The Real Estate Effects of the Wall Street Mess

The weekend Wall Street crisis will affect New York real estate. Here's how:

Apartment sales ~ Manhattan recorded over 10,000 home sales in 2007, but sales numbers have been off throughout the city in 2008. In Manhattan in the second quarter, home sales were down 21.8 percent annually, according to a Miller Samuel-Douglas Elliman report. In Queens, 23.7 percent; and, in Brooklyn, over 43 percent. The Wall Street crisis, due to the inordinate influence of the Street on local apartment and townhouse sales, will likely drive the number of deals further downward as the year ends. This could give a hefty advantage to buyers.

The weekend Wall Street crisis will affect New York real estate. Here's how:

Apartment sales ~ Manhattan recorded over 10,000 home sales in 2007, but sales numbers have been off throughout the city in 2008. In Manhattan in the second quarter, home sales were down 21.8 percent annually, according to a Miller Samuel-Douglas Elliman report. In Queens, 23.7 percent; and, in Brooklyn, over 43 percent. The Wall Street crisis, due to the inordinate influence of the Street on local apartment and townhouse sales, will likely drive the number of deals further downward as the year ends. This could give a hefty advantage to buyers.

Apartment prices ~ They're a tad trickier to handicap than sales. But the prices that sellers ask for their apartments have been known to go up or down based on the fortunes of Wall Street (I wrote about this reality here). When the Street's doing well--particularly when its year-end bonuses are particularly flush--sellers tend to set prices higher than they might should the Street be having problems. (A note on the luxury apartment market: That will likely not be affected at all by the weekend's events. Most of the city's tonier co-ops require at least half the closing price in cash. That sort of liquid money isn't impacted by mere investment bank failures.)

Apartment rents ~ Apartment rents are tied closely to the local economy, particularly to the job market. If there's significant layoffs (Lehman Brothers' 25,000 employees worldwide could soon be out of work, including hundreds in the city), then there will be fewer desirable prospective tenants needing or qualifying for apartments. This slackening of demand could drive landlords to drop rents rather significantly. Rents have already started dropping mildly in 2008 because of the worsening economy--which is only made worse by the weekend's events.

Office leasing ~ The Manhattan office market exited the summer with a vacancy rate of 8.7 percent, according to Colliers ABR, essentially the same as when it entered, but slightly higher than at the same time last year. Leasing has slowed and vacancies have increased. Like apartment rents, office leasing feels intimately the effects of a bad economy. But it takes time. Don't expect a shedding of significant space right away, even by Lehman Brothers or Merrill Lynch. Companies have long memories: in the last major local recession in the early 1990s, a lot of companies shed space--only to have to rent it back at much higher rates when the economy returned with a roar.

Office rents ~ Same deal here. Rents have ascended to record highs in the last couple of years, particularly for the sort of top-flight office space that investment banks occupy. Asking rents in that space routinely top $90 a square foot, and sometimes twice as much. Expect that to continue. There's foreign firms, after all, who can still readily afford it; and you'd be surprised the lengths a Fortune 500 company will go to for a Manhattan toehold. Wall Street will have to get a lot worse for office rents to drop significantly.

Building and property portfolio sales ~ Oh boy. These have already dropped significantly in Manhattan: About $13.8 billion in investment sales closed or went to contract in the first six months of 2008, compared to over $34 billion in the first six months of 2007, according to Cushman & Wakefield. And a lot of the 2008 amount was due to foreign investment--nearly half, in fact. The investment sales market, already walloped by a lack of financing due to the same credit crisis that has felled Lehman Brothers, will likely only get worse as the year marches to a close.