparently not to many investment banks). The trader was given a large bonus guarantee, which I joked, must not have been reviewed by the pay czar. It gets better. When this trader arrived on the trading desk of this large previously bailed out institution, he discovered a total lack of risk management. To wit, when the desk lost money, the policy was to simply sack the youngest guy there - I am not making this up. My understanding is that the newly hired trader was viewed as a risk management guru for implementing risk management policies generally followed by legitimate hedge funds.
Meanwhile the banks have begun to report results for the fourth quarter and full year 2009. It probably doesn't help their case that Goldman clocked in this morning with a monster quarter putting up a headline number of $8.20 per share vs. street expectations of $5.20.
As if on cue, Bloomberg reports that at 11:40 today, the President will propose new rules to limit financial institutions proprietary trading operations. This after a meeting with Paul Volker, the revered ex-Federal Reserve Chairman I quoted in my original piece railing against the inadequate changes to the financial system made thus far post crisis. According to Bloomberg, the Senate seat lost by the Democrats in Massachusetts yesterday, has woken the President up to the fact that the populous could give a grape about paying for universal healthcare, but is currently much more concerned with the economy, jobs and punishing Wall Street for its roll in the downturn.
In case anyone wants to shrug off the potential impacts of restrictions on proprietary trading, I would note that in its quarter reported this morning Goldman's trading and principal investments netted the firm $6.41 billion versus the rather paltry sums of $1.64 billion from I-banking and $1.57 billion from asset management and securities services. (Note that Goldman, which does not need customer deposits to run its business is least susceptible to government imposed prop trading limitations.) Other banks that have reported results in the last couple of days have also revealed that a significant part of their profitability came from fixed income trading, which more than offset the woeful performances in such normal bank activities as lending to consumers, businesses and the real estate market.)
As in my last piece I won't get into a discussion of the economic validity of government intervention into the workings of banks or the financial markets or whether banks should be gambling with depositors money on their proprietary trading desks (or front-running their customers orders for that matter). My purpose here is only to warn you that the backlash is real, re-regulation is highly likely and it will not be good for Wall Street business levels, compensation, or employment. This will be a distinct negative for Manhattan real estate. WE ARE NOT GOING BACK TO 2006.
E86th Sunken Plaza To Be Home of New Shake Shack
A: Hat tip Curbed. I keep hearing all about this Shake Shack and their amazing burgers but I am yet to try one. Its not because of lack of effort. On three occasions my wife and I walked the dogs to the much better dog run over on 81st and CPW and tried to get into Shake Shack for a quick takeout; the Carl Schurz dog run just doesn't match up for dog owners on the east side! On all three tries, the lines were way way out the door and we gave up. Doh! So, the hype is high and the food better be good because it's coming only 2 blocks from my apartment and Digs likes to eat his burgers!
According to the NY Times, they signed a 15-year lease and I'm dying to know what rate and incentives they got to ink that deal in this very attractive market for commercial tenants:
"Shake Shack has signed a 15-year lease at 182 East 86th Street, which is between Lexington and Third Avenues at the base of the 440-unit apartment building with circular balconies known as Park Lane Tower. Neither the landlord nor the lessee would reveal the negotiated price. The company’s owners expect to open within the year in the 3,200-square-foot retail space, which is reached via the 2,750-square-foot sunken plaza.Mr. Garutti said the Shake Shack intended to make the plaza a place for patrons to have picnics. They will be able to place orders at the Shake Shack stand. There will also be seating inside, he said. Though the plaza extends through to 85th Street, it will be open only on the 86th Street side."
It's funny because I always told my wife that this spot would be perfect for a Dairy Queen with an awning and picnic tables in the sunken space for outdoor dining...guess I wasn't too far off!
For me, I got used to the burgers at these 3 restaurants in the Upper East Side:
1. The Lexington Candy Shop Luncheon - pricey and very tight seating booths, but this old school candy shop has all the stuff to make any adult think they are a kid again. Even egg creams done the real way! For the burger, get the bacon cheeseburger with fried onions - you know, the ones that remind you of White Castle's bite size burgers but in a high quality way!
2. Gracie Mews Diner - Yes, an above average diner in my opinion also has some underrated burgers! I think its the apple smoked bacon that makes it soooo good..even if delivered!
3. Burger Heaven - Been here a few times with colleagues of mine to discuss the state of the Manhattan markets and what they are seeing in their business. The bacon cheeseburger deluxe hit the spot, but is not my top choice when that itch hits!
What are your favorite burger joints around the city??
