Boomism Immortal

mrbubble2 0 Boomism ImmortalOn Feb. 8, the city’s biggest building-sales brokerage, Massey Knakal, blasted a press release announcing the sale of a narrow, four-story, red-brick building along First Avenue, a block southwest of Stuyvesant Town. The walk-up rested snugly between a larger building cloaked in mesh and fronted by scaffolding and a similar-sized, white building. A chicken joint called Senor Pollo occupied its entire ground-floor retail space; there were three market-rate, floor-through apartments upstairs.

The Massey Knakal release noted that 221 First Avenue had just sold for $1,112.80 a square foot—the most ever paid for a retail and apartment building in the East Village (city records confirmed the price).

Less than a week later, The Wall Street Journal summarized a housing report by boutique brokerage Olshan Realty. The report contained this dynamite factoid: During the week ending Feb. 13, buyers signed contracts on 31 New York apartments with asking prices of at least $4 million, generally considered the threshold for the luxury market; it was the highest weekly total since the Lehman collapse in September 2008.  (The previous post-Lehman high was 27 contracts during the week ending Nov. 22, 2009.)

Also: Sellers are getting what they want. The report showed that the spread between a seller’s first asking price and the final one was narrowing.

So is this a new bubble/boom upon us? Not really. New York never exited whatever frenzy we were in four or five years ago. Things just kind of slowed a bit, and are now picking back up volume- and price-wise. The bust/burst of late 2008? Almost like it never happened—at least not here. To prove my case, we’ll take building sales first, and then apartment sales.

Robert Knakal, the chairman of Massey Knakal and The Commercial Observer‘s Concrete Thoughts columnist, explained his firm’s statistical take on 2010 a couple of weeks ago.

Interestingly, while the dollar volume of sales nearly tripled in 2010, the number of buildings sold revealed a much smaller yet impressive increase over 2009 totals. In 2010, there were 473 buildings sold, a 47 percent increase over the 322 sold in 2009. While this increase created a positive psychology within the market, the 473 buildings sold was still 53 percent below the 999 buildings sold in 2007, and well below the 860 sold back in 2005.

… In conjunction with these, we’ve seen the average price of a property sold in Manhattan nearly double, from $12.9 million in 2009 to $25.3 million in 2010. The 2010 average was slightly less than half of the $52.5 million average in 2007, and was only slightly below the $28.5 million average in 2005. Not surprisingly, the $25.3 million average transaction size in 2010 is nearly four times the citywide average of just $7.2 million.

So while building sales and prices are not up to 2005-through-2007 levels, they were up against 2009 numbers (and, largely, against 2008 as well). And they are trending upward still. And… and! They are, most importantly, doing so against an economic backdrop that is not necessarily supposed to foment brisk sales at increasing prices.

What brokers call fundamentals—jobs and the lack thereof being No. 1 in this case—are not as strong as they should be to warrant such sales and pricing activity. In other words, who knows, really, why things are improving? There are theories—foreigners parking money in New York City property, rules changes involving refinancing (kicking the can, a rolling loan gathers no loss, etc.)—but none really nails why, with the rest of the nation and much of the world still mired in fiduciary quicksand, New York would be recovering so quickly (I have a pet theory, and it’s not mind-blowing, but more on that later).

As far as apartments go, the picture of improvement is clearer, though the reasons for it are just as opaque. In the fourth quarter of 2008, in the shadow of the Lehman collapse, 2,282 condo and co-op deals closed in Manhattan, according to appraisal firm Miller Samuel, which produces a much-watched quarterly housing report for Douglas Elliman. In the fourth quarter of 2010, 2,295 apartments traded, a nearly identical number. In the two years in between, quarterly Manhattan apartment sales spiked as high as nearly 2,800 and never dropped below 1,500. In short, Manhattan was never in danger of not reaching its typical apartment-trade volume of 9,000 to 10,000 annually.

On the luxury end, as we’ve seen, the steadiness was even more pronounced. Crash? Puh-leeze. In the fourth quarter of 2008, 228 luxury apartments, according to Miller Samuel, traded in Manhattan. Two years later: 230. There was a dip in early 2009, as the total descended to 150, likely an effect, indeed, of the Lehman collapse, as the quarterly numbers refleted deals negotiated months before. But, still, you get the picture. No cliffs dropped off from; no tumbles taken; no nosedives executed; your cliche here. (As Jonathan Miller, the author of the Douglas Elliman reports, has aptly put it on several occassions, the New York—or larger nationwide—housing boom was never really a housing boom but a credit boom as mortgages were cheap to come by.)  

Why, though, no nosedives? Why do nondescript East Village walkups trade for records and luxury apartments sell voluminously amid double-digit real unemployment, cable-news-ready recriminations over states’ ballooning deficits, and an era of collapsing Western economies (Ireland, Greece, Italy)? Wasn’t the city, Manhattan in particular, supposed to have been awash in a distressed-assets wave? Isn’t it supposed to be cats and dogs living together by now?

It can’t just be the cheap money; mortgage rates, after all, are creeping upward, and the commercial mortgage market has yet to return to pre-2008 fluidity (Scott Singer wrote about the slow return to normalcy in this newspaper a couple of weeks ago).

A week before Tax Day 2010, this newspaper neologistically labeled the continued faith of lenders in the Manhattan commercial market as “boomism,” an addiction to belief in the redemptive power of walk-up portofilios and troubled landlords of midtown south Class B buildings. (We also referenced the last Bourbon king of France—extra points!) From the piece by Dana Rubinstein:  

Has New York real estate learned anything over the past two years? Anything at all?

“Nope,” Mr. Durst said. “Nope. Nope.”

“This is my third cycle,” [Douglas] Durst, co-CEO with his cousin Jody of mega-landlord the Durst Organization, told The Observer, sounding world weary. “And each time we get back into it quicker and quicker. We seem to be getting there fairly fast already. Some of the things that have been done don’t make a lot of sense.”

So, that’s it, really: A few down quarters in 2008 and 2009, and a gradual, then quick, ratcheting up to where we stand now on both the commercial and residential sides. All, I think, based on the conviction among investors and homebuyers that any money to be parked in real estate should be parked in real estate in New York, America’s only true world city on par with Tokyo, London, et al. That conviction kept the boom from every really going bust, the bubble from ever bursting.

Does that mean, of course, we’re still in a bubble that could pop at any moment? Well…

tacitelli@observer.com