New luxury developments, how low can it go?

sunday, it really depends on the bank, and the developer, no? and the development. i'm constantly amazed when i see sponsor condo units being sold in buildings that have been closing for 4 years and have been supposedly fully sold out. those buildings are safe from the economic wrecking ball, but it just shows you how long it can take to sell out a building, even in boom times.

my guess is you look to some of the developments with european banks for your more interesting early developments.

I really don;t know the typical financing structuure for a new development as to how much equity a "developer" actually has on the line. My guess would be that building specific entities are used with some equity put in, or guaranteed line of credit or something providing some limited equity type exposure from the developer. Maybe someone here knows. Assuming developer liability is limited, I suspect many will lose all their equity at the kind of prices needed to clear a building today, but they are hanging around in case of an uptick that saves them, and the lenders are playing along because they don't yet want to handle the mess.

Jimeasystreet's theory has merit.
Seems very plausible a number of new developments will survive, but the sponsor makes no money. I'm beginning to believe Rushmore may fall into this category. Seems less likely that this will default. More likely that Extell merely loses money.

right. although it doesn't really matter. either way prices fall. just a bit more sloooowwwwwllllly.

I was just wondering at what discount J.Miller's Condominium Recovery LLC can potentially buy some of these new developments at. When a couple of the developers and banks start selling, others will follow. Banks will need that money back soon. Don't let the fact that the banks paying back the Gov. as a sign that their capital is in good shape. They really just want to get out of having the government telling them how much to pay their people. These banks know they can't compete with such restrictions.

what would be fascinating to see is the rental valuation model that they're going to use to try to determine what to bid.

sunday, some banks will. others won't. morgan stanley has a foul real estate portfolio, but i don't know how much is here.

we have given the banks a shitload of cash, or access thereto. this will take time. they are hoping that demographics and income will allow the units to be absorbed over time, with the banks having the contingent "asset" on their books a bit (or more) longer than anticipated. if the leverage/capital requirements were to be tightened here you'd see major movement quickly, i'd think. but there was a LOT of overseas lending here. and much of it sucked. so make yourself some popcorn and stay for the show.

It only take a few who has to sell to determine the price.

CC, I agree that would be an interesting detail, but I wouldn't trust that number even if they posted it. Only the decisions makers over there would know the real number. Besides, that would only determine the maximum they would bid. I'm more interested in the lowest they can get.

actually, no sunday. it would only take a few rushmores. we've already had a few, that place in battery park, the sheffield, etc. it will take awhile.

i would like to see their demographics analysis.

If the banks didn't need cash, they wouldn't have sold more shares at a discount to current market price. Their stocks would have shot up if they were paying the money back because they didn't need it anymore.

ar, yes, I meant a few developers/banks...

sunday, who sold shares at a discount to market? only citi that i'm aware of. the others rode the great gov't largesse train to huge issuances at very good prices.

i don't like it, you don't like it, but we've definitely put our largest banks on extra-special life support. and most buyers are thinking it will last forever. of course it won't. but it will take longer than some other markets. commercial lending tends to be more heavily concentrated in the regional/local banks in other markets. from what i've seen, that's not generally true for the majority of the developments in NYC. the local banks are being allowed to fail. not the larger banks. but there have been a number of international banks that should get the shit kicked out of them shortly. again, pop the popcorn.

Wells Fargo, Bank of America, Citi, all at discount.

ok - just for tonight, only tonight, try one more of the 10mg green ones

sunday, have they been financing local commercial development? and i'm asking, because i don't know. but they all have been paying back tarp funds, i believe. they have much greater issues currently, as congress thinks about reinstating glass-steagal.

and it should be at a discount. earlier issuances weren't, which was stunning. but they are still able to raise huge amounts of money, and make large amounts, because of the gov't intervention. they expect the intervention to continue, and the accounting rules have been changed in their favor.

pop the popcorn.

ummm, AR, all stock offerings are done at a discount, including the banks. or nobody would buy them. the amount of the discount can vary, of course.

don't confuse pricing the offering at the closing price as "no discount" if the stock dropped 10 or 20% on the news of the offering.

hfscomm1,

Seriously, you need to leave AR alone.

Sunday,

Thanks for your contribution to SE.

Some of these banks could have invested with the developers as partners, loan them the money, I don't know which one did or didn't and how much. All I'm saying is, the credit crisis is not over. I was trying to explain that the big banks paying back the Gov. should not be looked at as a sign that they have the cash. The fact that their new shares were lower than market price at the time of pricing suggest they know they were paying it back just for the purpose of getting out the pay restrictions.

As you know, smaller banks are going out of business left and right. What's the count YTD? It must be over 100 months ago...

I would expect J. Miller's group would be looking to buy at about an 8% cap rate which would make the properties viable on a rental basis. As condos generally seem to be selling retail at about a 4% implied cap rate that suggests his group would be looking to buy at about a 50% discount to current (slow) retail market prices.

Some of the discount simply reflects wholesale versus retail pricing. Most reflects the current difference between rental cap rates and retail condo implied cap rates.

The message for retail condo buyers is simple. Caveat emptor!

modern, i'm fairly sure you know what i meant. why didn't you address sunday?

sunday, i agree with you 100%. i'm just saying that our gov't is doing everything it can to prevent the reckoning. and the banks, generally, have oodles of cash right now. because they think they may very well need it in the future.

except, i'm not certain i agree that they were issuing stock only to pay back tarp. if there is a correction in the market, which may or may not occur if the fed truly winds up many of its life-support programs, this may have been their best opportunity to raise extra cash. those three banks have far more problems on their hands than just pay restrictions. they will be our commercial banks of the future. and what of chase/dimon? interesting question.

topper -- there seems to be a concensus roughly along the lines of what you wrote, so the topic now seems to be when, under what circumstances, are we going to see banks/developers willing to turn over properties at prices that will meet that 8% or so cap rate criteria?...obviously, if it happens, it will be huge impact on the retail lemming market

no way to know....depends on each individual circumstance. if i were negotiating for the fund, I would take the tack that those who jump first will get the best deals....once so called wholesale prices become known, good luck selling at retail.

cc, exactly. no way to know. and once it starts, it could be fugly.

Human capital is a number concern for them and it should be. If they thought that issuing stock now is the best chance they got of raising capital, then that only shows they are in worse shape than they would like to admit. There is a reason why Wells Fargo and Citi "rushed" to pay it back this month! It is indeed to get out of the pay restrictions. I believe it to be a fact.

oh, and sunday, in terms of repaying tarp? why not i guess, because they are pretty damn sure they'll be bailed out in one way or another in the future if they need money. although i don't believe they were able to pay off everything?

oh sunday, maybe youre right, but there are so many dumbasses in banking making mega-bucks it's amazing; and the so-called really valuable people are often just running the gimmick/flavor of the year whether it is russia, or tech, asset backed this or that, all happily enjoying the assymetric pigout where they make big bucks while the party lasts, but only get booted with severance when things go bad....

As Modern said, all secondary offerings are priced at a discount to market, You are diluting the current owners, so the stock is not worth its current price. The banks are not all in the same pool of crap, some have "relatively" solid balance sheets, Chase/Dimon included.

But the credit market as a whole remains on shaky footings. Why would the folks here be encouraging banks to lend at the same time as saying that prices are going to drop another x%? I agree credit can and should open up, but people should not be buying assets at 6-10x leverage. If people can put up 25-30%, the money is there and cheap. Hopefully, that will become the norm. Real estate dips are seriously exacerbated by people with no equity. Selling when you lose your downpayment is one thing. Selling when you have to write a check is something very different.

Don't under estimate the top 20% of every team/group. They are likely to be responsible to 80%+ of the revenue. There are always employers willing to pay for that top 20%. Every where you look, in any business, that top 20% are the ones who really know the stuff.

This is a little different from other secondary offerings. If it wasn't to pay off TARP, the stock price would have went down quite a bit.

nyc_sport, it's not just downpayments. i know interest rates used to be higher, but back in the day the norm was for a mortgage that was 1.5 times your income. really. even with the lowish interest rates that i had in late 2000, i still needed PMI for a 10% down loan at less than 2.5 times income. and i found that horribly difficult, even with common charges and taxes that only equaled $800 per month, on a 1300 sf apt.

people have not been able to put up 30% on condos, uniformly, for years. that, combined with the at-closing heloc, no PMI, and huge leverage, deadly.

Sunday, I agree people with a knack for closing the deal, extracting the profits etc. are considered more valuable but personally i think they are grossly overpaid often because th ability to do such deals often requires risk taking for which they bear no practical downside, and what looks like genius is often just riding a wave where lots of market players are doing the same thing, until it crashes, and they move on to the next flavor....

and hell, how much of the banks' income this year came from selling gov't debt? rumor has it they're trying to roll that over to longer term debt (we'll see), so let's see how much money is generated there going forward.

The major banks are out of the woods. They have zero cost of carry. Frankly I'm more worried about inflation as a result of all this credit and money sloshing around.

jim, perhaps you are talking about a specific type of deals/business unit. What I'm talking about refer to any business. Even a business that fix elevators for example. If you get two that can fix any issues, you have a business. You can have 10 that are ok, and they might never succeed. There are many units within banks like that as well.

you heard it here first---direct from riversider....the banks are all ok. hilarious.

especially those providing loans to extell. they can extend forever.

Any way, my point is the credit crisis is not over. The banks will be willing to settle for loses in their RE investments/loans. The question is how much are they 'willing to' or 'forced to' lose.

The developers will have to pay up as well. Again, let's see how much they are willing to or forced to lose...

its not up to them.

sunday, you're right. it's not over, just delayed. my only point was that patience is needed. the forces against correction are quite strong right now.

The banks will evaluate each property. Weaker credits will be foreclosed on. If there is a reasonable chance of recovering the banks will opt to roll over. On the resi side, a number of option arms were converted by Wachovia to ten year IO loans.

There are two questions price direction and velocity. The most likely scenario going forward is low single digit price movement(up or down), and low volume.

The credit market's and economy won't support massive buying. Likewise inventory will be "managed". Banks will not dump on the market, and sellers have a tendency not to sell unless forced when they don't like the price.

uh oh...the guru has spoken.

and...that's the way it is.

Sunday, The credit crisis is over for the majors. It's playing out right now at the community bank level which haven't benefited from Government intervention to the degree that Goldmna , Citi & BAML have.

you're nuts...better to post the youtubes.

cc, you might be right. However, the first ones who negotiate with J. Millers's Condominium Recovery LLC might have a say. They might be able to get out within a reasonable lost.

lets see: "the banks will evaluate each property."

as opposed to what? evaluating some? randomly choosing? what does this mean?

"weaker credits will be foreclosed on"

really? why not foreclose when you can't? oh...because you can't. you are beyond belief.

J Miller is just copying a strategy which was employed in the early 90's. Some money came into three Lincoln Center that way.

"there are two questions price direction and velocity?" and your answer is that they will go up or down? really. didn't you leave out that they could stay the same? brilliant analysis.

sunday, good lord. if they are relying on the top 20%, what's to say the management won't get rid of lots of the lower 80% to keep compensation high where they want it?

"some money came into three Lincoln Center that way." who cares and what does that mean?

"J Miller is copying a strategy"--no shit...its called taking advantage of the situation. dates back way, way before three lincoln center.

I just think these firms buying in bulk will wake people up and cause the double dip much sooner.

agreed.

sunday, i thought the double dip would have already happened. it could happen very quickly, but my bet is on the gov't propping up everything through at least the mid-term elections. the fed may not cooperate. nasty rumors floating around.

ar, the people on the buttom who makes a lot less, very often are the ones who get canned first even though one from the top 20% could be making 2, 3, or more times more.

The Vulture funds buying in bulk will have long term horizons and reduce inventory. The biggest at risk sellers are those that are long multiple properties or have owned for a very short time.

Those that purchased more than five years ago are unlikely to make decisions based on latest Elliman market report, unless they lose a job.

One of the reason is they are the making the decision, but the other reason is, you can rebuild much easier with the top 20%, but much harder to rebuild just with the lower 80%.

now they're vulture funds? you're the only vulture that i see here.

sunday, i know that. how many people are currently employed on wall street? how many were in 1995?

so the lower 80% make much less than the top 20%? isn't that still enough for a fidi or williamsburg condo?

oh please. the vulture funds won't touch them until the rent/buy equation makes more sense.

The number of projects that are currently stalled and climbing is also a good indications that developers and banks will be willing to cut their loses and make a deal. Waiting won't be an option for them that much longer.

"Waiting won't be an option for them that much longer."

The big question.

Funny how no one on this board ever seems to be a good source from 1) an actual developer (i mean, haven't some of these troubled buildings developers laid off some people who can spill the beans on what's going on?), or 2) finance provider, such as a bank (makes me want to call up an old buddy in re finance to see what he thinks).

sorry to repeat but...each one is a different deal and subject to the issues underlying that deal. overall situation has little to do with each individual situation until and unless some critical mass develops as to direction. until then, everyone is no doubt desperately trying to hold the line within each deal.

jim, that's my problem with this line of commentary as well. some have already failed. some ought to, like tomorrow, but they probably won't.

eventually, you can't support an excess of condo units, particularly in a market with a large overabundance of luxury rentals. but when that will snap, who knows? i would have said this (last) year, but then the administration derailed those notions.

AR: There are cracks in the Extell BS. First Barnett absolutely denied news reports that Carlyle was demanding that deals be cut at Rushmore. Then, two weeks later, in a Post fluff piece on sales, Barnett says condos are really moving at Rushmore since they are discounting 10%. But in the past few weeks, at least 5 apts have closed at the Rushmore down 20%. That sets the new floor except for the people who had early contracts and can only squeeze a few percentage points off, if anything. Very suspicious that you can't get the truth out of the guy. Makes you wonder. Over 10 million sq. ft. of Manhattan real estate. You are right. If developers like this are not servicing debt it could get fugly.

apt23, absofnglutely. but it will take longer for the likes of extell generally to go down. or, in the more likely alternative, to have a development go down. but as i said, and you've always also said, the rushmore could be the catalyst.

this is such a small market, and it can jubilate and convulse at very interesting timee.

hfs:
You don't work.
You don't try to work.
You do nothing.
You have no career.
You have no credentials beyond a bachelors in psychology.
You don't work.
You can't even get your story straight if your husband's firm is hiring or firing.

_____

what is the deal? with unemployment at its highest in 2 decades, are you saying that aboutready ought to get a job and potentially keep another family's breadwinner unemployed (your post implies that her spouse can provide for her family)? There was an interview with Paul Volker not long ago where he shared an anecdote about the depression and his dad (or other family member) who as a teen at the time was instructed NOT to get a part time job while there were so many people (breadwinners) looking for work. Think about that for a minute.

I am just trying to understand the motive here. If you are just just carping to be a prick, apologies in advance for wasting my time bothering to give perspective.

Lecker...do i take it you were ambivalent about the decline in the murder rate in nyc?

Maybe I don't read these boards enough, but I don't get it. Jim - not sure I understand the comment on the murder rate. I'll try to reread it tomorrow when I am less tired.

jim, that is dark! I felt guilty for laughing...

"I would expect J. Miller's group would be looking to buy at about an 8% cap rate which would make the properties viable on a rental basis. As condos generally seem to be selling retail at about a 4% implied cap rate that suggests his group would be looking to buy at about a 50% discount to current (slow) retail market prices."

They have stated that they are seeking an average cap rate of 10%. I'm interested in who here thinks the lenders would rather foreclose on Extell Projects, deal with the lawsuits from people in contract, etc. (and fight Extell who probably isn't going to just say "ok, take them) rather than allowing Extell to discount prices 40% and sell of what remaining inventory they have?

It seems Extell is moving Rushmore inventory albeit slowly at discounts of between 0-15%. They constructed Aldyn when the real estate market had already slowed down. I imagine they got better pricing from Bovis and others and constructed the building to hit at a lower price point. While I would not be shocked if Extell defaulted, I would not expect it either.
There are tons of weaker players out there who are more likely candidates for J. Miller's venture.

jim, murder for hire, crimes of passion, or other kinds?

i wonder what the all-in psf costs were to build the rushmore. at this rate it will only take them about 3-4 years to sell the units. many buildings take that long to sell ALL of their units, but it's probably a very poor sign that there have been fewer than 100 closings in about 10 months.

Now I'm picturing what the potential murder weapon could be! I really should stop laughing and flush it out of my head... I guess I have been officially corrupted! Thanks a lot Jim!

Thanks, 30yrs!

10% would be a nifty cap rate. Scary what that would mean in terms of price per square foot.

" rather than allowing Extell to discount prices 40% and sell of what remaining inventory they have?"

30: That is exactly what they did in Miami, except they sold at 50% off. It is hard to understand why people buy in a troubled building without any transparency on the developer. Especially one with a history of bailing on their buyers.

sunday - http://www.diybyexample.info/2009/08/hacksaw/

Can't help but remember the vulture buyers from the early 90s. We've seen some of this in Manhattan commerical transactions already. Virtually none in residential. But the next shoe may soon drop.

Scary time. But could eventually be a time of fine opportunities as well.

which projects will be the target of Miller's sweep?

Riversider: It seems Extell is moving Rushmore inventory albeit slowly at discounts of between 0-15%.

I don't believe that is correct. Since 11/30/09 (right after it was reported that Carlyle Group was pressuring Extell to lower prices and Gary Barnett was adamantly denying that they were discounting at the Rushmore in that report) Apt 3X, 36A, 17D, 18D, and 17E (multi) were sold for around 20% off ask. The other two apts that closed since then for little or no discount, I can only imagine were buyers already in contract at a much earlier date. If not, they did not do their research to know that the developers price is now 20% off.

It does give credibility to the report that it was Carlyle pushing for the discounts. Since they are privy to the financial status of the building and the rest of us are not, I would say that is quite a tell.

Apt23. On ACRIS they post the contract date and the closing date.

And I've said all along that just because Carlyle has deep pockets, it does not mean they are in this for the long term. The listed prices for Rushmore have to be about 20% over-priced, in my opinion(maybe 25%).

where did you hear this? more ringing in your ears?

Riversider: Yes, but still. If you paid ask in that building, you are not happy that at least 5 apts have a 20% edge over you for any resale. With more to come. Ouch.

And I don't understand the comment about Carlyle. I assume like any investor, they want to get their money out and if need be, cut their losses. They have had very recent experiences with a huge RE debacle and I am sure they are going to do everything they can to avoid another one. Probably why they stepped in and insisted on price cuts now.

apt23, my feeling is that Carlyle was probably looking for their profit to occur in a certain time frame, and that this window is being exceeded. Some investors are known for more patience. From what I have read/heard Carlyle is not in that camp.

more drivel....are you telling us an investor wishes/requires a return? astonishing news. truly earth shattering. i had no idea. patience implies that prices will get better over time. are you suggesting that?

apt 23 : "I assume like any investor, they want to get their money out and if need be, cut their losses. They have had very recent experiences with a huge RE debacle and I am sure they are going to do everything they can to avoid another one. Probably why they stepped in and insisted on price cuts now. "

For all the discussion on these threads about how long it will take for this nyc disaster to unfold, where miller fund will get buildings willing to sell at prices that meet their yield targets, etc...........I wonder sometimes: aren't there any developers or banks who have a similar market view to the bears on here that things have a significant chance of getting much worse, so they decide to leap frog the slow-mo market decline to get inventory out before things get worse. ...That decision won't come from the developer (it would mean admitting all equity gone), but maybe from the bank except banks are such bureaucracies they may not react until clubbed in the face.

bank can't act until developer is in deep trouble. no upside for developer to move quickly. for that matter, very little upside to be the person in the bank who raises hand and suggests taking the loss sooner.

cc: exactly. Jim, as sit here in sunny Miami Beach, I can't tell you how many empty apts there are -- entire buildings, huge 600 plus apt buildings are empty and it is the banks that will be left holding the bag. Yet they still haven't taken the hit. Developers are only interested in cash flow. They built many of the empty buildings here knowing full well the jig was up, but they continued anyway because they had cash flow. They have loans up the wazoo. Construction loans, mezzanine loans, interest loans. They are just sitting there praying for an uptick before the cash flow runs out. Quietly working behind the scenes to have the govt allow them to sell a greencard with every apt purchase because that is literally the only thing that will save their asses. The jig is up only when they can't service their debt. The banks don't want them to give up because they will be left with the default on their books. The banks know they are cooked and all they can do is hope to kick the can down the road one day at a time hoping things get better.

However, Carlyle Capital Corporation just very recently (mid 2008?) defaulted on something like 17 billion dollars of US mortgage backed debt. It was a huge embarrassment. I imagine they don't want to face their very fancy board with the same egg on their face. That is why it is more interesting to me what Carlyle does than what any two face-saving, sweaty palmed banker wants to own up to. I find it very interesting - if that newspaper report is to be believed- that Carlyle forced Gary Barnett of Extell to discount prices at the Rushmore seemingly against his will. When you say, Jim, that we don't hear from bankers or finance guys in the know on this board you are right. I, for one, know nothing. But Carlyle does. They are the only regulator that Extell and their 10 plus million square feet of Manhattan RE knows or has to be held accountable to. The fact that Carlyle seems to be calling some shots at an important residential building should be of great interest to everyone interested in NYC RE.

It was the banks who needed to give approval for the price cuts, not Carlyle.

It will be interesting to see what happens with regards to Riverside South after Aldyn(which I think will be rental in disguise considering the likely unit sizes). There's no way the city can absorb the amount of units four additional buildings will bring. If this project gets postponed it will definitely make headlines.

are you kidding? do you really think the banks would go against any recommendation of Carlyle and their 100 or so billion dollars?

Banks are senior to all other parties when it comes to getting paid back. This is also Hypo Real Estate(now under German state control). My take is Extell has been tracking sales for the past year, and in consultation with Corcoran and Carlyle went to Hypo. The sponsor cannot sell below the offering plan without lender permission.

River: I think you are right about Aldyn. Which four buildings are you referring to? Does Aldyn consist of four buildings or are you referring to the entire planned Extell project at Riverside South? Or another four buildings in the area?

Aldyn is the building immediately to the south of Rushmore. There's another building adjacent(facing west end avenue) which is true rental. The Aldyn "condo" units are small enough that they could rent them out. Rushmore is more problematic, the pricing and size does not readily lend itself out to a rental type situation. The mega-project I'm referring to is what's being planned after Aldyn. See below for some details...

http://www.riversidecenternyc.com/

Those plans say five buildings. Do you think that they will go forward with the other buildings or the new proposed school. You would think that we would here something from the city government about this --- except the deputy mayor went to work for Extell.

Yes, I think five is right. The community needs the school, so that would be very welcome. And I have thought that NYC government is a microcosm for what goes on at the National level with people going back and forth between private and public sector and utilizing the contacts these relationships bring. It's really hard to see how the city absorbs five buildings and where the money comes from to finance it.

From what I understand (based on Community Board & CEC meetings) - it's not that Extell or Trump (when they greenlighted Riverside Blvd dev.) don't want to build the schools. The DOE turned Trump's offer of a new school because the DOE mistakenly thought there was no need for one. Now, conspiracy-minded theorists might say that there could been weird insider dealings within DOE that conspired to turn Trump down.

hudson yards? atlantic yards? there is a remarkable ability to perceive opportunity. someone will produce a demographics study showing that all the youngsters hanging out at the parents or crammed together 6 to an apartment are growing up and desiring their own space and then it will be off to the races again. and it will be too early.

bankers like to lend, builders like to build. memories are short. we'll have an even greater glut of units in the future. the US doesn't understand retrenchment, and we refuse to learn from the japanese. we're unwilling to control our banks, so they'll just take the gamble again, at least in some markets.

jim, funny. check out arris lofts in LIC. i'm very much afraid that is what today's buyers have to look forward to, but even worse, in bburg new development.