Articles 12.18.08

It seems only a matter of time before the current economic conditions affect Manhattan and outer borough apartment rental market. The article How Many Apartments Are too Many? discusses the current state of the Manhattan apartment market. Reports about the outer borough apartment market are sketchier. However, based upon my discussions with outer borough landlords it appears as if the outer borough apartment market is holding up better than the Manhattan apartment market.

People often ask, "What is the rental rate for my office or store space?" In today's market, it is an exceedingly difficult question to answer. The article Asking Rent Agonistes further describes this problem.

The Garment Center as the focal point for the garment trade has been dying for several decades now. Its demise has been postponed by zoning that attempts to preserve manufacturing space. It appears, however, that the garment center is soon to be removed from life support. See the article Union, City Sew Tentative Deal on Garment Center Future.

Giant and Jets fans! Have any of you wondered when that horrible monstrosity that is being constructed next to the Meadowlands will be completed? Construction has been going on for years and has been incredibly disruptive to traffic and parking. For those of you who are curious, check out the article Meadowlands Xanadu in New Jersey.

Finally, what will happen to all those bank branches that sprouted up all over the city during the past 10 years? Their possible fate is described in the article It's a WashMu!

Articles 11.14.08

Okay, so conduit lenders have disappeared, banks are getting finicky, and life insurance companies are sitting on the sidelines --where does one go to get mortgage financing? Read the article The New Lehman's to find out.

Remember the good old days when it was the borrower who defaulted? Lender Defaults describes what a borrower should do when the tables have been turned and it is the lender who is defaulting.

Will Obama with his urban agenda but proposed tax increases be good or bad for New York? The answer can be found in What Obama means to New York.

Building and Staff Performance Reviews

Knowing and understanding your building is critical to its success. Owners that self manage one or two buildings have a huge advantage in this regard. They are frequently at their buildings and generally know every tenant on a first name basis. Larger property owners and those that must delegate responsibility to a staff do not have this advantage. How then can a larger property owner or property manager truly understand what is going on in their buildings?

Sierra Realty has implemented an annual review process that goes a long way to solving this problem. Each year we send out a questionnaire to every one of our tenants asking them to rate their building, building staff, management staff, etc. The questionnaire also solicits suggestions about what can be done to improve the building. When we first started doing this, we figured only a small percentage of tenants would respond and probably only those that wanted to complain would take the time. I've been very surprised at the level response that we receive. Over 20% of our tenants respond and usually provide very favorable and valuable feedback about the building. As result, we have been able to obtain a far better understanding of how our buildings operate and our staff function.

Articles 11.04.08

Our most recent batch of articles focuses on the retail sector.

For those of us who've gotten tired of the typical fast food fare (McDonald's, Panda Express, Wok N' Roll) found at local shopping centers "Food Courts for Food Lovers" describes the recent and welcomed trend of replacing traditional food courts with higher end food courts focusing on comfort, atmosphere, and fresh food.

The story "Incentive Enough" describes the unscrupulous accounting trick that one recently bankrupt retailer, Steve and Barry, used to artificially inflate their earnings.

Those of you with empty retail space will be interested in the article "Vacancies to cash cows" which describes how vacant stores can easily be converted into valuable ad space.

Next time you spend 15 minutes lost in a multi-tiered parking structure, think about the article "Beyond Valet Parking". This describes a high-tech parking system that reduces parking time by up to 55%.

"Developers cut 2008 pipeline by one third": does this is article really need an explanation?

Articles 10.31.08

I've put another batch of news clippings relevant to the New York realty market and outlook on the website. Check them out!

A Silver Lining?

OK. The sky is falling, right? Yeah, it pretty much is.

But that doesn’t mean it needs to fall on you.

This is when savvy retailers who’ve been sitting on their money can go out and snag some prime storefronts that have eluded them over the past several years. Why? Because the players who were snagging those stores out from under you are now reeling. They’re the chains, and they are getting killed in just about every market (with the possible exception of Manhattan, where tourism is keeping retail afloat).;

We’ve all seen this first hand: first, Starbucks announced closures, then the banks started going down (WaMu followed by Wachovia followed by ???). What this means is that the landlords who thought that it would be as easy as putting up a sign and waiting for calls to roll in are now scratching their heads.

I know a space only a block from the Flatiron building where the landlord has dropped the rent twice in the past 3 months – from $25,000/mo., to $19,000 – and now $16,000. And it’s a nice space!

The bottom line is that this awful, gut-wrenching recession could have a silver lining for some of our smart NYC players who’ve been saving their pennies for a rainy day.

-Peter Braus

How to Create Affordable Housing Now at No Cost

Mayor Bloomberg has proposed a far-reaching plan to create a total of 165,000 units of affordable housing by the year 2013 at a cost of 7 1/2 billion dollars. This plan has been described as "the largest municipal affordable housing plan in the nation's history ". As commendable as this goal may be, there is a far cheaper way of not only achieving this goal but of exceeding it.

It has been estimated that there are currently one million to 1.1 million units of rent regulated housing in New York City much of which is renting at a below market rents. As the most recent revelations concerning our governor and one of our congressmen have revealed many of these units are occupied by those who are not in need of affordable housing. The current system of rent regulations provides no form of "need test" to qualify those who receive these apartments. If just one in 5 of the existing rent regulated apartments are occupied by those who could otherwise afford market rate housing then if we were to require a " needs test" for those in rent regulated apartments, we could free up over 200,000 units of housing and make them available for those in need. The cost? Zero dollars. Obviously, this would be incredibly disruptive in the short term so if such a system were to be implemented, it should be phased in over a period of time.

Rent Regulations: The Cost of Good Intentions

When first enacted our system of Rent Regulations was intended to relieve the housing shortage created by World War II. Since then its purpose has expanded to include the creation and preservation of affordable housing. While this is indeed a laudable goal and necessary for the health of our city, an examination of the cost of rent regulations reveals that as well-intentioned as the system may be, rather than creating and preserving affordable housing the system instead has had just the opposite effect.

In previous blogs I've estimated that New York City's system of rent regulations is costing almost $2 billion per year to operate. According to city budget estimates, it costs the city $50,000 to create one unit of affordable housing. Assuming that this $2 billion a year of lost revenue could be leveraged to create an annual $10 billion pool of investment capital then the city would be able to construct 200,000 units of affordable housing every year if our system of rent regulations was eliminated. When you compare this to Mayor Bloomberg's ambitious plan for affordable housing which calls for the construction of a total of 165,000 units by the year 2013at a cost of $7.5 billion (and which has been described as "the largest municipal affordable housing plan in the nation's history ") it gives you some idea of the opportunity lost to the city every year as result of the operation of our system of rent regulations. Further, if the system were eliminated altogether tomorrow, the one million units of housing that are now regulated by the system could be completely replaced by newly constructed, better quality housing, within five years!

Rent Regulations and Affordable Housing

One of the most compelling arguments advanced by tenant advocates in support of rent regulations is the need to preserve affordable housing in New York. However, one question that never appears to be answered is "affordable for whom?" The regulations do not answer this question. This argument would be far stronger if there was some provision in the law that insures that rent regulated housing is preserved for those who can not afford market rate housing. This is not the system however. As the recent articles detailing the favorable rent deals that our governor and esteemed Congressman (for 4 apartments no less! ) receive many of those who benefit from rent regulated apartments do not require such favorable treatment. While the law may preserve affordable housing, it is not necessarily preserving it for those who need it. This is a one of the major flaws with this system that s needs to be corrected.

Disfunctional Court System Stifles Retail Development

New York City has one of the most dysfunctional landlord tenant court systems in the country. It is a system that easily permits tenants who fail to pay their rent to continue in possession of their stores for many months if not years after they stop paying rent. The simplest of uncontested court cases take a minimum of four months to resolve. It is no wonder then that landlords are reluctant to accept this risk and consequently either rent desirable store locations only to well-known chain and national tenants or require significant security deposits from mom-and-pop tenants. Perhaps if the court system could be reformed so as to ensure a measure of certainty and expediency to landlords this risk could be reduced and landlords would be more willing to rent desirable stores to a wider selection of tenants. Instead of every street corner then being occupied by a Starbucks, Duane Reade or bank branch perhaps we could then see more interesting stores operated by entrepreneurs and startups.

Cost Of NYC Rent Regulations (cont.)

I initially estimated lost real estate tax revenues of $1 billion. When you factor in other lost tax revenues including income tax (federal, state and local), mortgage recording taxes and transfer taxes this estimate increases to $1.8 billion per year. If this amount can be leveraged by four dollars for every one dollar invested, this would create a $9 billion pool of capital that could be made available every year for the construction of affordable and workforce housing.

The issue with respect to rent regulations is whether the current system is the most effective way of creating and maintaining affordable housing in New York City. Given the large sums of money involved, it is worth a hard look.

Cost Of NYC Rent Regulations

I have never seen an analysis as to the annual cost of the current rent regulation system in New York City, but by my own estimation the city is losing at least $1 billion a year in lost real estate tax revenues due to apartment rents being kept at a below market level. This $1 billion shortfall would be sufficient to fund the construction of 20,000 units of affordable housing every year.

This estimation is based upon the existence of 1.1 million rent regulated apartment in New York City and the assumptions that each rent regulated unit rents at an average monthly rent of $400 below market (this seems reasonable, but needs to be verified), and that real estate taxes generally are 20% of the gross rents of a building. Based on these figures, the city is foregoing the receipt of $1 billion per year in real estate taxes because of the existence of rent regulations. In essence, the city is spending $1 billion a year to provide rent subsidies to individuals regardless of their need.

The most public example of the ludicrousness of this system is the rent subsidy our current governor is receiving. It has been reported that Governor Patterson lives in a $1200 per month apartment that has a market rent of $2600. Because of the existence of rent regulations, the governor is receiving what in essence amounts to a rent subsidy that costs $3360 per year in lost tax revenues. Do we really believe that our governor needs a rent subsidy that costs taxpayers $3360 per year?

This $1 billion in lost tax revenues represents about 2% of the current annual city budget of $59 billion. In addition, assuming it costs approximately $250,000 to build one unit of affordable housing, $1 billion a year could be used to finance the construction of 20,000 units of affordable housing every year (assuming 80% financing).

This analysis does not even include the cost of operating and implementing the system of rent regulations nor the lost income and capital gains taxes to the City, State, and Federal governments due to the fact that the annual net operating incomes of rent regulated buildings are also artificially depressed due to the existence of rent regulations. If these costs were included, the numbers would be even more compelling.