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Latest State of Affairs in New York City

07/31/2009

You would think we are in the middle of a strong economy, with all the hoopla surrounding the stock market rally of the past two months, together with the positive comments issued by Federal Reserve Chairman, Ben Bernanke.  While many of the numbers coming in from the multi national corporations have been better than expected, the effect upon Mr. John Q. Public and "Main Street" businesses, have yet to be felt in any significant manner.

    More importantly, New York City and New York State generally are always lagging indicators in the last few national recessions.  Indeed in 2008, our local State and City economy fell into recession many months after the rest of the country did.

    New York State and New York City took much longer to dig out of the past two recessions than the rest of the country.  In both cases, our local recession lasted a year or more longer than the rest of the country.  1993-94 is the best example of this delayed start to the local recovery.

    Our current facts on the ground,  include the following:
        

  • Billions of dollars of Manhattan real estate has been returned to lenders. Many more billions of dollars will be returned over the next 12 months (See Crain's New York Business July 27, 2009 issue, article entitled "Bills coming due for Moinian ".)   
  • "Manhattan Office Rents dropped 44%", published in the July 14, 2009 issue of Crain's New York Business.                                      Commercial rents have a great deal further to fall in this recession.
  • "RFR's Rosen & Fuchs sued for $145,000,000.00" as reported by Crain's on July 16, 2009. - If market leaders, Rosen & Fuchs can be sued, can anybody else be far behind?

       
    As previously predicted in prior postings, New York City and New York State generally, will continue to see weakness for the balance of 2009 and well into 2010.  That is because tenants still can't afford to pay the high rents that landlords are trying to achieve in this sorry market.  Landlords will have to  price their offerings much lower in order to entice tenants to come back into the market.

    What many owners do not understand is that a typical law firm, accounting firm or other service company cannot sustain rent in the $60s, 70s and 80s under normal financial circumstances.

    The rents achieved in the 2005-2007 " financial bubble", were straight from dreamland.  They were never sustainable for any normal type of business.  Landlords need to understand this and reprice their leasing inventory to what the market is willing to pay for it.  That is probably 20-25% lower than current rates.  A total of about 50% to 55% off the top rates achieved during the hubble.

    As far as the commercial office market, banks were willing to lend any amount of money to purchasers. They did not learn from their prior mistakes of the 1980's and 1990's.  They will not learn from their mistakes made over the last 5 years either.

    A survey of many of our clients both inside and outside of the real estate industry indicates clearly that the recession has not yet turned the corner in New York City.  But that provides buying opportunities for tenants, owners and investors.

    What should one do?  Here are some answers: 

  • As previously predicted, start scouting for investment opportunities in the last quarter of 2009 and the first quarter of 2010. The bottom in the market will occur some time during the next nine months. Prices will be significantly lower then than they are now.
  • If you are a tenant looking for space to lease, start looking after the summer and don't stop until you find a place that is affordable for you and your company.
  • If you are a leasing landlord, reprice your space now to lure the few tenants that are still in the market. Failure to do so will just result in your losing tenants to a cheaper alternative. It is clear that a tenant whose business is down 30 to 40% must achieve a 30 to 40% reduction in its annual leasing bill. If you want to keep quality tenants, you must satisfy their financial needs or you will lose them.

    So there are opportunities galore for those who are willing to look and for those with the money to invest.

    Financing is available but only for 50% of any particular deal sent your way.  You must presume that you will have to pay 50% of the purchase price of any apartment building, commercial property, etc., that you wish to purchase in this market.

    Please let me know what you think.  Please email me at Malkie@kleinsolomon.com. Have a great summer.






























 

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