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Monthly Archive for August, 2011

Second Quarter Construction Project Starts Fall Dramatically in New York City

Distressed home sales made up nearly a third of all residential sales in the country in the second quarter, the Commerce Department revised second quarter GDP downward, and year-over-year construction project starts fell nearly 40 percent in New York City. However, the Obama administration is floating new proposals to strengthen the housing market and new construction projects are planned for 42nd Street.

The Commerce Department revised its estimate for second quarter growth in gross domestic product downward to 1 percent from 1.3 percent. GDP only increased by 0.4 percent in the first quarter. Meanwhile in a speech in Jackson Hole, Wyo., Fed Chairman Ben Bernanke described the U.S. recovery as modest but was optimistic about the future because U.S. banks are healthier, manufacturing has increased, and Americans are improving their balance sheets. He said the central bank is prepared to use its resources to boost economic growth, but gave no indication of specific plans.

Distressed home sales made up nearly a third of all the residential sales in the country in the second quarter of 2011, RealtyTrac reported. These homes, which were in some stage of foreclosure or bank-owned properties, accounted for 31 percent of all sales and increased 24 percent in the second quarter of 2011 compared to the same period the previous year. Additionally, pre-foreclosure sales rose 19 percent in the second quarter 2011 compared to the first quarter.

The Obama administration is reviewing a proposal to strengthen the housing market, which would allow millions of homeowners with government-backed mortgages to refinance them at current rates of about 4 percent. The refinancing effort would lower mortgage payments, enabling consumers to save an estimated $85 billion a year. The program would stimulate the economy because consumers would spend their savings on other goods and services. Roadblocks to the plan could include the regulator for Fannie Mae and Freddie Mac and investors in government-backed mortgage bonds. Another proposal under consideration by the administration is a home rental program to prevent hundreds of thousands of foreclosed homes from flooding the market.

Construction project starts in New York City, including new construction as well as alterations and renovations to existing structures and “nonbuilding” projects such as bridges, highways, mass transit, and water supply systems, fell nearly 40 percent in the first half of 2011 compared to the same period the previous year, according to a New York Building Congress analysis of McGraw-Hill Construction Dodge data. The study found that $6.4 billion worth of construction projects were started in the first half of 2011, compared to $10.6 billion in the first half of 2010, $7.0 billion in the first half of 2009, and $10.8 billion from January through June of 2008. The report said there are signs of improvement in the second half of 2011, with building permits up 12 percent this year, offering hope for a modest rebound in residential construction.

On the bright side, several new construction projects are planned for West 42nd Street between Sixth Avenue and Broadway. Blackstone has filed plans to demolish a vacant five-story building at 124 W. 42nd Street to build a retail glass box parallel to the new public plaza, which is next to the office tower it owns at 1095 Sixth Avenue. Also, Highgate Holdings plans a new 250 to 400 room hotel on a vacant lot at 136 W. 42nd. The new hotel is adjacent to the former Knickerbocker Hotel at 1466 Broadway, which will return to life as a hotel after serving as a Class B office building.

Stock Market has Another Volatile Week; NY State Adds Jobs

The Dow Jones Industrial Average closed down 172.93 points on Friday, after falling 419.63 points on Thursday. Investors have been concerned about Europe’s sovereign debt problems, political gridlock in Washington, and the weak U.S. economy. The National Association of Realtors reported that sales of previously owned homes fell 3.5 percent in July from June; surveys by the Philadelphia and New York Federal Reserve Banks showed a downturn in manufacturing; and new claims for unemployment benefits rose to a seasonally adjusted 408,000.

An extended period of low short- and long-term interest rates will help the struggling housing market recover, and interest rates as low as 3.5 percent on 15-year fixed-rate loans will assure a continuation of the refinancing boom, according to Freddie Mac’s U.S. Economic and Housing Market Outlook for August. The report included data from the Freddie Mac House Price Index, which showed that in June U.S. housing prices were down 25 percent, on average, compared with the peak five years ago.

U.S. Commercial Mortgage Backed Securities 30 days or more delinquent, in foreclosure, or REO increased to 9.89 percent in July, an all-time high for delinquencies, according to Trepp’s July 2011 U.S. CMBS Delinquency Report. In addition, some analysts have observed that proposed risk retention regulations governing the market could end up decreasing investor demand. However, a Barclays Capital exec sees the CMBS market continuing to grow to a $100 billion a year market.

New York State’s Labor Department reported the state added 14,100 private sector jobs in July. Since the recovery began in November 2009, the state has recovered 57 percent, or 188,100, of the private sector jobs lost during the recession of 2008-09. The seasonally adjusted unemployment rate in July for the state was 8 percent, unchanged from June, and New York City’s unemployment rate was 8.7 percent, also unchanged from June. The national unemployment rate for July was 9.1 percent.

New York City Multifamily Transaction Rebound In June

Multifamily Month In Review

Transaction Overview
Buoyed by the two major Manhattan transactions, June was the most active month for multifamily sales thus far in 2011 and represented a strong rebound from dismal activity in May. June saw 40 multifamily transactions consisting of 42 buildings and totaling $383.6 million in gross consideration. Much of this dollar volume came from the Cheshire Group’s $105 million acquisition of 1327-29 Lexington Avenue and Macklowe’s $70 million purchase of 150 East 72nd Street.

Manhattan below 96th Street had the highest dollar volume this month. The area saw 14 buildings sell in 12 transactions for a gross consideration value of $254.2 million. Aside from the previously mentioned sales, several other bellwethers are worth noting. 414 West 44th Street, a 52 unit property in Midtown West, sold for $12.9 million which translates to $387 per square foot and $248,000 per unit. Downtown 126-28 Macdougal Street sold for $11.3 million, or $470 per square foot, and 200 Park Avenue South sold for $20 million, or $594 per square foot.

With 12 transactions, The Bronx matched Manhattan for the most transactions in the month. It saw 12 buildings sell for an aggregate value of $42.44 million. Most notably, there was a portfolio of 3 apartment buildings with a combined 175 units that sold in June for $15.5 million or $88,000 per unit.

Brooklyn saw the second highest transaction value this month with a gross consideration of $66.16 million. The sale of three, 7-story apartment buildings for $51 million, or $144,000 per unit, accounted for most of this activity.

Queens and Northern Manhattan saw the lowest activity across the board. Queens saw 4 buildings trade in 4 transactions for a gross consideration of $12.2 million. Meanwhile, Northern Manhattan had only 2 transactions that traded for $8.625 million. The sale of 500 Ft. Washington Street for $7.1 million, or $161 per square foot, stands out as a notable Washington Heights transaction.

Despite this activity, our six month trailing average still declined slightly in both dollar and transaction volume for the second month in a row. This decline is not surprising since the 1Q 2011 of the year saw much less activity than 4Q 2010. We continue to expect steady to increasing activity through the end of the year.

Please refer to our Comp-Trak application for a full list of transactions across the five boroughs.

Economic indicators
as captured by Ariel Property Advisors’ Landlord Dashboard show the following trends:

Unemployment Rate – According to the NYS Labor Department, the New York State unemployment rate (seasonally adjusted) for June came in at 8%, 20 basis points higher than May’s rate of 7.8%. This is the first time the State unemployment rate has increased month over month since September of 2009, ending a span of 20 consecutive months that saw a decreasing or unchanged State unemployment rate. The New York City unemployment rate (not seasonally adjusted) also rose by 20 basis points to 8.8% for the month of June. The City rate has now increased in back to back months for the first time since June of last year and seems to have broken out of the downward trend we saw in the first half of 2011.

Financing – Treasury rates exhibited very marginal moves across the board from May to June. 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 May’s 1.6%.note. The 1-year T-bill remained unchanged at .18%.

Rental Market / Vacancy – The June rental report from Citi Habitats showed vacancy rates unchanged as prices increased very slightly across the board. June rents increased close to 1% over May’s levels for 2 bedroom and 3 bedroom units in Manhattan while rents for studios and 1 bedroom units saw prices higher by nearly .05%. The vacancy rate remained constant at 0.69% of the rental stock. This is the first time the rate did not decline month over month since November of last year.

Expenses – This month’s residential electricity rates rose .88 cents/KWH to 17.05 cents/KWH, and has now increased every month since the start of year. Home heating prices for June declined sharply for the second consecutive month. The price per gallon of No. 2 oil fell 8.1 cents from 419 to 410.9 cents per gallon and has dropped considerably since peaking in April of this year.

Our Observations For the Week

All eyes were on the volatile stock market this week as it dipped and climbed more times than the Coney Island Cyclone. For the first time in its 115-year history, the Dow Jones Industrial Average moved by more than 400 points for four consecutive days. The week ended with the Dow Jones Industrial Average closing up 125.71 points, after jumping 423 points on Thursday. Investors responded positively to Friday’s report that retail sales increased 0.5 percent in July.

While Wall Street was reeling, elsewhere in New York City, the commercial real estate industry continued to report good news.

The City’s Department of Buildings reported that construction permits for new buildings, alterations, and demolition increased by about 12 percent in the first half of 2011 compared to the first half of 2010. However, permits were still about 6 percent below the first half of 2008. Demolitions, an indicator of new projects, were up 14 percent. However, about 650 projects remain stalled in the city.

The Chinese, it turns out, are the New York City real estate industry’s new BFFs. The New York Times reported that Chinese banks invested more than $1 billion in real estate loans in New York City during the last year. Chinese investors also are buying luxury apartments and plan to spend hundreds of millions of dollars on commercial and residential projects like Brooklyn’s Atlantic Yards. Leases also have been signed by Chinese companies at the Empire State Building and 1 World Trade Center.

Marcus & Millichap reported that New York City’s second quarter apartment vacancy rate, 2.8 percent, was the lowest in the country. Average monthly rents of $2,749 in the second quarter were about $47 less than the peak in 2008. Meanwhile, Citi Habitats reported a softening in the Manhattan apartment rental market in July with the average Manhattan rent falling to $3,358 in July from $3,372 in June. The Citi Habitats report said the vacancy rate in Manhattan was 0.86 percent in July compared to 0.69 percent in June.

CoStar reported that New York City’s retail vacancy rate fell to 2.2 percent in the second quarter of 2011 from 2.3 percent the previous quarter. Net absorption was a positive 8,555 square feet, and vacant sublease space fell by 4,733 square feet. New York City’s quoted retail rental rate, however, decreased in the second quarter to $64.02 per square foot. Nationwide, the retail vacancy rate was 7.1 percent.

U.S. Jobs Data Better Than Expected, but Stocks Report Dismal Week

The U.S. Bureau of Labor Statistics reported that total nonfarm payroll employment rose by 117,000 in July, which was a higher number than economists expected. Job gains occurred in health care, retail trade, manufacturing, and mining. Government employment continued to trend down. July’s unemployment rate was little changed at 9.1 percent, down from 9.2 percent in June.

Buoyed by positive news from Europe that addressed investor concerns, the Dow Jones industrial average at the close on Friday was up 60.93, or 0.54 percent, to 11,444.61M, a day after plunging 512.76 points. But the broader Standard & Poor’s 500-stock index was off less than a point to 1,199.38. The Nasdaq composite, meanwhile, was down 23.98 points, or 0.94 percent, to 2,532.41.

Although the jobs report was cheerier than expected, manufacturing in July reportedly fell to its lowest level since July 2009. The Institute of Supply Management’s factory index fell to 50.9 in July, from 55.3 in June, lower than the 54.5 decline forecasted by the Bloomberg News survey of 80 economists. Figures less than 50 indicate a contraction.

The Commerce Department reported that consumer spending fell 0.2 percent in June, which was the first decline since September 2009. Incomes rose 0.1 percent. Other data were more positive—motor vehicle sales rose to a 12.2 million annual rate in July from 11.4 million in June; borrowing by small businesses in the country rose in June to the highest level in more than three years; and inflation appears to be under control.

Public and private institution construction in New York City fell 27 percent to $3.2 billion in the 12 months ending May 2011, according to McGraw-Hill Construction Dodge data. Since May, however, construction on two new projects began—the Whitney Museum, a $600 million project near the High Line, and Fordham University, a $250 million multi-use facility at its Lincoln Center campus. Commercial and residential construction projects aren’t included in the data.

Major retailers are planning store openings on Fulton Street in Brooklyn including H&M, Aldo, Aeropostale, Filene’s Basement, the Gap, and Shake Shack. In addition, the city’s Economic Development Corp. will soon select a developer for the Brooklyn Municipal Building project, which will bring 37,000 square feet of retail space to the first two floors of the building located at Court and Joralemon Streets. Also downtown, Muss Development Co., developers of the Marriott, is seeking restaurants and retailers for 345 Adams Street. For its population, Brooklyn is under retailed, with 11 square feet of retail per person, compared to the national average of 36 square feet per capita.