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Monthly Archive for July, 2011

Featuring Our Northern Manhattan 2011 Mid-Year Market Fundamentals Reports

This week we are pleased to announce the release of our Mid-Year Market Fundamentals Reports for Northern Manhattan. The reports provide insights into the strengthening uptown rental, condominium and retail markets. Looking at our regular market overview, we cover several macro-economic developments, the potential impact of a US debt default on multifamily properties, banks reentering the RE markets and local developments.

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 1.3 percent in the second quarter of 2011, (from the first quarter to the second quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. Economists expected the economy to post a 1.8 percent growth rate. In the first quarter, the increase in real GDP was revised downward from 1.9 percent to 0.4 percent.

In the debt ceiling showdown, increased borrowing costs present the greatest concern for real estate investors, according to Christian L. Redfearn, associate professor at the USC School of Policy, Planning and Development and member of the Lusk Center for Real Estate. In an interview with Multi-Housing News, Prof. Redfearn said that while investors are already turning away from Treasuries to multifamily investments to get a better yield, it’s unclear if a debt default would change the spread between the two.

In second quarter earnings conference calls, banks across the country reported growth in commercial real estate portfolios or plans to reenter the market, according to an article by the CoStar Group. Both large banks and community banks reported increased demand and more competition for new commercial real estate loans, especially in the multifamily market. Banks are optimistic due to the improved quality of the commercial real estate assets on their books.

The Lois V. and Samuel J. Silberman School of Social Work at Hunter College has a new home in East Harlem. The School of Social Work has moved to its new location at 119th Street and Third Avenue in time for the start of classes in August, according to the Hunter College website. The eight-story, 147,000 square foot, $135 million facility also will house Hunter College’s Institute for the Study of Puerto Ricans and faculty from the new CUNY School of Public Health. An official ribbon-cutting ceremony is scheduled for September.

The Bronx is rising, not burning, according to an article in Crain’s. The Bronx, which lost 21 percent of its population in the 1970s, in the last decade reported the addition of 52,458 new residents, a growth in wages that exceeded the rest of the city, a greater influx of immigrants than the other boroughs, and construction of the borough’s first co-ops and condos in more than 30 years. The article cited data from Milano The New School for Management and Urban Policy that found city-financed gut rehabs, which began in the Koch Administration and continued through subsequent administrations, shrank the number of vacant apartment buildings by 78 percent to 4,832. The Bloomberg Administration has created or preserved nearly 35,000 units of affordable housing, and the borough is attracting private investment in new businesses.

Northern Manhattan Investment Sales Jump In the First Half 2011

Featuring Our Northern Manhattan 2011 Mid-Year Sales Report

Investment sales in Northern Manhattan jumped 30 percent in transaction volume and 34 percent in dollar volume in the first half of 2011 compared to the second half of 2010, according to Ariel Property Advisors’ Northern Manhattan 2011 Mid-Year Sales Report. For the first six months of the year, Northern Manhattan saw 107 trades totaling $259 million.

“We’re pleased to report that there has been a clear improvement in the investment market in Northern Manhattan in the first six months of the year,” said Michael Tortorici, vice president of Ariel Property Advisors. “We anticipate that the second half will be even more active because recent bidding activity has been strong on the available inventory.”

Multifamily assets made up nearly 80 percent of the total dollar volume of investment sales in Northern Manhattan in the first half of 2011.

The Northern Manhattan team sees several reasons for optimism. “Real estate fundamentals are quickly turning in favor of property owners as rising rents, firm condo prices, tight supply, and continued low interest rates add upward pressure on prices,” said Victor Sozio, vice president of Ariel Property Advisors. “We’re already seeing this with development sites, where 2011 prices are 10 to 15 percent higher than 2010.”

Although sales for development sites for the first half of the year were light compared to the second half of 2010, a higher number of transactions are expected for the second half of 2011 as indicated by the amount of development properties under contract and set to close later this year. Ariel Property Advisors, for example, has six development sites in contract and several more on the way. The Ariel team sees this activity as an indication that the development market has moved beyond the “bottom” and is headed up.

The following is a breakdown of the investment assets in Northern Manhattan in the first half of 2011:

Multifamily: In the first half of 2011, Northern Manhattan’s multifamily asset class saw 59 transactions totaling $207 million in gross sales, which is a 39 percent increase in transaction volume and a 34 percent increase in dollar volume compared to the second half of 2010. Average cap rates increased to 7.55 percent, compared to 7.01 percent last year, and average gross multiples came in at 7.7 percent, a 5.5 percent decline from the previous year. The average price per square foot in the first half of 2011 increased to $182, a 20 percent jump compared to 2010, and the highest level since 2007 when multifamily assets traded at $239 per square foot.

Development Sites: Seven development sites traded in Northern Manhattan in the first six months of 2011 for a total aggregate consideration of $9 million, compared to 12 for an aggregate consideration of $28 million in the last six months of 2010. At $79, the average price per buildable square foot was 14.5 percent higher than last year, which suggests the market has passed the bottom in terms of development site prices in Upper Manhattan.

User Properties: With 37 transactions in the first six months of 2011, the number of trades for the user property segment was 20 percent higher than the levels seen in the second half of 2010. The average price per square foot for renovated user townhouses dropped 9 percent from 2010 figures, settling at $274 per square foot.

Commercial: Four commercial properties traded in the first half of 2011, compared to three in the last half of 2010.

Please go to www.arielpa.com/research/reports for a copy of the interactive research report.

Our Observations For the Week

The New York State Labor Department reported the state gained 13,600 private sector jobs in June 2011, and an increase in the state unemployment rate (seasonally adjusted) to 8.0 percent in June from 7.8 percent in May. The number of unemployed New Yorkers also increased to 760,500 in June from 751,600 in May. The seasonally adjusted unemployment rate in New York City increased to 8.7 percent in June from 8.6 percent in May. The national unemployment rate in June was 9.2 percent.

The Bloomberg Administration has announced two economic development projects for 125th St. in Harlem. The NYC Economic Development Corporation has selected Janus Partners LLC and Monadnock Construction, Inc. to redevelop the former Taystee Bakery complex in West Harlem into CREATE @ Harlem Green, providing an additional 328,000 square feet of commercial and industrial space to house a number of tenants from creative industries. NYCEDC also selected 125th Street Equities LLC to redevelop the Corn Exchange Building at 125th St. and Park Ave., rehabilitate its landmarked base and add six additional floors for office and retail use. The two sites have each been vacant for several decades.

Manhattan Office Leasing Jumps 40 Percent in First Half of Year

Fed Chairman Ben Bernanke told Congress that failing to raise the debt ceiling by the Aug. 2 deadline “would have a very adverse effect very quickly on the recovery.” In response to the impasse in Washington, Moody’s is reviewing a possible downgrade of the U.S. government’s debt rating. Bernanke said that although he is less confident than in previous months that the recovery is sustainable, no new Fed policies to lift the economy are planned at this time. The Fed completed its $600 billion bond-buying program in June.

In a nationwide survey of readers, the CoStar Group found commercial real estate professionals are disappointed that the economy isn’t recovering faster. Although some cited an uptick in market activity this year, others reported cautious lenders, wary tenants, and investors that are still looking for “deals.” The uncertainty in the economy caused by high unemployment and other gloomy economic news is contributing to the market’s indecisiveness.

In New York City, however, the commercial real estate industry had more good news to report. Office leasing in Manhattan in the first two quarters totaled 17.6 million square feet, which is a 40 percent jump from the same period last year and the best six-month performance in 13 years, according to Cushman and Wakefield Inc. The firm added that leasing activity in the last two months was the strongest on record. Average asking rents only increased 2 percent to an average $55.52 per square foot, but downtown rents increased 4.2 percent to $39.38. The firm’s brokers said that at 9.4 percent, the vacancy rate is still favoring tenants.

The New York City Housing Authority will receive $273.78 million of the $1.9 billion that the U.S. Department of Housing and Urban Development has awarded to public housing authorities to make improvements to public housing units. The allocation is part of HUD’s Capital Fund Program which funds the construction, renovation, and/or modernization of public housing.

Representatives of the Olnick Organization, owners of Lenox Terrace in Harlem, have presented tenants with a plan to expand the 1,700-unit complex by building six new apartment towers; improving the retail space and adding upscale restaurants; and turning parking lots into parkland. Lenox Terrace, whose tenants include former Gov. David Paterson and Rep. Charles Rangel, is located between Fifth and Lenox Avenues and 132nd and 135th Streets.

National Jobs Numbers Bleak, but Positive Signs in Local Real Estate Market

The jobs number barely budged in June, with only 18,000 new jobs created, according to the US Bureau of Labor Statistics. The unemployment rate bumped up to 9.2 percent from 9.1 percent in May, the third straight increase and highest level since December 2010. Employment in most private sector industries was unchanged, but the number of government jobs fell by 39,000. The long-term unemployed, who have been jobless for 27 weeks or more, totaled 6.3 million and made up 44.4 percent of the unemployed. The stock market fell on news of the weakest jobs report in more than a year, and investors rushed to Treasuries, pushing the 10-year note to 3.04 percent on Friday. It is worth noting that while unemployment is up nationally, NYS unemployment has been well below national levels for the last few months, most recently at 7.9%.

Second quarter figures show a growing confidence in the Manhattan office market with the vacancy rate falling to 10.8 percent, 1.7 percentage points lower than the same period the previous year, and rents increasing to $53.49, which is 2.7 percent higher than the year before, according to statistics released by Jones Lang LaSalle. Class A rents increased by 4.7 percent to $61.13 per square foot, while Class B rents fell or remained flat in some areas, indicating a flight to quality.

Average residential rents also rose in every neighborhood in Manhattan in the second quarter of 2011 compared to the same period in 2010, according to a report released by Citi Habitats. Manhattan rents jumped 10.1 percent, the largest average increase in rent since the end of 2006, and the vacancy rate fell to a record low, 0.72 percent, which is a 0.25 percentage point decline from the previous year. Another report, released by Prudential Douglas Eilliman, showed average rents in second quarter increased by 3.5 percent.

Asking rents for retail space on Broadway from Battery Park to Chambers Street in Lower Manhattan are rising faster than in other areas of Manhattan, according to a report released by the Real Estate Board of New York. Average asking rents along the Broadway commercial corridor have increased 36 percent to $184 a square foot this year compared to the spring of 2010, as landlords prepare for new office workers, tourists, and residents to return to new buildings at the World Trade Center. In the entire downtown area, asking retail rents rose 2 percent to $103 a square foot, and increased by 1 percent in all of Manhattan.

US Home Sales Show Increase for First Time in Eight Months

Multifamily Month In Review

Transaction Overview   After rather significant increases in transaction and dollar volume in March and April, May showed a marked decline in multifamily trading activity. For the month, 19 multifamily transactions took place consisting of 29 buildings and totaling $144.263 million in gross consideration. This is less than half of the number and dollar volume of trades that took place in April. It also pales in comparison to May 2010, which saw 33 multifamily transactions comprised of 47 buildings totaling $199 million in gross consideration.

Manhattan saw the most activity with 8 transactions consisting of 10 buildings sold for an aggregate consideration of $34 million. The average price per square foot for the month was just over $432, but several properties like 245 Mulberry Street and 212 Eighth Avenue saw prices over $625 per square foot. Though it posted only two sales, Queens saw the highest dollar volume thanks to the $57.75 million sale of 245-10 Grand Central Parkway South, a housing complex that contains 3 buildings housing 240 units and also includes several open areas that could potentially be developed.

The Bronx saw four transactions totaling over $28 million. The sale of 999 East Tremont Avenue and 2008 Bryant Avenue accounted for almost $25 million of this total. They sold to the same buyer and averaged out around $56,700 per unit.

Brooklyn saw only 4 trades totaling $19 million in sales, but a notable 8 building package sold in the up and coming Boerum Hill area. The propery located at 525-35 and 539-41 Atlantic Avenue sold for $10 million, or $410 per square foot and $333,000 per unit (though the price per unit number may be misleading due to the ground floor retail). Upper Manhattan saw only 1 multifamily sale at 630 West 172nd Street for $2.14 million or $85,000 per unit.

Despite a strong March and April, lackluster sales activity in May led our six month trailing average numbers to level off for the first time in several months. As all of our multifamily assets continue to receive significant bidding activity at relatively aggressive levels and several have contracts signed or negotiated, we continue to believe activity will pick up over the course of the year.

Unemployment:   According to the NYS Labor Department, the New York State unemployment rate (seasonally adjusted) remained constant at 7.9% for the month of May. This marks the 20th consecutive month that the State unemployment rate has either decreased or remained unchanged dating back to August of 2009. The New York City unemployment rate (not seasonally adjusted) rose by 30 basis points to 8.6% for the month of May. It is the first month over month increase in the City’s unemployment rate since the start of 2011.

Financing:   Treasury rates exhibited very marginal moves across the board from April to May. The 30-year bond was up 1 basis point from 4.15% to 4.16%, while the 10-year note was down 3 basis points to 2.93%. The 5-year note showed the largest move, dropping 8 basis points to 1.52% from April’s 1.6%.note. The 1-year T-bill remained unchanged at .18%.

Rental Market / Vacancy:   The May rental report from Citi Habitats showed a significant drop in the vacancy rate while prices remained relatively stable. May rents increased 1% over April’s levels for studios, 1 bedroom, 2 bedroom and 3 bedroom units in Manhattan. The vacancy rate for Manhattan fell to .69% of the rental stock, a decline of 25 basis points from .99% in April. This marks the fifth consecutive monthly decline in the vacancy rate and the largest decline month over month since April/May 2010.

Expenses:   This month’s home heating prices declined for the first time since August of 2010. The price per gallon of No. 2 oil fell 8.7 cents from 427.7 to 419 cents per gallon. This is the largest month over month decline in home heating prices since January 2009. Residential electricity rates rose .84 cents/KWH to 16.82 cents/KWH, and has now increased every month since the start of the year.

Our Observations For the Week

For the first time in eight months, the S&P/Case-Shiller Home Price Indices show a monthly increase in prices for the 10 and 20-City Composites of 0.8 percent and 0.7 percent, respectively, in April versus March. Year over year, both indices are lower than April 2010 levels, however, with the 10-City Composite falling 3.1 percent and the 20-City Composite dropping 4.0 percent. In the New York Metropolitan Area, home prices rose 0.8 percent in April compared to March, but are 2.8 percent lower than in April 2010.

The commercial mortgage-backed securities market, which peaked at $243 billion in 2007 and fell to $2.4 billion in 2009, is making a come back with Bank of America, Citigroup, Cantor Fitzgerald, and Citadel reviving the bonds, which are backed by pools of commercial real estate loans. In 2010 there were 12 deals totaling $12.6 billion and so far in 2011 there have been 16 deals totaling $16.8 billion, a figure that could rise to $30 billion. The NY Times reported that underwriting standards today are not as strong as they were in 2010, but are similar to the deals underwritten in 2004 before the boom.

The New York Rent Guidelines Board voted to raise the maximum increases on rent-stabilized apartments to 3.75 percent for one-year leases and 7.25 percent for two-year leases, leaving landlords to complain that the increases are not enough to cover operating costs. The increases go into effect in October. Last year, the board voted to allow rent increases of 2.25 percent for one-year leases and 4.5 percent for two-year leases.

The slowdown on Wall Street is resulting in hundreds of layoffs at New York City investment banks and could result in lower bonuses, which would hurt New York’s economy including the residential real estate market. A Wall Street Journal article said that according to FactSet, major Wall Street firms are projected to generate $180 billion in revenue for the first half of 2011, a 10 percent decline from the first half of last year.

Tahl Propp Equities is seeking to buy a city-owned property near 107th and Park Avenue on which to build a $40 million, 200,000 square foot affordable housing apartment building with 200 units, the Wall Street Journal reported. Tahl Propp began investing in Harlem in the late 1990s and currently owns about 3,500 apartments in the community, of which 90 percent are affordable housing. The NYC Department of Housing Preservation and Development owns the development site, therefore, a sale would require City Council approval.