How to Make the Most of the Wall Street Crisis

Kevin Phillips was a top aide to Richard Nixon 40 years ago (he coined the term “Sun Belt”). Since then, he’s turned into a professional scold, warning particularly about the nation’s dependency on the financial services industry.

Mr. Phillips, author of Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, fortuitously published earlier this year, e-mailed on Monday evening his thoughts about the unfolding fiscal crisis: “There’s very little excuse for Wall Street’s sad but pervasive mixture of myopia and incompetence. Clues to the excesses were everywhere.”

It’s O.K., in other words, not to feel too badly about what went down with Lehman Brothers, Merrill Lynch, et al. It may, in fact, be ripe time for a sort of economic schadenfreude.

After all, there’s tangible upsides to the whole debacle; foremost, a leveling (a bit) of the financial playing field.

For one, apartment rents and apartment prices should soon come down—further, in some cases; for the first time all century, in others—because there just won’t be as many qualified people competing for the static pool.

“I think, if this is going to continue to happen on Wall Street, at least there’s not going to be a whole lot of job creation,” said Daniel Baum, an executive at the Real Estate Group New York, a brokerage. “And if there’s not going to be a lot of job creation, that means demand for apartments is going to remain the same or continue to diminish.”

Since 2001, apartment prices in New York have ascended to record high after record high (the average Manhattan apartment sales price crossed $1 million in mid-2004, and has rarely looked back).

“I just bought an apartment, and I got it at a great, great price,” said restaurateur Ken Friedman, owner of the Spotted Pig, of his new place in the East Village. “I got an apartment that’s worth way more than I paid for it, I hope.”

And what of retail, particularly restaurants and upscale shops? Their owners have to eat. Sales and specials may wend their way to the racks and menus. Mr. Friedman hadn’t heard reaction by early Tuesday afternoon from fellow restaurant owners (he said his business won’t be affected much), but he imagines some of the tonier joints might have a tad more open tables.

“At fine-dining places—Del Posto, Le Bernardin—the only people who can really afford to eat there are people with expense accounts and people with lots of money,” he said.

Drew Nieporent, owner of Tribeca Grill and Nobu, said he’s not sure the lasting effects, yea or nay, of the crisis quite yet. But on Monday, when discussing reservations from here on, he alluded to the new on-the-ground New York City: “I don’t think restaurants are going to be turning anybody down.”

 

Your Office

The Manhattan office market exited the summer with a vacancy rate of 8.7 percent, according to brokerage Colliers ABR, essentially the same as when it entered, but slightly higher than at the same time last year. Like apartment rents, office leasing feels intimately the local economy’s effects. But it takes time. Don’t expect companies to shed significant amounts of space right away, including Lehman Brothers. They have long memories: In the last major downturn, in the early 1990s, a lot of companies shed space—only to have to rent it back at much higher rates.

 

The Apartment Next Door

It could very well get a lot cheaper and fast, whether it’s up for sale or for rent. Manhattan recorded 13,430 apartment sales in 2007, according to appraisal firm Miller Samuel, the highest annual amount since at least the late 1980s. In Manhattan in the second quarter of 2008, however, sales dropped 21.8 percent annually. In Queens, they dropped 23.7 percent; in Brooklyn, over 43 percent. The Wall Street crisis could further dampen demand and also erode the pool of eligible mortgage applicants. A similar scenario may unfold in the rental market. Rents have dropped since last summer rather steadily. Again, trouble on Wall Street—particularly layoffs—could slacken demand for apartments, forcing landlords to lower rents for whomever might be left.

 

The Neighborhood Shopkeeper

His or her life just got more difficult. Consumer confidence had increased throughout the summer due to falling gas prices but it wasn’t enough to reverse a plunge that started last year. This August’s nationwide Consumer Confidence Index was 56.9, higher than July’s but about half what it was in the summer of 2007. At the same time, local retail rents have increased steadily: Landlords asked in May an average of $111 per square foot annually for average Manhattan retail space, according to the Real Estate Board of New York—a 3 percent increase from 2007. So, how to cover this rising rent amid slackening shopper interest? We’d say sales.

 

Strip Clubs

Or clubs and bars overall in the city. Like the retailers above, they gotta eat. “The need for people to go out and have a good time is increased,” said Lonnie Hanover, a manager of Rick’s Cabaret, a gentlemen’s club chain. Clubs and bars—alcohol dispensaries in general—are, like the Mafia, recession-proof, and, as Mr. Hanover notes, may only be helped by the Wall Street crisis.

 

Helping Others

If Barbara Walters on the arm of Henry Kissinger strolls routinely into the events your charity runs, then worry not one whit. If your charity’s on the less ambitious (but just as earnestly do-gooder) side, then it may be time to fret a bit. Twenty- and thirty-something climbers willing to drop $200 or so to attend an event may become scarcer. In 2007, the total amount of year-end bonuses for the city’s seven biggest investment banks dropped for the first time since 2002. There’s just not as much disposable income as there once was.

 

Eligible Single Men

Wall Street’s year-end bonuses increased every year from 2002 through 2006, and then stopped doing so abruptly last winter. Analysts, of course, expect 2008’s year-end bonuses to be much lower than the approximately $33 billion doled out in each of the past two years (after all, three of the seven investment banks used to measure the total bonuses have effectively gone out of business). There’s less disposable income for frothy weekend jaunts to the Cape, much less Canary diamond engagement rings from Harry Winston. He’s just not that into money.

 

Wall Street Journal Subscriptions

Knowledge may be power, but who wants agita with their morning coffee? Financial media could be an unlikely casualty of the downturn. It happened to those how-to-get-rich-in-real-estate books: In 2005, consumers bought 223,000 books on buying and selling homes, according to a Portfolio.com report; in 2006, they bought about the same number. But, by November of 2007, the number had declined by one-fourth. A lot of financial firms comp financial media subscriptions—so, subtract those, and it’s like USA Today losing its access to America’s hotels.

 

Hamptons Next Season

It was Manhattan on the East End earlier this year! Hamptons home sales plunged 26.2 percent annually in the second quarter of 2008, similar to the decline in Manhattan, according to Miller Samuel. Over the same period, Hamptons home prices also dropped—the average by 11 percent annually to $1,730,414. South of Route 27, the demarcation between the haves and the haves-a-lot-more, the median sales price was virtually unchanged from spring 2007 to spring 2008 at $1.55 million. A timorous Wall Street could lead to further stagnation in Hamptons prices and declines in sales. That could also make renting there cheaper come early 2009, as more desperate property owners react to the financial tea leaves back west.

tacitelli@observer.com

Meredith Bryan contributed to this article.

 

How to Make the Most of the Wall Street Crisis