Peter Von Der Ahe's Blog

Last Saturday's New York Times article titled "Real Estate Looks Risky, but Less So for Bargain Hunters," which takes a look at the current climate of commercial real estate investing, posed an interesting question in my mind.

"‘The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad' is priced in,' said David Frame, global head of alternative investments at J.P. Morgan Private Bank."

December's index of leading economic indicators, published by The Conference Board, showed an increase of 1.1 percent. The index showed a 1 percent increase in November, and a .3 percent increase in October. Could this mean that we're out of the woods? The index, which covers stock prices, initial jobless claims and consumer sentiment, among other indicators, has risen month-over-months in each of the past nine months.

Initial claims for unemployment insurance helped bring up the index in December. Early information for January shows an uptick in initial claims, but the rate of job contraction seems to be approaching levels consistent with payroll stabilization. As consumer demand increases throughout 2010, a net gain of approximately 1 million jobs will occur this year.

In the real estate industry, some indicators will continue to show declines throughout the year, as these numbers often lag economic recovery by six months or so.

With crude oil prices hovering around $80 a barrel in recent days following the end of the nationwide cold spell, it is an opportune time to discuss the importance of crude oil prices for multifamily building owners and management. This is especially important to owners in Harlem, the Bronx and the Upper East Side, where older heating systems using oil heat are still prevalent.

After real estate taxes, heating oil (for those who use it) is the greatest expense in a multifamily building. More importantly, oil is an expense that is completely out of your control as a consumer. Major global investment bank energy analysts are predicting short-term prices above $80 per barrel before oil markets tighten in the coming years.

Throughout the New York City area, many residential and multifamily buildings are still heated by oil – but you don’t have to be at the mercy of market price swings, which are affected by any number of factors around the world. It may be possible that switching your heating source from oil to natural gas may decrease your building expenses considerably over the long run. Natural gas is currently selling for less than half that of oil per million BTU and is therefore a less expensive alternative. However, replacing an oil boiler with a gas system (complete with gas lines) can be a costly endeavor. Electing to replace a failing boiler with a natural gas system can be a sensible, cost-saving idea. Alternatively, if your heating system is running well, you should calculate the life-cycle cost of replacing your system, as you may be better off investing your money elsewhere right now.

In a decided movement, the amount of foreigners looking for New York Real Estate has increased dramatically over the past quarter. It almost feels that the farther away from the trees they are, the more they can see the forest, and they want some of it. Many are driven by the incredible lows of the dollar (at the time of this writing it was trading at X vs. the Euro), and others, after reading enough negative press about the American economy, are looking to capitalize on opportunities. In short, there is a belief that much equity will be created when our recovery occurs. While not showing up in closings yet, as many are looking, this trend should be reflected in sales and closing over the next 12 months. I am currently working with more foreign families today than I was in the heights of 2007.

Another surprise buying group has appeared: local investors who are not primarily in the real estate business. These individuals have significant amounts of investment capital, may have been burned in the stock market, and see this as the time to look for multifamily opportunities. Similar to foreign buyers, these investors are primarily looking for long term appreciation, B+ and better locations, tenancy which would allow for third party management. Current cash flow is secondary. Their belief about residential rents is that "we may not be at the bottom, but we are a lot closer now than we were in January of 2009". Put another way, greed is coming back into the market, and that is a good thing.

Although layoffs have not been as severe as originally predicted, still-sizable job cuts have weakened apartment demand in Manhattan. With employers likely to continue thinning payrolls, developers have begun to alter plans in anticipation of declining residential demand. Multi-family permitting activity has dropped dramatically as a result. In February, for example, not one multi-family permit was filed in Manhattan. Renter demand has fluctuated markedly depending on location. Leasing activity has been sturdiest in the West Village, and SoHo. Buildings with rent-stabilized units, conversely, afford owners stability this year, as the Rent Guidelines Board approved increases of 3% and 6% for one and two-year leases respectively.

In all five boroughs, payrolls are projected to contract by 114,300 jobs in 2009. Manhattan employers will cut personnel levels by 2.9 percent, or 70,500 workers, after 27,800 positions were eliminated last year. Overall, vacancy in large, market-rate buildings is forecast to climb 140 basis points to 4 percent in 2009. While for most of 2009, apartment investment activity has been muted in Manhattan, investors should note that opportunities could be missed while waiting for possible fire-sale prices. I look forward to your comments and suggestions.