Trickle Down Dow?


The Dow is unsteady. Bonds are earthbound. Merrill Lynch is putting nearly 5000 workers out of jobs, and other Wall Street houses are expected to follow. Is there any good news out there?

Maybe. Shining in the sea of economic malaise is a glimmer of hope for tenants: the superheated economy that hurled real estate skyward is cooling off, and that means that prices for co-ops and condos, and even some rents, are headed south as well. But don’t give up that rent-stabilized walk-up yet: the sinking prices are located in a sector so high-end, most tenants would consider it stratospheric.

“There are already drops in rents at the $5000 range, and there will be a greater choice for people in the $2500 area in the very near future,” predicts Joe Strasburg, president of the Rent Stabilization Association, the city’s largest landlord lobby. “The frenzy we all experienced after June clearly has slowed down and I think you’ll find a shift to a renters’ market. There are economists who believe we’re talking a lot worse than recession, and that will directly impact everything from restaurants to rents.”

Nick Jankovic of Madison International Real Estate says his corporate relocation business is down 20 percent since June; he expects prices to follow within a few weeks. “Frankly,” says Jankovic, “by the end of the year, I see prices going down 10 to 20 percent.”

But for tenants living in the city’s 2 million older, rent-stabilized housing–especially in market-sensitive-Manhattan–the recent downswing has so far produced no deals, and perhaps never will. Brokers say they’ve seen no price change in rent-regulated units under $2000; the only difference Jankovic has noticed is that instead of being snapped up in hours, some apartments languish on the market for two or three days. In outer boroughs, drops aren’t even anticipated.

The reason prices among rent-regulated apartments don’t budge is simple: demand so profoundly exceeds supply, it takes more than a few months of a gyrating market to move it. “This is, after all, New York, and the market is extremely tight, especially among regulated apartments,” says Michael Schill, a law professor and director of the Center for Real Estate and Urban Policy at New York University. “It’s a curse to tenants, who never get the benefit of having a glut, but it insulates the providers–the landlords–who in a downturn still don’t really have to worry.”

In fact, Strasburg says the only difference rent-regulated tenants might notice is a slowing down of the “apartment improvement” fever that has swept landlords in the past year. In 1997, the state legislature allowed landlords to deregulate apartments for new tenants once the rent hits $2000, prompting many landlords to make–or claim they’d made–enough improvements to jack rents up to $2000.

“As it gets worse, owners will make decisions about whether it’s worth doing the work that’s necessary to bring a unit above $2000,” says Strasburg. “If they can’t get the price, these improvements just won’t get made.”

Michael McKee of New York State Tenants & Neighbors Coalition doubts that will happen. “Any landlord, especially in Manhattan, who does not take advantage of that loophole would be stupid, and generally speaking, landlords are not stupid.” Besides, McKee says, claims of apartment renovations are “often fraudulent. A landlord will do very little work, and simply charge a higher rent, assuming a new tenant won’t appeal it.”

Clearly, the breaks of the current market decline have, so far, benefited wealthy tenants. High-end sales are the first sector to go soft, and brokers report that asking prices for apartments over $300,000 are off by 10 percent; some say sellers may be willing to pick up half the application fees or do some general improvements
to move a co-op or condo. Among high-end rentals, just last week, some landlords began to pick up brokers’ fees.

“They just started doing this down in Battery Park City,” said broker Larry Goldblatt of Citi Habitats, referring to Le Rivage, a 293-unit luxury building (studios start at $1810) owned by Rose Associates. Owners of the Renaissance, an office-building-turned-apartment-house at 100 John Street, began to pick up the fee late last week. Apartments in the financial district–hailed as the next hot neighborhood–are especially vulnerable.

“Listen,” says Goldblatt, “Merrill Lynch just laid off thousands of people, and there will be a bunch to follow. Who’s going to live down there? It’s most of those people in buildings that have huge tax abatements from the city. It’s going to be very bad for downtown.”

“Everybody in the industry right now is reassessing what’s going on,” says Bob Scaglion, director of marketing for Citi Habitats and manager of the Renaissance, where rents range from $1450 to $4000. “No one will panic now, but real estate is just like the stock market. At first, people said it had been so hot for so long and it was just a minor correction,” says Scaglion, who has been in real estate for 20 years. “Then that happened a few times and now they’re saying, uh-oh. Well, we’ve had a very robust real estate market for a while; is it time to say uh-oh? The next six months will be very telling.”

People are not only cautious about predicting the effect of the economic tumult; they are debating the terms to describe it. Now that it’s obviously well beyond being a simple market correction, words like downcycle, recession, and even depression are surfacing.

As for New York City real estate, the prospect of a slump is rather incredible. Wasn’t it just this summer that we read about five-digit rents? Saw copper cladding laid on old buildings simply because it looks pretty? Even now, don’t construction cranes dot uptown avenues, building luxury towers while downtown, tenements are being topped with new upper floors to be rented at premium prices? Didn’t Donald Trump just announce plans to build what would be, by his own distorted math, the world’s tallest residential tower?

Yes, yes, yes, and yes. But now, rents in some of those newly built towers are negotiable. Strasburg says developers who built co-ops and condos are considering marketing them instead as rentals; others in the planning stages are being shelved. The fact is, after a long-running financial feast, even a flat market feels like a famine.

And, not surprisingly, the best news for tenants is reserved for those at the top. Any rent-
stabilized tenants likely to be directly affected are those whose annual income is so high, they face “luxury decontrol”; a loss of income could save their rent-stabilized status. As for landlords, most are likely to withstand the drop; many won’t even feel it.

In fact, add this to the current soothsaying: Regulated tenants are not only unlikely to find good news in the near future; there may indeed be trouble. If landlords claim to suffer from the market dive–either in their own portfolios or lowered rent returns–they undoubtedly will argue for higher rent hikes when the time comes next June. But that’s three quarters away. Stay tuned.

Archive Highlights