Lehman Brothers, Merrill Lynch, Wall Street and NYC Real Estate

New York City September 15 2008

What keeps the Big apple "Big" is the financial sector, two words: Wall Street. Now Wall Street is facing some of the darkest days in its history since the Great Depression. What impact will this have on NYC's fabled real estate market? Let's take a gander….

First some context; Lehman Brothers, a firm steeped in tradition and an American success story has filed for Chapter 11 bankruptcy. Here is a short history on Lehman; Lehman Brothers started in the 1800's by trading commodities such as cotton, and later moved into underwriting public offerings (IPO's). The names of their IPO's includes a list of American brand monoliths, such as Macy's, Sears, B.F. Goodrich and even Halliburton.  Lehman even survived 9/11 with the death of one sole employee. Then they moved their HQ to Times Square. Now almost 7 years to the day, Lehman has been dealt a mortal blow by the sub-prime mortgage industry collapse. For more history on Lehman look here.

To make potential matters worse, Merrill Lynch, the company, "Bullish on America" had to sell itself, to stay above water, to Bank of America. All this happened in New York City over the weekend, at meetings in the Federal Reserve building in downtown Manhattan. This just adds additional fodder to the recent news about Freddie MAC and Fannie MAE, and the 1Q news about Bear Stearns demise. Needless to say, the Financial World is in chaos at the moment, because of sub-prime lending and miscalculated risks. The names have not stopped here, as other famous names are being tossed around, in a sad game of "who's next?".

WOW.

In the last few years the country has been reeling because of the mortgage crisis. In some states, markets have dropped over 30%, yet New york City, specifically Manhattan has been bucking the downward trend. Why?

A large reason is because of the same two words: Wall Street. Jobs, fat bonuses, and high paying jobs raise the demand for high-end housing, condos, co-ops and rent, year over year. But this year, does not hold the promise of years past. I have many friends and some family that work in the NYC financial industry, and they are all nervous. The news from the TV's, and talk around the water-cooler, is not positive. People are nervous because bonuses are being cut, some are already losing them entirely. Now, when we (normal working stiffs) say "bonus", it may mean MAYBE 10% of our yearly salary. Well - in Wall Street, bonuses can hit the 7 figure mark, and administrative roles may see 20-30% of their salary in bonuses. So, when you "bank" on getting $30-$50K a year in bonus alone, and you hear you aren't getting it - spending habits change, investments change and deals get canceled. Fat bonuses, usually meant Fat Spending - one major area: Real Estate. So what does this mean for NYC real estate? Sadly, this kind of news, makes this writer think that the fairytale MAY be reaching an important turning-point.

This kind of news can really have ripple affects into other markets. Not just the financial markets, but job markets, technology companies, service industries, etc. When you consider the jobs alone in NYC that have been lost in the financial industry over the year, the numbers are frightening. To get more answers I went to some of NYC's top brokers to get their input: Brown Harris Stevens/Halstead, Prudential Elliman and Coldwell Banker Hunt Kennedy.

First to get back to us on how this will affect the local real estate market in NYC was David Michonski:

David Michonski, Coldwell Banker Hunt Kennedy:

"The impact will be mixed.  The worst thing about it is the tens of thousands of jobs that will be lost and their impact on all the boroughs. This affects not just Manhattan but Brooklyn, Queens, Staten Island and the Bronx where 80% of these people live. It will mean fewer sales and surely more listings hitting the market.

Regarding Manhattan it will affect everything but [from] bars and restaurants to corner sandwich shops to Madison Avenue retail. The upper end housing market will be affected, too, as buyers put their hands in their pockets and wait. It should pressure prices as inventory sits not from flooding the market but from just staying on the market.  Every month that things don't move means another month when the inventory climbs.  We are not at critical inventory levels in Manhattan the way the rest of America is, but now the real possibility that we will get there increases daily.

On more positive notes, Manhattan is not as affected by foreclosures as the rest of the country because of our unique coop form of ownership which covers about 70% of the market.  Coop buyers had to put down 25% to 50% and some even all cash and have very high net worth to qualify for their coop boards. Thus,  these units are in the safest hands in America and while they are less safe today than they were yesterday,  there are still very many wealthy individuals in Manhattan who will ride out this storm.

New York still benefits from outstanding leadership in Mayor Bloomberg and from being a place that young people want to be and a place that Europeans and other foreigners still see as the most exciting place in America.  None of that has changed.  And that is fundamentally what will support this market. This is not 1974 when people were fleeing New York.  Rather, the more weakness that prevails, the more foreigners and well-heeled domestic buyers will come into the market.  We still suffer from a lack of developable sites and from a lack of housing, rather than a surplus and demographically the US is getting bigger, not smaller and the same holds true for New York. Remember the US is going from a nation of 300M people to 400M people. In order to accommodate all those people we have to build 1.6 to 2M units a year. Housing starts are now below 1M and still dropping.  In the years ahead we will have a real lack of housing (which seems so unlikely in today's environment, but is true) and all those people have to live somewhere.  When the smoke clears, many will continue to choose New York. "

Dottie Herman, CEO Prudential Elliman (over the phone interview): "No one knows exactly how it will shake out, you can read alot of speculation, but no one really KNOWS. But, looking at the fundamentals of New York City, and comparing this year  to 2007 (for most[NYC] companies one of the best years in history)…. I thought "why?" - well, the Euro, NYC is #22 in prices of global cities (good bargain still), as an international city prices are not off the wall…NYC is not a short term investment area, [buyers] need to have cash-in, and it's an island with limited space,  not a lot of land to expand upon, hence a limited commodity…. key differences between then and now, inventory is up now, last year, you had to move as a buyer, with everything going on this year, buyers are sitting back. It is really a credit crisis, not a real estate crisis. However, we have projected 2009 to be a slower year. This year the difference is credit and the buyer mentality. there is no "fear of loss on the buyers side, the sense of urgency is lost, people are going to the sidelines. I do not foresee a disaster. Many of these people made so much money that they are safe to sit in their units and not need to sell. Cash is king right now. You'll see new businesses and alot of private financing going around too.

Barbara Corcoran: "All bad news is contagious and so the financial woes of one big player ripple through other businesses.  The financial collapse is the quivalent of kicking the citys real estate market in the gut and things are going to be shaky for a while to come.
As always, when bad news hits, everyone runs for cover, particularly would-be buyers.  Most buyers will wait this one out on the sidelines.

The smart agents out there will be on the phone to their past clients tonight asking them if they want to cash out and trade down to a smaller ome or trade up and get a steal of a deal on a bigger place.  As always, listings are the road to riches."

Terra Holdings  (Brown Harris Stevens/Halstead): Declined to comment stating that it is too early to tell what this could mean for the NYC real estate market. Does not want to speculate.