manhattan real estate report

Manhattan rents dip as boom market eases slightly

2007-03-08T14:02:00.000-05:00

The commercial market is shifting gears. Though vacancy rates continued to drop in Manhattan overall, rents fell and leasing activity was slower in January.

According to a market report by commercial brokerage CB Richard Ellis, January resulted in 1.56 million square feet leased overall, down from 2.73 million square feet in December and from 2.20 million square feet last January.

"The market is steady, but there may be a slower decline in availability rates going forward," said Gregory Tosko, vice chairman of CB Richard Ellis.

Manhattan's vacancy was 6.0 percent in January, down from 6.7 percent for the quarter that ended in December, according to a market report by Cushman & Wakefield.

Overall, asking rents in Manhattan dipped 2.2 percent from $50.56 at the end of 2006 to $49.45 in January, pulled down by a 2.6 percent decline in Midtown.

Limited availability of large blocks of contiguous space continued to drive some tenants out of Manhattan.

"So far, we've seen the Manhattan vacancy rate stabilized but the total vacancy will continue to drop," said Barry Zeller, executive director at Cushman & Wakefield's Midtown office.

Midtown
In Midtown, the vacancy rate continued to tighten while average asking rents dropped.

According to Cushman & Wakefield, Midtown had a 5.4 percent vacancy rate in January, down from 6.4 percent for the quarter that ended in December. For January, the average asking rate was a reported $57.39, down from $58.92 in the final quarter of 2006.

Still, there were plenty of buildings with sky-high rents.

"Some premium buildings are holding out on their last blocks of space for prices north of $125," Tosko said. "For that tenant demographic, rent isn't nearly as big a portion of their gross revenue as long as they feel like they're getting a fair deal."

Marathon Asset Management last month leased two floors at One Bryant Park, reaffirming the market for high-end office space with rates above $125. Class A office space in Midtown had an average rate of $65.71 and reached as high as an average of $89.38 in the Madison Avenue/Fifth Avenue submarket, according to Cushman & Wakefield.

According to Zeller, as the vacancy rate continues to tighten, tenants who need large blocks of space must set up corporate campuses in Midtown (see Lack of large spaces leads to more office campuses).

The investment bank Bear Stearns is one of several companies that have put workers in different buildings. The financial services firm took more than 100,000 additional square feet at 237 Park Avenue, one of their two Park Avenue locations.

Financial service firms are leading the demand for expansion space amid a healthy Wall Street climate, Tosko said.

Midtown South
To ensure that they have room to expand, Estee Lauder's MAC Cosmetics last month leased the remainder of 25,000 square feet at 130 Prince Street -- office space that won't be vacant in the near term. CBRE defines Soho as a part of Midtown South.

"There is not a lot of product [available], no large buildings, not much turnover and mostly old buildings," Tosko said. "Pricing for good product is in excess of $50 a square foot, and tenants who run the risk of no space are signing forward commitments as far ahead as the third quarter of 2008."

Creative firms like MAC Cosmetics prefer to be in Midtown South despite the tightened vacancy and rising rents, said Tosko. "Creative firms are really benefiting parts of Midtown South," he said.

According to Cushman & Wakefield, the vacancy rate in Midtown South was 4.9 percent in January, down from 5.6 percent for the quarter that ended in December. The average rent rate increased slightly to $40.99 from $40.55.

Downtown
In Downtown, the vacancy rate dropped to 8.2 percent in January, down from 8.4 percent for 2006's final quarter. Average rent rates continue to rise steadily, up to $39.11 from $38.62.

"There is some pressure on pricing -- it's moving along constantly upward. But this is not a market where three tenants are going after a single block of space," Tosko said.

While market insiders say Downtown activity has substantially picked up in the past year, it will be a while before the market sees the same demand as Midtown.

By Vanessa Londono

‘Celebration' Is Tune For Real Estate in 2006

2006-12-27T15:18:00.000-05:00

The song "Celebration" by Kool & the Gang is played frequently at weddings and parties, as well as at the conclusion of many important sporting events. In addition, it could be the national anthem of New York City's real estate industry.

The song certainly would be an appropriate accompaniment to an examination of commercial real estate sales volume. Preliminary estimates indicate that commercial sales in the city this year soared 140% above 2005's record, to as much as $31 billion.

"The sales volume is probably closer to $45 billion to $50 billion, when you consider the purchase and privatization of the publicly held real estate investment trusts assets," the president of Cushman & Wakefield, Bruce Mosler, said.
It was "a great year for the investment sales business, although it really was a tale of two markets," the chairman of Massey Knakal Realty Services, Robert Knakal, said. "One encompassed the first half of the year, and the other was the second half. During the first half, the sales activity, in terms of number of buildings sold, experienced among the highest turnover levels recorded within the last 20 years, running at about 3.9% annually.

"While the numbers are not yet complete, I am confident the second half of 2006 will show a significant reduction in the number of sales closed," he said. "Many people will quote the $30 billion of sales and compare it to the much lower number recorded in 2005, but this is misleading. Mega sales in 2006 are skewing the numbers upward. We are much more focused on the number of sales, which we think is much more indicative of market activity, viability, and strength."

Fueling the increase in sales of commercial properties is the rise in office rents and the low vacancy rates."Rents for class-A office space in Midtown is $65.63 per square foot, with a vacancy factor of 6.2%," the executive director of Cushman & Wakefield, Glenn Markman, said. "The market has not been this tight since the second quarter of 2001. For the first time in five and a half years, the overall vacancy rate in Manhattan is below 7%.

"On average, close to half a million square feet of available space has been removed from the inventory since the beginning of 2006," he said. "You can count on one hand the amount of large blocks of space in excess of 200,000 square feet available for occupancy."

"The big story for 2006," the chairman of Newmark Knight Frank, Jeffrey Gural, said, "is the fact that for the first time rents are rising significantly, where in the past only the price of the building was rising."

The president of Dividend Capital Realty Trust, Marc Warren, adds: "Real estate is basically an accepted institutional asset class and notwithstanding asset class and notwithstanding high market pricing, it is the ‘least bad' investment to many large capital sources."

Some real estate leaders have different opinions on the investment sales outlook. "Most of the major purchases made this year are by buyers who are chasing the dough in the market and ‘potential' market explosion from a rent standpoint," a principal at Stellar Management, Robert Rosania, said. "These are momentum plays, as opposed to genuinely increasing the real estate values."

One of the most active purchasers this year is the Witkoff Organization. The company recently bought the 675,000-square-foot office component at 1745 Broadway that serves as the world headquarters for Random House for $509 million, or $754 a square foot. The company also purchased a 116,000-square-foot office condominium at 420 Fifth Ave. for $58.5 million, or $505 a square foot.

The condo encompasses four floors of the 30-story, 609,000-square-foot building on West 37th and West 38th streets.

The seller was a partnership that includes the German company Bayerische Beamten Versicherungen, which acquired the condo in 1995 for $30 million. "These purchases were well-priced on the bricks, certainly as compared to some of the other purchases made this year," the CEO of the Witkoff Organization, Steven Witkoff, said. "Properties in New York are hot and cheap. Last week, our company entered a contract for a property in London for $400 million that cost us $1,500 a foot, much more expensive than any building in New York."

Immediately after the attacks of September 11, 2001, few investors had an interest in purchasing properties in Lower Manhattan. That's changing: In fact, the highest price ever for a Lower Manhattan office building is expected to be fetched when Deutsche Bank sells and leasebacks on its 47-story, 1.65 million-square-foot building at 60 Wall St. Industry leaders expect the building to be sold for about $1.2 billion, or $750 a square foot.

Early next year, the Koeppel Companies are expected to close on the sale of its landmark Standard Oil building at 26 Broadway. Industry leaders expect the property to fetch more than $200 million. A local investor is expected to pay about $60 million for two office buildings that presently serve as schools at 90 and 100 Trinity Place. The adjacent properties have a total of 175,000 square feet and include about 75,000 feet in development rights.

As reported last month in The New York Sun, Silverstein Properties and California State Teachers Retirement System purchased the corporate headquarters of Moody's Corp. at 99 Church St. The joint venture paid $170 million, or $505 a square foot, for the building. A number of industry leaders expect the joint venture to demolish the property and build a new office or residential tower on the site. The Sun has learned that a number of other properties on Trinity and Greenwich streets are expected to go to market early next year.

With rents rising all over Manhattan, real estate investors are betting that rents will exceed $60 to $70 a square foot for classic office buildings at One Park Ave. and Two Park Ave. in the Murray Hill section of Midtown. Both of these properties are expected to be sold, and the purchaser believes that the rents will meet expectations to pay these record prices.

Last week, a joint venture of Murray Hill Properties and Westbrook agreed to enter into a contract to pay about $550 million for the 20-story, 929,000-square-foot One Park Ave., built in 1925. The seller is a joint venture of SEB Immolnvest and SL Green. SEB paid $242 million for a 75% stake in the building a few years ago. According to the trade, the joint venture purchased the property to defer taxes on its windfall profit on the sale of 450 Lexington Ave.

Last month, Murray Hill and Westbrook purchased the Brill Building at 1619 Broadway, an 11-story, 162,000-square-foot office building built in 1931. They paid about $89 million, or $550 a square foot, to Alan Rose, AVR Realty Company. Last month, AVR agreed to pay $1.28 billion to Boston Properties for the long-term leasehold interest in the 1.1 million-square-foot 5 Times Square.

Earlier this month, a joint venture of Murray Hill Properties Fund III and Principal Real Estate Investors paid $177.5 million to purchase the 25-story, 400,000-square-foot office building at 1412 Broadway at the corner of Broadway and West 39th Street. The joint venture paid $177.5 million to the seller, a joint venture of Murray Hill Properties Fund I & II and local investors. The seller acquired the property in 2004 from a JER Partners Fund for $105 million.
Directly across the street from One Park Ave. is the 29-story, 855,000-square-foot 2 Park Ave. In October, a joint venture of L&L Holdings and General Electric Pension Trust paid $450 million, or $526 a square foot. The property was owned by SEB ImmoInvest, which acquired it in 2003 for $292 million. According to the trade, the building is in contract to be sold for approximately $570 million.

Over the years, organized labor has assembled and maintained headquarters in Manhattan real estate. Last month, the Amalgamated Bank of New York agreed to sell its headquarters at 15 Union Square to Brack Capital for about $80 million. As reported in the press, the Service Employees International Union Local 1199 has retained an investment banker to sell its headquarters at 310 W. 43rd St. and an adjacent site. Transport Workers Union Local 100 went into contract to sell its headquarters building at 80 West End Ave. for $60 million.

Last week, Vornado Realty Trust closed on the acquisition of the 538,000-square-foot office building at 350 Park Ave., between 51st and 52nd streets, for $542 million, or $1,007 a square foot.

In November, the REIT announced it had entered into in agreement to acquire for approximately $689 million the Manhattan Mall, a mixed-use property located on the entire Sixth Avenue block front between 32nd and 33rd streets in Manhattan. The property contains about 1 million square feet, including 812,000 square feet of office space and 164,000 square feet of retail. Included as part of the transaction are 250,000 square feet of additional air rights adjacent to the 1.4 million-square-foot Hotel Pennsylvania, owned by Vornado. Vornado controls more than 5 million square feet of office properties within the eight-block radius of the Manhattan Mall.

A number of properties have traded on Fifth Avenue during 2006. They have included 485, 521, 522, 535, 545, 597, the retail component of 717, 720 and the record price of $1.8 billion for 666 Fifth Avenue. Last month, Corporate Realty Income Fund I LP entered a contract to sell, the 23-story, 234,000 square foot, office building at 475 Fifth Avenue for approximately $160 million, or $619 per square foot. According to the trade, at least three other buildings on Fifth and Sixth avenues between 34th and 42nd streets are expected to be marketed for sale early next year.
Let's all remember it's time to celebrate 2006 and look forward to favorable outcome for 2007.

BY MICHAEL STOLER

Market sees calm before bonus buying storm

2006-12-10T15:09:00.000-05:00

December 2006

Prices, sales numbers stay even, though top end rises; brokers expect wave of buying in '07:

Manhattan's residential market remained relatively stable, as housing prices and inventory numbers barely moved over the last several weeks, say market watchers.

"We saw that for the month of October, prices seemed to be fairly flat -- unchanged from previous months," said appraiser Jonathan Miller of Miller Samuel in late November. "Inventory levels over the past five months have also remained fairly flat, only going up or down 100 listings per month."

Miller said this flatness is a new aspect to a market that experienced considerable volatility over the first half of the year and through 2005. Despite slowing sales, prices rose in the first half of this year, coming off a weak second half of 2005. They slipped in the third quarter, bringing the average price of a Manhattan apartment to $1,050 a square foot.

Prices more realistic

The market tightening between the second and third quarters has made sellers more cautious when they price their properties and put them on the market for the first time, Miller said. When homes were still appreciating in value at a healthy clip, many not-so-serious sellers would "go fishing," placing their properties on the market at inflated prices on the chance that a buyer might bite. That no longer works very well.

"Now, there is a certain precision required for pricing due to the increased competition," Miller said. "There are no more casual sellers and the property must be priced properly or else it won't move."

All in all, it's part of a long, slow slide toward a buyer's market.

"We're sort of in this neutral mode, maybe the market is tilted a bit to the buyer's side," said Miller. "But it's not an overwhelming advantage. I guess I'd characterize it as a buyer's market in the weakest sense."

Wall Street fuels luxury-market surges

The high end of the market remains competitive, though. The most expensive properties in Manhattan still sell. Miller Samuel data indicated prices for these elite properties -- the top 10 percent of the priciest available listings -- rose 18 percent in the third quarter. The average property in the top market bracket sells for $4.5 million.

Thank Wall Street for the price hikes. The Wall Street Journal reported last month that investment bankers and traders can expect to see their bonuses rise 10 to 20 percent this year, which should prompt another wave of top-tier property purchases.

"Wall Street bonuses are supposed to be higher, so the luxury market should be strong in the first two quarters of 2007," said Miller. "Wall Street workers account for just 5 percent of employees in the city and they take home 20 percent of the wages. They have a significant leveraging effect on consumption."

Glenn Norrgard, a broker for the high-end firm Sotheby's International Realty, agrees. His most expensive listing this fall, an $8 million pad at Skylofts at 145 Hudson Street in Tribeca, is among his most-viewed properties, and most prospective buyers are Wall Street heavy hitters.

"It's the middle level of the market that has been flat. The [high-end] market is still being shown and people are still buying at that level," Norrgard said. "All indications are that the Wall Street bonus numbers will be higher, so people are looking around now."

Norrgard said brokers expect a lot of money to be spent in Manhattan this year. He said much of last year's bonus money was used to buy homes in the Hamptons. While the bonus numbers bode well for brokers at the top end, Wall Street alone won't prop up the entire New York City residential market.

"Having big money transactions around does not mean there's a booming real estate market," Miller said. "But it does set a psychological tone that's positive."

"God bless these bonuses," added Kirk Henckels, director of Stribling Private Brokerage, which handles high-end properties. "[The bonuses] will keep the market going through spring just as they did last year."

By Tim Moran

Manhattan commercial rents reach record heights

2006-12-10T12:08:00.000-05:00

December 2006

Office rents hit an all-time high in October, with the greatest jump in rents recorded in the last 15 years.

Average commercial rents for Manhattan Class A office space set a new record, ticking up 4.8 percent on the month to $63.26 per square foot, according to numbers provided by brokerage Colliers ABR.

The new high bests a previous record of $63.26 set in April of 2001 and shows a 4.8 percent climb over September, which is the largest month-over-month rent hike since 1991.

Vacancy rates also fell in commercial buildings island-wide, dropping to 7.8 percent in October from 8.1 percent the previous month. Class A space is particularly hard to find. Vacancy rates for those properties dropped to 6.5 percent from 6.8 percent in September, its lowest figure since July 2001.

"There's simply a lack of liquidity in the market right now and it's leading to higher rents," said Matthew Astrachan, vice president of CB Richard Ellis. "A year ago, you had nine or 10 blocks larger than 200,000 square feet [available for lease]. Now, you have two.

"We've seen a 25 percent spike in rents citywide over the past year, and I'd say that 20 percent of that has happened over the past six months," he added.

Vacancy rates could ease a bit soon.

Colliers reports that seven blocks of space in the 100,000- to 300,000-square-foot range will become available over the next several months as some major tenants relocate. However, if the economy remains strong, these properties should go to lease quickly.

Midtown
The average asking rent for Class A space in Midtown rocketed up 5.2 percent in October to $73.95 per square foot -- up from $70.30 a foot in September -- according to Colliers. This high average was helped, no doubt, by the stunningly high rents in the Plaza District submarket, where rents jumped 8.8 percent on the month to $88.45.

"That's no surprise," said Astrachan of the Plaza District rents. "Those properties have always commanded the highest rates in any market cycle in New York and the rent in some buildings there is approaching $170 a foot."

Class A vacancy rates also dropped in Midtown as a whole to 5.9 percent, its lowest level since March of 2001, when the vacancy rent was 5 percent.

Midtown South
The numbers from Colliers show a flat Midtown South market, where they say the overall vacancy rate held steady at 8.2 percent.

Other brokerages have a more positive take on what's been happening recently.

Numbers from CBRE show a vacancy rate much lower than the Colliers' figure, at 5 percent. The brokerage found that Midtown South leasing totaled 520,000 square feet in October, or 30 percent ahead of the market's 400,000-square-feet, five-year monthly average.

CBRE credited strong activity in submarkets Madison Square and Chelsea, where leasing numbers were twice their average. For his part, Newmark Knight Frank executive managing director Peter Kozel agrees with the CBRE numbers.

"Midtown South picked up steam this month," Kozel said. "Plenty of submarkets had availability rates under 5 percent. That means the actual vacancy rates could be as low as 2.5 percent."

Perhaps explaining the weaker numbers from Colliers was a re-measurement at 350 Fifth Avenue, better known as the Empire State Building, which technically caused availability and vacancy rates there to increase. For all they disagree on, however, both Colliers and CBRE had similar rent numbers for the neighborhoods. Colliers puts the average at $37.18 a square foot and CBRE puts the average at $39.63.

Downtown
The numbers from Colliers and CBRE were also close Downtown, with Colliers pegging the average rents in the neighborhood at $40.12 and CBRE reporting $40.22, up in both cases over last month.

Leasing activity was light, however. After seeing over 1 million square feet leased in both August and September, just 320,000 square feet moved in October. That's a full 35 percent lower than Downtown's 490,000 square foot, five-year monthly average, CBRE reports.

If one takes a longer view, however, the numbers are still strong. Year to date, 5.73 million square feet have leased, which puts Downtown 68 percent ahead of last year's pace.

"The Downtown market remains softer, but that's changing quickly," said Astrachan. "The space crunch is such that the market for properties, especially Class A, is very strong in just about every submarket."

By Tim Moran

NYC foreclosure figures defy national trend

2006-12-10T11:58:00.000-05:00

December 2006

New York and the rest of America are out of sync once again. Foreclosure figures, a key indicator of the trajectory of the real estate market, are falling in the city and state while they rise in the rest of the country, confounding bearish analysts and economists.

But many holders of adjustable rate mortgages, or ARMs, a variable rate loan that New Yorkers sought in high numbers during the housing boom, could soon be exposed to rising interest rates as the period of their mortgage that has a set rate expires. Exposure to higher payments could land some ARM holders in trouble and push foreclosure numbers up.

New York's high property prices amplified the appeal of other formerly obscure types of loans, sometimes called "toxic mortgages," which include interest-only loans and payment-option mortgages, which require low payments during the loan's early years and rise over time.

In September, five federal agencies, including the Federal Reserve, issued new guidelines governing ARMs, payment-option and interest-only mortgages, which state regulators are expected to use as a blueprint for monitoring the industry.

Figures buttress their concern. Nationwide, foreclosures peaked at 117,150 in February 2006, dropped to 88,194 in June and climbed to 112,510 in September, according to figures compiled by RealtyTrac.com.

In New York, statewide statistics compiled by RealtyTrac.com defy national trends. Foreclosures in February 2006 reached 5,205, dropped to 3,907 in June, bounced to 4,537 in August, then fell to 3,622 in September.

"New York City represents a classic case of Economics 101," said Rick Sharga, vice president at RealtyTrac.com. As long as property values remain strong due to high demand, "the fallout of a higher default rate will have much less impact than in, say, Detroit, where values have gone down and unemployment has risen."

In the five boroughs, the number of foreclosure auctions dipped in the third quarter, according to PropertyShark.com. The downturn is surprising, since the steady increase in the Federal Prime Rate from its historic lows in the early 2000s led to fears that foreclosures would follow an anticipated rise in payments, though mortgage rates have come down recently.

New York City foreclosures dropped from 948 in the first quarter to 762 in the third quarter. Numbers for the year to date follow virtually the same trajectory as the last three quarters of 2005, according to the Web site. There were 949 foreclosures in the second quarter of 2005, a figure that dropped to 771 in the final quarter of 2005.

"The recent run-up in New York City real estate and the lengthy court system, combined with the fact that most ARMs have not yet adjusted upwards, have created a declining number of foreclosures in the near term," said Ryan Slack, CEO of PropertyShark.com. "But foreclosures are expected to rise in the next two years."

Not everyone in the industry agrees.

"Housing is not as bad as it seems," said Billy Procida, CEO of Palisades Financial in Englewood, N.J. "This hand-wringing is all due to hype. The media scares people, so in turn, the guys who sit on bank boards hear nightmare stories and at the next meeting they say that housing is in trouble, so they stop doing housing. The perception is not reality."

The New York market's resilience will help weather a rise in interest rates, because prices will stay relatively high and there aren't as many buyers who own properties as investments.

"Even people who took out exotic mortgages aren't being killed yet because interest is still historically low," said Andrew R. Berman, a professor at New York Law School who specializes in real estate. "The rental market is so strong and the vacancy rate is so low that people's cash flow on properties that generate rental income can offset any mortgage interest debt they have to service."

Despite the spread of creative financing tools and the potential for a rise in foreclosures, the situation feels familiar to Procida. "This happens every seven, eight or nine years," he said.

By Marc Ferris

Mortgage rates fall to 6.11%

2006-12-10T11:57:00.000-05:00

Friday, December 8th, 2006

# Mortgage rates nationwide fell for the fourth straight week, with the 30-year fixed-rate loan dipping to the second lowest level of the year.

Mortgage lender Freddie Mac said 30-year, fixed-rate mortgages averaged 6.11%, down from 6.14% last week. The only time rates have been lower this year was the week of Jan. 19 when they dipped to 6.1%.

Rates on 30-year mortgages reached their peak at 6.8% in late July.

US Office Recovery Behind Manhattan’s

2006-11-09T14:13:00.000-05:00

NEW YORK CITY-The balance between supply and demand in the office market in Manhattan is reaching critical mass, with repercussions being felt throughout the market by the end of 2007, says David Arena, president of Grubb & Ellis New York, at a forecast breakfast Wednesday.

In the last two decades, development of speculative office space, due to high construction costs and lack of developable space in Manhattan, has been slow. “We are critically undersupplied,” Arena says. “There’s just 25 million sf available amongst the 360 million sf of office space in New York City.”

Four large financial services firm in Midtown are now looking to expand with no real options to do so. “They need space for their traders. One firm has closed off a stairwell between trading floors to expand,” Arena says.

Grubb & Ellis predicts rents will continue to rise in Midtown as well as Downtown. Manhattan’s direct average asking rents climbed to $65.80 in the Q3, surpassing the historical peak of $64.15 in 2000. Midtown asking rents are expected to reach $75 per sf and Downtown asking rents will rise to $55 by 2007/2008. “Historically there has been a spread of $20 per sf between Downtown and Midtown,” he says. “That historic average will be true again. This is going to happen. It has happened twice in my career.”

Companies will also seriously consider alternative locales for back office workers such as Jersey City; Stamford, CT; Brooklyn and Westchester, NY. in reaction to demand that is predicted to grow by 4% per year; requiring 3.2 million new office space per year. Speculative office development is expected to accelerate to meet that demand.

That growth is likely to occur in Midtown, west of Seventh Avenue along the 42 Street and 34 Street axis. “We expect tenants will pay a premium for high quality assets with better security, close proximity to transportation hubs, large efficient floor plates and green or sustainable characteristics.”

Elsewhere in the country, the real estate market is not as tight. In fact, the rest of the country is still in recovery mode after 9/11, according to Robert Bach, senior vice president of research & client services for Grubb & Ellis. “We are bullish about the office market,” Bach says. ”The economy is cooling off, because it is finally reacting to the Fed’s 17 interest rate hikes. It has not yet reached bottom. Short-term rates have leveled off, while long-term rates have actually gone down. It seems to be in the middle of a soft landing.”

Vacancy rates nationwide, although not as low as New York City’s 7.3%, will continue to decline. “We see US office vacancy rates declining to 13.2% in 2007, compared to a year end of 13.6% in 2006,” Bach says.

Demand for industrial space also remains high, especially around ports in Northern New Jersey, Pennsylvania and Southern California. “Industrial is further along in the recovery than office,” he says.

The question remains: “Is real estate over priced as an asset class or was it under priced during the 1990s? That’s a question that will play out for the rest of next year, with demand remaining strong,” Bach says.

Internationally, Steven Mallen, senior managing director and global client services consultant with Grubb & Ellis, says “real estate worldwide is undergoing a revolution. Supply is tracking demand better than it ever has before. Real estate has matured as an asset class in first decade of this century.”

With better lending practices and improved ways to access risk, investments worldwide will reach $600 billion by the end of 2006, with that rising to $700 billion by the end of 2007, a marked increase from 2005’s $450 billion and 2004’s $300 billion, Mallen notes.

With real estate investment opportunities dwindling here, US investors mostly originating in New York, have looked oversees. The hottest countries in the emerging markets are Korea, India and China. The next hot spots, Mallen predicts, will be Thailand, Malaysia, the Philippines and Taiwan.

By Barbara Nelson

Top Manhattan Office Space Now Costs More Than Ever; Companies Lap It Up

2006-11-09T14:09:00.000-05:00

Up, up, and way away went Manhattan office rents in October, according to new numbers from a top city brokerage.

Colliers ABR says the average asking rent for Class A space - the sort of top-tier stuff in Midtown skyscrapers and in downtown addresses like 7 World Trade Center - hit $63.26 a square foot last month, a record that bests the previous all-time high of $61.48 in April of 2001.

Robert Sammons, Colliers' research director, credits the spikes in Manhattan office rents to the strength of Midtown, were the average asking rent for Class A space in October was $73.95 a foot, up from around $70 in September. Sammons said that the asking rent for top Midtown office space will likely smack $75 a foot by the end of 2006; in Manhattan overall, it will be renting at $65 a foot by year's end.

Will companies continue to pony up the dough for such pricey addresses? Apparently.

Colliers ABR reports that the vacancy rate for Class A space in Manhattan tumbled in October to 6.5 percent, its lowest level since July of 2001.

By Tom Acitelli

"Music Hall" plan reflects a changed Williamsburg

2006-11-06T12:43:00.000-05:00

THESE days, the road to Northsix is a crowded one. All along the stretch of North Sixth Street that leads to Northsix, a five-year-old rock music club by the Williamsburg waterfront, there are raucous bars, restaurants and stores. Almost none of them were there when Jeff Steinhauser, still in his 20s and armed with his inheritance money, leased space in an old mayonnaise factory and hammered a stage together by hand.

The club, which was one of the first of a wave of music places to open in Brooklyn, and an early hub in the Williamsburg music scene in the heady days when bands like the Yeah Yeah Yeahs were becoming famous, is getting ready to close — sort of. It is scheduled to shut for an extensive renovation at the end of January and reopen a few months later as the Music Hall of Williamsburg, owned by the Bowery Presents, the company that puts on music shows at the Bowery Ballroom, the Mercury Lounge and Webster Hall, all in Manhattan.

Williamsburg is not losing a rock club, then, but gaining one that may be more suited to its current state of gentrification, to the 40-story condos being planned along the East River nearby. Where Northsix has distressed, paint-caked wood floors and rudimentary high-school-style risers, the Music Hall will have balconies and a big-city gloss.

On Wednesday, a crowd of pale, messy-haired young men (and a few women) wearing slouchy jeans filed into Northsix for the second night of the annual CMJ Music Marathon. Mr. Steinhauser, a red-haired former rock musician who at 33 could still blend easily into the club’s audience, attributed the closing to familiar factors. There was a long run of bad luck — including an initial opening date two months before Sept. 11, 2001; a lawsuit from a customer who was injured in a fight there; and a fire code violation that closed the club for a month during its busy season — and, lately, rising rent.

“Unfortunately, we’re just getting by with the rent the way it is now,” said Mr. Steinhauser, who booked all the bands for the club with Bob D’Amico, a longtime friend who now plays drums for the band the Fiery Furnaces. “I would have liked to have continued what we’re doing, but it’s just not possible.”

Even surviving this long was hard to picture in the 1990s, when Mr. Steinhauser was lining up investors to supplement money he inherited upon the death of his father, who worked for an insurance company. Word of Williamsburg’s transformation was only beginning to spread.

“My grandmother is from Brooklyn,” he recalled, “and when I told my dad before he passed away where a lot of my friends lived, he said: ‘Williamsburg? That’s the place my mother told me never to go.’ ”

Things have changed, of course. Among the CMJ indie-rock enthusiasts smoking cigarettes outside was Dan McElroy, 24, who lives nearby and was there to see the night’s headliner, Magnolia Electric Co. Mr. McElroy, who had never been to Northsix, was not surprised to hear of its fate.

“Isn’t that the way it’s going?” he said with a shrug. “Money spreads; it’s the natural order.”

On the other hand, he added, at least a music club will remain, and music fans in more remote neighborhoods like Bushwick and Bedford-Stuyvesant will most likely be happy when spreading gentrification brings them a rock club of their own.

Inside, Mr. Steinhauser, who will have a job in the management of the new club, pondered the transition. “It’s weird,” he said. “But you know, the way the neighborhood is changing, I don’t know that a place like this necessarily fits in with what the neighborhood is changing to.”

By JAKE MOONEY

Observers with different methods of analyzing the housing market come to some similar—and some dissimilar—conclusions

2006-11-06T00:30:00.000-05:00

Where Housing Prices Will Fall the Most

Prediction is very difficult, especially if it's about the future.
—Niels Bohr, Nobel laureate in Physics

Almost no one is arguing about whether the U.S. housing market is in decline these days. Prices are skidding across the country. Homebuilding stocks like Lennar (LEN ), DR Horton (DHI ), and Pulte Homes (PHM ) have gotten crunched.

Yet many people are wringing their hands over which markets will be the worst hit and how steep the price declines will be. Where will the housing market in Chicago or New York or Miami be next year? Bohr's take on predictions is as true as ever.

CONTRASTING APPROACHES. Into the breach have stepped economists, analysts, and academics. They're trying to predict where housing markets are headed using everything from econometric analysis to gut instinct. Two of these efforts offer a particularly intriguing contrast in approach. On one side is Mark Zandi, chief economist at Moody's Economy.com, who released a mammoth report on housing prices last week. On the other side are traders and speculators at the Chicago Mercantile Exchange (CME). Just a few months ago, they began trading futures and options contracts on housing prices in 10 markets across the U.S.

The contrast couldn't be more extreme. Zandi is one very smart economist, who mined reams of data to come up with his predictions. He sorted through everything, from employment levels in certain regions to historical housing price increases. At the Chicago Mercantile Exchange, the predictions are determined not by one person, but by a crowd of anyone who wants to participate. They may be real estate investors, economists, or simply speculators with a hunch about where prices are headed.

Neither forecasting approach offers much reassurance for homeowners. Zandi says that housing prices will decline in 2007, which would be the "first decline in national house prices since the Great Depression." He adds that the catalyst for the unwinding of the housing boom is higher interest rates and that the unraveling of some of the markets is due to high speculation and short-term investors, or flippers with the objective of purchasing and then quickly selling those homes.

REASONS FOR PESSIMISM. Zandi's predictions for specific markets are sobering. The worst hit metro areas, he asserts, will be Cape Coral, Fla., with an 18.6% decline in housing prices; Reno, Nev., with a 17.2% drop; and Stockton, Calif., with a 15.7% fall. To conduct his analysis, Zandi looked at the supply and demand of housing, changes in mortgage rates, demographic trends, the job market, and new housing (see BusinessWeek.com, 9/19/06, "Can Wall Street Withstand Weak Housing?").

The CME covers just 10 housing markets, rather than the 379 examined by Zandi. The exchange launched the trading in housing prices in May and volumes are still modest, which may affect accuracy. Investors are predicting declines in all 10 cities over the next 12 months. In fact, by August, 2007, when the one-year contract expires, futures traders expect the San Diego real estate prices will have declined 8.2%, Las Vegas 7.9%, and Los Angeles 6.9%. The composite index is expected to fall 6.8%. "The markets are clearly concerned that home prices are going to fall," says Robert Shiller, an economics professor at Yale University. Shiller helped develop the contracts with professor Karl Case and Standard & Poor's (which, like BusinessWeek, is a unit of McGraw-Hill (MHP )).

In the cases where they cover the same ground, Zandi and the CME traders have some uncanny similarities. For instance, Zandi expects San Diego to drop 8.4% through the second quarter of 2008, while the futures market is expecting a drop of 8.2% by August, 2007. In Washington, Zandi expects prices to drop 12% through the second quarter of 2008, and the futures market expects a 7.7% decline by August, 2007 (see BusinessWeek.com, 9/26/06, "Hopeful Glimmers in the Housing Slump").

ANYBODY'S GUESS. But in Boston, there's a sharp contrast. Zandi thinks that the worst is over. He estimates that prices declined 2.2% in the second and third quarter of 2006, and that should be the end of the meaningful declines. "Boston's jobs market is coming back, and the city didn't see much froth anyway," says Zandi. But the CME futures markets expect Boston to continue to drop, at least 7% by August, 2007. Similarly, Zandi expects New York to drop 3.5% through the fourth quarter of 2008, while the futures traders are betting that New York's real estate will drop a sharper 6% by next year.

Who would you put your money on? Zandi is certainly a smart, resourceful economist. But "predictive markets" like those used at the CME have proven surprisingly accurate in forecasting everything from the weather to political races. They're particularly accurate when money is on the line, as it is in Chicago.

As Rick Redding, CME managing director for products and services says: "These products create a liquid and transparent market that can be used…to help reduce risks associated with holding real estate assets." This is no academic experiment. The results of these predictions will be made all too public in the months and years ahead.

By Pallavi Gogoi

A Dollars-and-Cents Man With a Green Philosophy

2006-11-05T20:28:00.000-05:00

ANDREW SHAPIRO got the idea for the company he helped to start, GreenOrder Inc., from his younger brother’s music club, the Wetlands Preserve in the TriBeCa neighborhood of Manhattan.

The club, popular in the 1990’s, was dedicated to staying “green,” whether in its use of recycled paper products and energy-efficient light bulbs or its full-time environmental center. Between sets, patrons could sign petitions, say, to stop global warming or to bolster car-emission standards.

But the club also had to work hard to stay green while remaining in the black, and it closed down in 2001 when its lease expired.

“Through that experience,” Mr. Shapiro said, “I became passionate about one of the thorniest problems in business, which is: How do companies meet their goals for growth and profitability while also being environmentally responsible?”

To offer solutions, he and Peter Shapiro, the brother who ran the music club, founded GreenOrder, a consulting firm that promotes environmentally friendly business practices, six years ago.

The firm, based in Manhattan, started as a sort of “green dot-com,” he said, using the Internet to help companies procure products that were environmentally safe and energy efficient. Today, with a staff of 14, it works on some of the country’s largest green commercial development projects.

“Increasingly, companies are recognizing that how they manage issues related to energy and environment is key to their success as businesses,” said Mr. Shapiro, 38, a former lawyer and journalist who attributes some of his love for what’s green to summers spent at Camp Keewaydin in Salisbury, Vt. The camp was the subject of “Camp” (Warner Books, 2005), a memoir by Michael D. Eisner, the former chief executive of the Walt Disney Company.

Mr. Shapiro has also served as a consultant to the Lower Manhattan Development Corporation, a joint venture formed by New York City and New York State after the terrorist attacks of Sept. 11, 2001, to coordinate rebuilding in the area.

GreenOrder worked with Silverstein Properties on the new 7 World Trade Center, which was the first office building in New York City to be given a “gold” certification by the U.S. Green Building Council, a nonprofit group that has a ratings system for buildings that meet certain design criteria. Green buildings typically incorporate recycled or renewable materials and minimize energy use with features like fluorescent light bulbs or photovoltaic cells, which convert sunlight to electricity.

At 7 World Trade Center, which opened in May, construction vehicles used ultralow-sulfur fuels and special filters to minimize air pollution in the neighborhood.

The 52-story building conserves water by using rainwater for cooling and to irrigate a small park nearby, and saves energy with steam-to-electricity turbine generators and variable-speed fans. It also lets in more natural light, further conserving energy, and has improved air quality through filtration.

Environmentally friendly buildings can sometimes cost more upfront, Mr. Shapiro said, but the returns can be significant in the long run. “You’ve got some of the biggest projects in the country today being built green,” he said, “and developers are doing that because they believe they’re going to get a premium in selling the building or leasing it up at a higher rate.”

The green features of 7 World Trade Center have become “a huge hit with potential tenants,” said Janno Lieber, a World Trade Center project director for Silverstein Properties. Nearly 60 percent of the building’s 1.7 million square feet of space has been leased or committed.

GreenOrder has eight employees with science or engineering degrees, and two have certification from the Green Building Council. Mr. Shapiro himself is not a scientist, and his role in development projects typically is to be a business-strategy consultant rather than a technical consultant.

“Andrew’s talent is to help businesspeople understand the business benefits of environmental investments, and also to speak to the environmental community about how businesses look at these issues,” Mr. Lieber said. “He’s a strong bridge.”

It took several years for Mr. Shapiro to develop that role. Initially, he had to go out in search of real estate customers. Tishman Speyer Properties and Vornado Realty Trust were two early clients.

“I went to them and said, ‘Look, we can make a business case for greening your properties,’ ” Mr. Shapiro said. “We worked on energy-efficiency projects for them. We took existing properties, did energy audits, swapped out lighting and HVAC” — heating, ventilating and air conditioning — “to cut costs with a low payback period.”

Now, General Electric’s real estate division, which owns about $47.5 billion in assets, has turned to Mr. Shapiro for advice on increasing property value through green design. He is now working on a building near Perth, Australia. Initially, G.E. hired GreenOrder in 2005 to conduct an environmental analysis of the company’s products, including appliances and building materials, for a project known as “ecoimagination.” Products that comply with environmental standards created by GreenOrder qualify for the ecoimagination stamp from G.E.

That project has been highly successful because of Mr. Shapiro’s pragmatic approach, said Lorraine Bolsinger, a G.E. vice president who leads the campaign.

“He knows that in order for any of this to work, it has to have a business proposition,” she said. “To me, that is a rare find in the green realm, where there are people who believe you do things for altruistic purposes. That’s very difficult for the people at any public company to get their heads around.”

Mr. Shapiro is also consulting on a project proposed by the mall developer Robert J. Congel, a $2.6 billion complex of retail shops, restaurants and entertainment sites in Syracuse to be called DestiNY USA.

The developers said that they plan to break ground by year-end, and they have begun selling $1.037 billion in “green bonds,” a low-cost financing program from the federal government that encourages developers to incorporate technologies that conserve electricity, reduce air pollution and use solar power.

“I always think of it as part Disney World, part Mall of America, part Biosphere,” Mr. Shapiro said of the Syracuse project. “They want the whole thing to be powered without fossil fuels, so instead it’s biomass and solar and wind.”

Richard Pietrafesa, a managing director of DestiNY USA, said the aim is to show that environmentally friendly construction is financially feasible. Mr. Shapiro “can take the geeky stuff and make it attractive to consumers,” added Mr. Pietrafesa, who credits Mr. Shapiro with making him an advocate for environmental concerns.

“If someone ever told me I’d be an environmentalist 10 years ago, I’d have blown smoke at them from my cigar,” he said. “But now I drive a Prius; I have a condensing furnace in my house; I have all fluorescent light bulbs; and I’m a candidate for the U.S. Green Building Council. And I attribute that to Andrew’s infectious enthusiasm for this topic.”

MR. SHAPIRO says he believes he has found his niche in business precisely because he is not an environmentalist in the traditional sense of being an outdoors enthusiast. Despite the childhood camping and regular trips to Aspen, Colo., where he met and married his wife, Nina Bauer, Mr. Shapiro said he considers himself a dyed-in-the-wool urbanite.

“What I’m passionate about is an idea: how to convince businesses that being leaders in environmental performance will also make them leaders in business performance,” he said. “For me, it’s more about testing a concept than a passionate sense that businesses should plant trees or save water.”

By ALISON GREGOR

Manhattan office vacancy hits lowest level since 2001; Downtown grabbing big share of large leases

2006-11-05T20:14:00.000-05:00

Encouraging signs in office market: less room, everywhere

The Manhattan commercial market in the third quarter had one of its busiest three-month periods in years, analysts said, with vacancy rates in the borough's submarkets generally dropping as asking rents continued to climb.

The borough's vacancy rate for all types of office space dropped to 7 percent in the third quarter, the lowest total since 2001. It dropped from 7.8 percent in the second quarter and showed a decline from 9.6 percent in the third quarter of 2005, according to the brokerage Cushman & Wakefield. By the third quarter's end, the absorption rate, or the total space taken off the market this year, hit 2.1 million square feet, despite the addition of 1.7 million square feet of office space at the start of 2006.

Large blocks of top-quality office space are especially scarce now. Only five blocks of contiguous Class A space of at least 250,000 square feet remained in Manhattan by the end of the third quarter on Sept. 30 -- three in Midtown and two in Downtown. The Class A vacancy rate was down to 6.6 percent from 7.7 percent the quarter before.

Companies, though, keep hunting in Manhattan.

"The need doesn't always coordinate with availability, and, often, availability doesn't always coordinate with need," said Stephen Siegel, global chairman of brokerage CB Richard Ellis. "There's a tremendous amount of [leasing] activity now from the service sector and the financial services sector. Really, it's across the board."

This brisk leasing comes as office space continues its pricey ascent.

The average asking rent in Manhattan was $45.84 a square foot at the end of the third quarter, Cushman & Wakefield reported, up from $43.46 in the second and $41.35 a foot a year ago. Rents in prime office buildings are reaching well over $100 a square foot, and the investment sales market in Manhattan is on pace in 2006 for a record year (see below).

Midtown
Only two Midtown Class A buildings are expected to be completed in the next 18 months -- the New York Times headquarters on Eighth Avenue and One Bryant Park on 42nd Street -- and each is already 85 percent pre-leased, Cushman & Wakefield reported.

"With much of the development in Midtown already spoken for, it's going to become increasingly difficult to find office space, especially for those tenants looking for large, contiguous blocks of space," said Joseph Harbert, COO of the New York metro region for Cushman & Wakefield.

Midtown's vacancy rate dropped from 6.9 percent in the second quarter to 6.5 percent in the third. The rate for Class A Midtown space, the most coveted in Manhattan, dropped from an already five-year low of 6.8 percent in the second quarter to 6.3 percent. More than 4.2 million square feet of Class A space was taken off the Midtown market in the third quarter.

And it was snatched for increasingly higher rents. The average asking rent in Midtown was $53.02 a square foot in the third quarter, up from $50.35 the quarter before and $48.06 in the third quarter of 2005. The Class A rent was $59.47 a foot in Midtown in the third quarter, up from $56.08 in the second.

Midtown South
The vacancy rate in Midtown South ticked slightly upward in the third quarter, rising 0.1 percent from the second quarter to 6.1 percent. And the vacancy rate for the Class B space that dominates the submarket was also up quarter over quarter, from 7.5 percent in the second quarter to 8 percent through September.

Midtown South, however, remains tight. It has, for instance, just three Class A spaces of at least 100,000 contiguous square feet, Cushman & Wakefield reported, and the vacancy rate for Midtown South Class C space is 3.7 percent; the rate for Class A space is similarly low at 5.6 percent, below the overall Manhattan Class A vacancy rate.

Downtown
Four of the top 10 leases in Manhattan in the first nine months of 2006 were inked in Downtown, including the two biggest of the third quarter. Moody's Investors Service took 589,945 square feet in 7 World Trade Center, and the city's Department of Transportation leased 429,258 square feet in 55 Water Street.

More than 4 million square feet of office space was leased in Downtown in the first nine months of 2006, compared to 3.4 million during the same period last year. This absorption helped drive down Downtown's vacancy rate in the third quarter to its lowest level since September 11; it dropped from 11.2 percent in the second quarter to 9.1 percent, according to Cushman & Wakefield.

The average asking rent for Downtown office space increased more than $5 on average year over year to $36.18 a square foot in the third quarter; it was also up from $35.18 a foot in the second. For Class A space, such as that inside 7 World Trade Center, the average rent was $41.76 a foot, up from $40.23 the quarter before.

Office deals push Manhattan investment sales toward record year

Office building deals are spurring the Manhattan investment sales market toward a record year in 2006.

Sixty-two percent of the $14.3 billion in investment sales closed or put in contract in the first nine months of 2006 involved office properties, according to brokerage Cushman & Wakefield.

Last year, $12 billion in investment sales closed in the first nine months of the year on the way toward a record annual total of $20.9 billion.

Investors are taking advantage of strong office leasing fundamentals in putting their money into office properties, according to Joseph Harbert, head of Cushman & Wakefield's New York area operations.

The Manhattan office vacancy rate was 7 percent by the end of the third quarter of 2006, according to Cushman & Wakefield, down from 7.8 percent in the second quarter and nearly 10 percent during the third quarter of 2005. Asking rents, at the same time, for office space have continued to rise, with the Manhattan overall rent averaging $45.85 a square foot by the end of the third quarter, up more than $4 from the average rent in the third quarter of last year.

While office building deals are fueling the record-setting 2006 investment sales market, investors are shunning the residential side. Residential properties accounted for 12.7 percent of the investment sales in Manhattan in the first nine months of 2006, down from 22.9 percent during the same period last year.

By Tom Acitelli

As buyers sit on sidelines, a group of high-profile new projects goes to Plan B

2006-11-05T20:09:00.000-05:00

Cancelled projects: Condo, what condo?

Condos no more: 159 Bleecker Street
New condos? No can do. As the condo market turns in favor of buyers, nearly every new building is offering some form of incentive, but the pressures are strongest on buildings just coming to market.

Many builders, especially those who bought their sites at recent values, are selling their properties outright as sky-high land prices and construction costs are driving the break-even point of new construction to a precarious level. Others are reshaping them into a different product, say a hotel or rental, for a smoother ride.

Here's a roundup of some star buildings, and their developers' decisions.

485 Fifth: condo project goes hotel

The most prominent recent reshuffling involved the sale of 485 Fifth Avenue, the Peter Som-designed condominium conversion-to-be on Bryant Park. With pre-sales stalled at the halfway point, Carlyle Group and Belfonti Capital Partners sold their property to an affiliate of Global Hyatt for $136 million.

According to Mark Gordon, managing director and head of the International Lodging and Leisure Group at Sonnenblick-Goldman, which arranged the transaction, "Developers and investors are always looking for the highest and best use of a building. While 485 Fifth would have made a great residential building, it will make an even better hotel, because of the hotel shortage right now -- particularly in Midtown."

Several thousand hotel rooms have been lost to condo conversions in the last couple of years; says Gordon, "a lot of residential developers are coming to see us now to help them figure out how to incorporate a hotel component in their residential buildings."

The owners -- who purchased the property for $86 million -- did well in the deal, though they might have saved some trouble had they seen the writing on the wall earlier in the planning stages.

"They came to us," recalls Andy Gerringer, managing director of the development marketing group at Prudential Douglas Elliman, "and we gave them numbers that were achievable for the building, $1,200 to $1,300 a square foot, and told them they should be doing small units. That's not an area where you make big, family-sized units."

The builders ultimately priced at $1,400 to $1,500 a foot with a preponderance of large units, says Gerringer, "and got themselves in a situation where they couldn't sell those kind of units. They weren't at a far enough point in sales where they had to pull the trigger one way or the other, and they decided this was a good out for them. At least they could walk away with money."

Copper sees gold in hotels

Another developer switching gears to capitalize on the soaring hotel market is the Copper Group, which is scrubbing plans for a 30-story residential tower at 133 Greenwich Street in the Financial District.

"We were intending to do a condo in 2005, when we closed on the property," says Jeremy Beyda, project director for the company, "but environmental issues related to the World Trade Center delayed construction."

For the better, no doubt, considering the market the building would have opened to. As it is, "we're talking to a number of luxury operators in the hotel industry to do a five-star boutique hotel, which may or may not have a condo element," Beyda said. "We know there aren't many five-star hotels in the Financial District."

Stanhope and Sutton change course

Meanwhile, the condo conversion of the historic Stanhope Hotel "has been on the market for some time," notes Gerringer, "and there are no sales in. Once you have 15 percent sold you have a certain amount of time to declare the plan effective or you run the risk of losing out on your condominium plan. I've heard from various sources that they may be too far along to have it go back to a hotel."

The Corcoran Group, which is marketing the Stanhope, did not return calls as of press time.

The Sutton Hotel at 330 East 56th Street has also seen a few changes of tide in recent times. It was well on its way to reincarnation as Sutton East Condominium, with eight of its 78 apartments already under contract, when Alchemy Properties sold it to a hotel operator.

"It was flip-flopped," Alchemy president Ken Horn told the New York Times.

159 Bleecker switches to rental

Hotels aren't the only plausible alternative for today's stalled new condos; the sizzling rental market is becoming a tempting alternative for developers who don't have to depend on a huge apartment sell-out to finance their construction.

According to Cliff Finn, director of new development marketing for Citi Habitats, "You'll find that somebody who's on the ground with one of their sites for a long time might be able to afford a rental model, but someone who's coming in at today's numbers is going to find it a lot harder."

John Young, principal of Emmut Properties, developer of 159 Bleecker Street, is "one of those who have had the ability to change direction in midstream," he says. "We went all the way: the book was approved by the attorney general's office, the building was built, but at this point we're going to cancel the book and revert to a rental."

159 Bleecker Street had already begun taking deposits. According to Dawn Tsien, president of development marketing at Coldwell Banker Hunt Kennedy, which brokered the Greenwich Village condo, when Young saw the for-sale market softening and began considering converting to rental, "rather than hang people up and keep their money while he was deciding, he returned their money."

Renters should be able to move into the building in early 2007. "They'll be getting condo-quality amenities," says Young.

Rumors tend to swirl around other buildings where sales have stalled. New York magazine reported that 55 Berry Street, a conversion of a manufacturing building in Williamsburg into 42 luxury lofts, was turning rental. But despite disappointing sales -- only 14 units have sold over 17 months -- the developer is sticking to the original condo plan, says marketer Douglas Elliman. The company is trying some novel marketing schemes to stimulate interest in the building.

"We're going to have a 48-hour Midnight Madness sale!" exclaims Elliman executive vice president Helene Luchnick. The building will have extended hours on Nov. 12 and 13, and 20 percent markdowns on 20 of its units, offering prices starting at $383 a square foot for large ground-floor duplexes, $585 a square foot for the one-bedroom lofts and under $900,000 for penthouses with private decks.

A prominent condo in the planning stages at Madison Square Park, Sundari Lofts & Tower at 158 Madison Avenue, has also been said to have been cancelled by its developer, Buttonwood Real Estate. Buttonwood's Brad Meadow insists that's not the case. "Just because the land was listed for sale does not mean that the project was canceled. In fact, at this point, the Sundari is likely to be developed."

It doesn't make sense for every building where sales are slowing to become a rental, says Adrienne Albert, president of the Marketing Directors. "The small developers that are underfinanced will feel the pinch because their sales rate will be slower than what they budgeted for," she says.

"It's attractive for a developer when they see rental rates at $65 to $70 a foot to say, 'maybe I'll switch over.' But we haven't [reached that rent level yet].

"For those of us who have been here before," adds Albert, the current slowdown in condominium sales isn't like the extended late 1980s slump, but "more like the blip we saw in 2001."

By Steve Cutler

Artists weigh in on Brooklyn's changing real estate

2006-11-05T20:06:00.000-05:00

They should call it Art-lantic Yards

"Cloud Cover Over the Atlantic Rail Yards," a painting by Brian Kuebler, is part of the "Footprints" exhibit that opened at Grand Space in Brooklyn last month.
In Brooklyn, two art exhibits are exploring the bricks-and-mortar topics of real estate development and gentrification on artists' canvases.

"The Footprints: Portraits of a Brooklyn Neighborhood" art exhibit, a combination of photography, video, paintings, drawings and collage, opened at the Grand Space gallery in early October.

The exhibition "3rd Wave: The Planet of Brooklyn Transitions" by the Brooklyn Arts Council, opened at the BAC Gallery on Oct. 13. It mixes a range of media by Brooklyn-based artists.

Both exhibits take an anthropological view of real estate development in neighborhoods with large immigrant populations.

"Some artists made work that show the need for development but focus on what kind of development is appropriate," said Daniel Sagarin, a co-organizer of the "Footprints" exhibit.

For example, he says the exhibit explores the Atlantic Yards issue, but isn't taking sides. Sagarin, a photographer, teamed up with Belle Benfield, a painter, printmaker and muralist, when they discovered that they were both planning on making work about residents living in the path of the Atlantic Yards development.

"We have had a positive response from the people," Sagarin said. "It's a chance to gain a deeper understanding of the nature of this place."

"3rd Wave: The Planet of Brooklyn Transitions," curated by Philip Harvey, will be on display at BAC Gallery, 111 Front Street, Suite 218 in DUMBO. "The Footprints: Portraits of a Brooklyn Neighborhood" will be on display at Grand Space, 778 Bergen Street.

By Vanessa Londono

Manhattan's tight commercial market and renewed focus on outer boroughs spawns office, retail projects

2006-11-05T19:59:00.000-05:00

The new building boom

The list could go on and on in New York City right now... Yankee Stadium. Mets stadium. Freedom Tower. Goldman Sachs headquarters. One Bryant Park. Silvercup West. Gateway Center at Bronx Terminal Market. Shops at Atlas Park.

The commercial development market is in the midst of a certified boom, as projects big and bigger redefine the city's skyline while non-residential development reaches areas once unthinkable as major building sites.

At the current pace, more commercial square feet will have been built -- or construction on more started -- in 2006 in Manhattan alone than in any other year but one going back to the late 1980s, according to data from brokerage Colliers ABR. Also, developers this year have announced plans for several million more commercial square feet in Manhattan, with construction and completion in the near future.

But, beyond the square footage, the sheer number of commercial projects reinforces the scope and scale of this boom.

The Real Deal collected data on commercial projects started since the beginning of 2005, as well on projects that were announced but on which construction has yet to start, such as the Freedom Tower. The collection did not include mixed-use projects that were mostly residential nor hotels, hotel-condos or dormitories.

It did include the more than 80 commercial developments -- malls, stadiums, skyscrapers, and a myriad of smaller projects -- that freshly dot Gotham's commercial development landscape or hover just over its horizon.

Growth, obsolescence spur demand

Daniel Doctoroff, the deputy mayor for economic development and rebuilding in the Bloomberg administration, says strong job growth spurs the demand for new commercial space. The city's unemployment rate dipped to 4.5 percent in September, an 18-year low. New York, unlike many major cities, keeps adding residents.

And the resulting demand for employee space has given developers the confidence to move forward with major projects. The Manhattan office vacancy rate, according to brokerage Cushman & Wakefield, reached a five-year low of 7 percent in the third quarter.

"We're an increasingly office-based economy, which requires additional commercial space," Doctoroff said. "And the demand's coming from all different sectors -- it's finance, it's service, it's education, it's not-for-profits."

Also, swathes of commercial space were converted (at least 12 million square feet in Downtown alone from 1995 through 2005) into residential space. In addition, lots of current commercial space simply doesn't meet corporate needs for top-flight Class A space. Think of the iconic, yet aged Empire State Building (see Empire State Building readies for makeover).

"I don't think there's a growing demand, but the existing buildings are becoming obsolete," said Douglas Durst, whose firm is developing One Bryant Park in Midtown, a 54-story tower with Bank of America as the anchor tenant.

Towers for recovering Downtown

Some of the biggest commercial development is happening in Downtown Manhattan, an area barely five years removed from September 11.

As many as four towers totaling 8.9 million square feet are planned at the World Trade Center site, with completion of all slated by 2013. The biggest of these skyscrapers is the 2.6-million-square-foot Freedom Tower. Across from the site, investment behemoth Goldman Sachs plans a 1.9-million-square-foot new headquarters to be completed by early 2009. The 1.7-million-square-foot 7 World Trade Center, also across from the trade center site, opened in February and is already more than half-leased.

But, beyond Ground Zero, commercial development thrives Downtown. Smaller projects are under way across the submarket, where the office vacancy rate in the third quarter dipped below 10 percent, its lowest level since September 11, according to Cushman & Wakefield.

Time Equities this year developed a 350,000-square-foot commercial condo at 125 Maiden Lane, one of the few such hybrids in the city. Also, the City University of New York plans a 400,000-square-foot building for 74 classrooms and laboratories and a student lounge at 30 West Broadway.

Tighter Midtown dominates

There's not much space to build new commercial projects in Midtown, one of the most built-up business districts on earth. But SJP Properties found space for a speculative office tower, buying an empty site -- some called it a gaping hole -- at 11 Times Square on the southeast corner of 42nd Street and Eighth Avenue.

There, the New Jersey-based firm plans to build a 1.1-million-square-foot tower even though it has no tenants lined up first, a sign of confidence in the New York commercial market. The tower's construction is set to start in 2007.

"For an owner and a lender to make that kind of commitment on a speculative basis, that tells me the environment is ripe for construction," said Gus Field, an executive vice president at Cushman & Wakefield who specializes in Midtown.

Eleven Times Square is far from the only upscale tower slated for Midtown, where the vacancy rate for Class A space was 6.2 percent in the third quarter, its lowest since 2001.

The 1.6-million-square-foot New York Times headquarters at 620 Eighth Avenue, developed by Forest City Ratner and to be half occupied by the newspaper, is slated for completion in April 2007. More than three long blocks away, the 2.1-million-square-foot One Bryant Park, overlooking what was only 10 years ago a crime-ridden park, should open in early 2008.

The Hearst Corporation headquarters on West 57th Street, developed by Tishman Speyer, opened in late summer, bringing 856,000 square feet of fully leased space into the Midtown submarket. Also, the 300,000-square-foot 505 Fifth Avenue, with financial firm CIT as anchor tenant, opened last April.

"Ahead of the curve"

The commercial development boom in New York echoes across the city, including the outer boroughs (see below). In fact, market realities should make development beyond Downtown and Midtown a must for the future.

"We have looked ahead 25 years and see a need for roughly 75 million square feet of space, only a minority of which we can accommodate with an existing capacity," Doctoroff said. "As a result, we're furiously trying to get ahead of the curve."

Doctoroff said the lack of space for new commercial development in parts of Manhattan helped spur zoning changes to create more commercial space in areas like Long Island City, the Hudson Yards on the far West Side, and downtown Brooklyn.

Trinity Real Estate, which owns nearly 6 million square feet of commercial space in Hudson Square in Manhattan, is considering new projects at 4, 6 and 7 Hudson Square that could bring nearly 2 million square feet to the long-struggling area. Hudson Square has had some of the highest vacancy rates of any Manhattan submarket this decade but a rising market has lifted the square's boat.

Its third-quarter vacancy rate was 22.9 percent, according to Colliers ABR, about identical as the same time in 2005. Asking rents, however, have shot upward in Hudson Square. "Two years ago, we'd be lucky to get mid-high $20s [per square foot]," said Jason Pizer, Trinity's leasing director. "Now, we're doing deals in the low $40s."

Hudson Square falls in a larger Midtown South submarket that hasn't been the site of any major new commercial development completed in 2006. But the potential's there for the future: The Real Deal's survey counted at least nine sites that brokerages like Colliers ABR and CB Richard Ellis have touted as potential development sites. The nine could host as much as 6.7 million feet of fresh commercial space.

"We never really had the demand for them," Pizer said of the three Hudson Square development sites. "Now, we're getting serious looks from people -- just a lot of different choices, because of the hot market, that were never available to us."

Bed, bath & beyond Manhattan

Commercial projects spill into outer boroughs as developers move past the familiar

Think of the South Bronx. Do you think of Bed Bath & Beyond? Soon, you may.

Bed Bath & Beyond will take space in a 1-million-square-foot mall on the South Bronx waterfront developed by the Related Companies called Gateway Center at Bronx Terminal Market. The mall, to be completed in the fall of 2009, will unfold over a formerly blighted stretch of dilapidated warehouses, a transformation indicative of the creep of commercial development into areas of the city once overlooked by developers.

A survey last month by The Real Deal found that in the outer boroughs, at least 20 primarily commercial projects are now under way, planned or have been completed this year (see chart).

The four other major commercial projects now under construction in the Bronx besides the Gateway Center are also in the borough's southern half. These include the 170,000-square-foot Hub and Retail Office Center between 153rd and 156th streets on Third Avenue, also a Related Companies project; and the new 51,800-seat Yankee Stadium nearby. Two more commercial spreads are planned, among them a 100,000-square-foot building at 854 Westchester Avenue.

In Brooklyn, much of the new commercial development clusters around downtown. A recent rezoning opened up developable space for at least 4.5 million square feet of Class A office space and 900,000 square feet of retail. Much of this surrounds the newer Willoughby Square, a 1.5-acre park between downtown and Fort Greene.

And, if the Atlantic Yards project does move forward, it would cover 16 acres southeast of downtown Brooklyn. The $4.2 billion project, backed by developer Forest City Ratner, would include more than 600,000 square feet of office space and nearly 250,000 square feet of retail as well as a new basketball arena for the New Jersey Nets.

The New York Mets are working on a 45,000-seat stadium on a parking lot next to Shea Stadium in Flushing, Queens. Like the new Yankee Stadium, the team should take to its new diamond by the summer of 2009. Elsewhere in Flushing, TDC Development International completed this year a mixed-use commercial project with more than 190,000 square feet of office space and 80 commercial condos. And Muss Development, partnering with Onex Real Estate, plans 800,000 square feet of retail in its new Flushing Town Center, with occupancy by 2009.

Several projects are planned in Queens, including the 2.5 million square feet of commercial space slated as part of the Queens West development on the East River waterfront.

Fresh space is slated for Staten Island as well. As much as 1.5 million square feet of retail space is under construction on the borough's South Shore, with two malls scheduled for completion in the next two years. Also, Chicago-based General Growth Partners, owner of the Staten Island Mall, plans to add 110,000 square feet to the indoor shopping center.

By Tom Acitelli

High apartment rents fuel "bounceback"

2006-11-05T19:57:00.000-05:00

Buyers who fled sales market pushed back in

Prospective homebuyers trying to ride out the rising prices of the last housing boom thought they'd blunt the high cost of living here by renting, but many who did found higher rents as the Manhattan vacancy rate dropped below 1 percent.

Many reluctant renters are now victims of what some analysts are dubbing a "bounceback" effect, which is pushing them back into the sales market.

"Buyers moved to the rent side for safety, but now they are in the same situation on the rent side," said Jonathan Miller, president of appraisal firm Miller Samuel. "Disaffected buyers unable to make a purchase decision waited with a rental, but they were unprepared for what they found."

The pricey phenomenon could gain momentum as prices on slow-to-move properties drop and become more attractive to buyers. The average sales price for a Manhattan apartment was down 7 percent from the second through third quarter to $1.28 million, according to a report released by Miller Samuel last month.

Prudential Douglas Elliman senior vice president Douglas Heddings wrote in his blog TrueGotham.com that the bounceback trend is backed up by the numbers and added that it's not an easy time to be a renter or a buyer.

"Consumers are being faced with high housing costs in either the rent or buy scenario," he wrote. "We are seeing some would-be renters return back to the purchase market in rising numbers -- not a wave, however, but a noticeable increase."

Other brokers agree, though the volume of bounceback victims remains in dispute.

"Now, financially, the markets are about equal and buyers can use this market to do research; it's more of a lifestyle decision," said Gordon Golub, senior managing director at Citi Habitats. "The interesting thing is now people have their choice to rent or buy, whereas in more markets, you are either pushed to purchase because of high rental prices or pushed to rent because purchasing prices are too high."

But Prudential Douglas Elliman executive vice president Darren Sukenik says buyers who have been waiting on the sidelines for the last two years now realize it's cheaper to buy. Out of 11 people who bought apartments recently through Sukenik, eight had moved from the rental to the sales market because of increasing rents.

The story of a recent deal on a Chelsea two-bedroom, two-bath apartment serves as a fine example.

A look at listings on the Web sites of Douglas Elliman and the Corcoran Group last month showed most apartments in that category renting for between around $6,500 to $9,500 a month.

The average price for a two-bedroom in Chelsea in the third quarter, meanwhile, was $1.7 million, according to Miller Samuel, meaning that you'd likely be shelling out -- at a 6.5 percent interest rate on a 30-year-mortgage -- around $10,000 a month, only a few hundred dollars more than pricier rentals.

Things are only expected to get worse for renters. A report by Marcus & Millichap last month found a 7.8 percent hike in rents from the second quarter of 2005 to the second quarter of 2006. The firm predicted rents will rise another 7.5 percent and the landlords' market will continue for at least the next two years. If rents continue to go up as apartment prices fall, the gap between the cost to rent and the cost to buy will keep narrowing.

Based on those numbers, the decision to rent versus buy is baffling to some brokers, who say a substantial amount of buyers are still sitting on the sidelines.

"When you're paying $8,000 a month for the most basic luxury two-bedroom, you might as well be buying," Sukenik said. "Buyers have been blowing tons of money for no reason [on rent]."

In a waning seller's market, it's now possible to negotiate down an apartment's price, says Holly Rose of City Connections Realty. "You can confidently tell a buyer to offer a lower price because sellers are more negotiable," she said. On the flip side, those buying now risk getting caught holding the bag if prices keep dropping.

Still, trying to avoid figuring out the answer to the question of whether now is a good time to buy or not may be little consolation as the rental market tightens.

"Several clients were holding out to see if there was going to be a bubble in the sales market," said Eric Hamm, director of rentals at Century 21 NY Metro. "They held on coming into the city or rented for a year. But the same rental they took a year ago has gone up 10 to 15 percent in price."

By Vanessa Londono

Social Improvement With Architecture

2006-11-05T19:49:00.000-05:00

THIS city, which is often described as one of the world’s great architecture capitals, also has a strong tradition — dating back to 1889 when Jane Addams founded the Hull House settlement community — of innovative housing projects aimed at improving the lives of the disadvantaged.

These two traditions, architectural and social improvement, continue today in two projects by leading architects under way in the downtown area.

The first is the Near North SRO by Helmut Jahn, a 96-unit project aimed at homeless people. (The project uses the phrase supportive housing, a social services term for housing that provides access to services like mental health assistance and vocational guidance, in addition to shelter.)

The second project is a new home for the city’s largest and oldest homeless shelter, the Pacific Garden Mission, by Stanley Tigerman.

Both projects symbolize what some say is Chicago’s leading role in housing the homeless and indigent.

“Chicago has the most vibrant nonprofit housing community in the country,” said Henry G. Cisneros, the former housing secretary during the Clinton administration and a prominent advocate of affordable housing. “If you want to talk about a city with a comprehensive approach to housing and ending homelessness, Chicago kind of sets the pace right now.”

The projects also showcase what is turning into another tradition in the city, that of sustainable, or green, design.

Over the last half-dozen years, the city has begun urging developers to incorporate sustainable elements into their projects. The city’s efforts include expediting constructions permits for projects that meet the certification standards for the United States Green Building Council, and providing matching grants of up to $100,000 for projects that involve green roofs, which use plantings to aid insulation. So far, the city has about 300 green roofs, more than any other American city.

Both the Near North SRO and Pacific Garden Mission expect to be meet the council’s certification standards, called LEED, for Leadership in Energy and Environmental Design.

“These two buildings prove that even nonprofit organizations can have very cool sustainable designs without a huge capital investment,” said Lori T. Healey, the city’s planning commissioner.

Of the two projects, Mr. Jahn’s is furthest along. The building, which is at the intersection of Clybourn Avenue and Division Street and within blocks of the notorious Cabrini Green public housing project, is being developed by Mercy Housing Lakefront, a division of Mercy Housing, a nonprofit group that owns and manages about 19,000 units of supportive housing nationwide.

Cindy M. Holler, director of Mercy Housing Lakefront, said one of the advantages of the building is the way it challenges traditional notions of what housing for the homeless should be. “Some very poor people are going to get beautiful views of downtown Chicago here, and that’s O.K.,” she said.

Charles Hoch, professor of urban planning at the University of Illinois at Chicago and a member of Mercy Housing Lakefront’s board of directors, went even further. “The building is a stigma smasher,” he said, “We are borrowing the cachet of Mr. Jahn to send a message to the larger society and that message is that homeless people have value, they have a role to play in society.”

Indeed, the building, which will open early next year, promises to be one of the more distinctive apartment buildings in Chicago.

The loaf-shaped stainless-steel structure recalls an earlier project by Mr. Jahn: a student dormitory complex at the Illinois Institute of Technology in Chicago that he completed in 2003.

“I always looked at the I.I.T. building as kind of a prototype for low-rise urban housing,” Mr. Jahn said. “The Mercy SRO project is a way to introduce the concept on the north side.”

The units in the five-story building average about 300 square feet, and all are equipped with private baths and kitchenettes. Although finishes are basic, the overall feel is closer to a hip hotel than the numbing blandness one associates with subsidized housing. (In fact, a little too hip, according to Ms. Holler, who said Mr. Jahn’s original color scheme of bright primary colors was toned down after research revealed the colors might be upsetting for some residents.)

One of the building’s most interesting features is an elaborate network of wind turbines and solar panels on the rounded roof that together will generate about 15 percent of the building’s power requirements. The building also has the city’s first so-called gray water system, which captures and recycles runoff from sinks and showers.

The total cost of the building is about $18 million, with the largest portion of financing coming from the National Equity Fund. The sustainable features accounted for about $1 million of the total cost of the building.

“Because many of the sustainable features were funded by grants, we were able to try some things that would not be possible in a more commercially driven project,” Mr. Jahn said.

Mr. Tigerman’s Pacific Garden Mission project has a somewhat more complicated program. Pacific Garden, a faith-based nonprofit organization that began in 1877, currently has two locations, one for men and one for women and children.

Although the main activity is feeding and housing up to 1,000 homeless people a day, the mission also provides an array of social services. In addition, it produces a weekly inspirational radio show, called “Unshackled,” from a studio in the men’s facility that is heard on about 1,600 radio stations around the world.

“We’re the oldest continuously operating rescue mission in the United States,” said David McCarrell, president of the mission. “Our goal is to take the overall man and create a new person who can be a contributing member of the community.”

The new building will consolidate all of the mission’s activities in a 156,000-square-foot structure at the corner of 14th and Canal Streets on the city’s Near South Side.

Mr. Tigerman’s design calls for a complex of four interconnected wings grouped around a landscaped courtyard that will also double as an outdoor chapel. Inside, in addition to large dormitories, there are classrooms and computer laboratories, workout rooms and lounges for families.

“Part of the building’s mission is to give the homeless a sense of security and to improve their self-esteem,” Mr. Tigerman said.

Probably the most distinctive feature is a large greenhouse complex that runs the length of the south facade where residents will grow vegetables for the mission’s kitchen and for commercial distribution and sale.

“It creates a whole new area where people can work and learn skills and go out and become marketable,” Mr. McCarrell said.

The building, which is costing about $24 million, will also have a 16,000-square-foot green roof that is being designed by Peter Lindsay Schaudt, a leading landscape designer in the Chicago area. Other features include solar panels and energy-efficient heating and cooling systems.

“Sustainable design is exciting because all of a sudden architecture loses a lot of its frivolity,” Mr. Tigerman said.

“Instead of worrying about Post Modernism and Deconstructivism,” he said, sustainable design “is based on reason and the forms come out of that.”

Mr. Tigerman said the project came along at the right time for him. “I no longer care about working on suburban villas for princes and princesses,” he said. “I’d rather retire than do more of that. These are people who have real needs. It gave me a great feeling to do this.”

By ROBERT SHAROFF

Architectural Gems in an Antique Setting

2006-11-05T19:42:00.000-05:00

By C. J. HUGHES
AN exquisite collection of well-polished architectural gems lures many people to Hudson, a small city in Columbia County in upstate New York that sits snug against its namesake river.

Trudy Walker is no exception. She visited Hudson, about 125 miles north of New York City, 15 years ago when she needed ideas on how to renovate her house in Greenfield, Mass. And there, amid the tidy grid of Georgian town houses and Second Empire mansions, sensible Craftsmans and whimsical Queen Annes, she found no end of inspiration. Though it came after a few more years and a divorce, Ms. Walker also found a weekend home: a 2,200-square-foot 1898 clapboard town house with three bedrooms, three baths and an original gas fireplace, for which she paid $275,000 last winter.

But the house’s best features are three rear decks that overlook a tableau of water, woods, clouds and mountains that at sunset, when the sky pulses with lilac and orange, seems to await a Hudson River School painter. “I can watch storms come in from miles away and roll across the valley,” said Ms. Walker, whose primary residences is now Brattleboro, Vt., where she invests portfolios in socially responsible companies.

Like Ms. Walker, a new breed of weekender is discovering Hudson, which for a decade has been best known for its antiques shops. Now, real estate agents and longtime residents say, single people and straight and gay couples have discovered it as not just an antiquing destination but as a place where a weekend home can be a short walk from the Amtrak station.

At the same time, Warren Street stores that once sold Napoleonic armoires and Sputnik lamps are giving way to places that feature vegetarian pizza and new books by local writers.

Though Hudson may be finally succumbing to gentrification, it still has less-expensive working-class neighborhoods that allow painters and upstart independent filmmakers to buy houses there.

“Home prices are still within reach, so Hudson keeps its creative edge,” said Ted Levenson, who works in the giftware business. During the week, he lives in Manhattan, with his partner, Vincent Cuticello, a lawyer.

They visited friends in Hudson for years before finally buying a Greek Revival semi-detached town house built in the late 1830s. A three-story, 3,200-square-foot house with three bedrooms, two full and two half-bathrooms and six fireplaces, it cost them $365,000 in spring 2004.

For Mr. Levenson, like other weekenders, buying in Hudson provides a chance to own an elegant style of home, of the sort found in prestigious addresses of Georgetown or on Beacon Hill, at a fraction of the price.

Or on a sought-after street in Greenwich Village: “If we could afford a house like this on Bank Street we would buy it in a second,” he said.

The Scene

The illustrations of whales on Hudson’s street signs are a nod to the city’s founders, quick-thinking Quakers from Nantucket who established the city after the American Revolution to hide their whale oil inland should the British strike again. Even today, lower Warren Street’s brick Federal houses, with their narrow, flush-to-the-facade outdoor stairs and the widow’s walks on some roofs, evoke maritime New England.

A century and a half later, however, it wasn’t British marauders that Hudson had to deal with, but rampant drinking, gambling and, especially, prostitution, clustered around Diamond Street. Today, subsidized housing stands in place of brothels , and the street has been renamed Columbia.

Much tamer and more legal night life these days centers on Warren Street. As it has for years, Red Dot, one of the first higher-end restaurants in Hudson, features a diverse menu and a lively bar scene.

Those partying late at night often amble to Stray Bar, which opened in February; D.J.’s spin till 4 a.m. in the sleek second-story space. The stripped-down Basilica Industria, a former glue factory near the river, has been host to art exhibits and concerts by musicians like Patti Smith.

There are state parks that provide good hiking all around. In Greenport, which surrounds Hudson like a horseshoe, is the Greenport Conservation Area, about two miles outside the city, where past the split-rail fence on a 714-acre riverside parcel, trails unfold to the Hudson River.

The river is popular with kayakers, who typically put in at North Bay, where the current is usually less fierce than elsewhere.

Pros

Cars rarely honk in Hudson, and pedestrians always seem to have the right of way.

In addition to its quality vintage buildings — Warren & Wetmore, the firm behind Grand Central Terminal, designed the county courthouse, and Alexander Jackson Davis is said to have built some cottages — the city also has many churches and firehouses, reinforcing its neighborhood charm. And seeing the occasional freight train rumble through Seventh Street Park burnishes Hudson’s working-class credentials.

It’s also a place where people stop on the street to make small talk, said Richard Volo, a computer consultant from the East Village who bought an 800-square-foot town house built in 1820 last summer for $85,000. “My social life is better now after three months in Hudson than after 20 years in Manhattan,” he said.

Cons

Though its Diamond Street days are long past, crime still troubles Hudson. There were 44 reported burglaries in 2003, with the figure rising to 55 in 2005, according Lt. Richard Paolino, a police spokesman. Drug violations also climbed in the same period, from 31 to 39 in a city where about 26 percent of the population lived below the poverty line in 2000, the most recent year for which census figures are available.

And Hudson still has an occasional arrest for prostitution, said Lieutenant Paolino. “We’re a city, so you will have city problems,” he said. “But we’re small, so it’s much easier to track people down.”

The Real Estate Market

Because the buildings along Warren Street typically allow businesses on their ground floors, they are among the more expensive in the city, brokers said, though they rarely sell for more than $800,000.

A town house on a street parallel to Warren that has been fully renovated will probably cost about $400,000, they say, though prices can vary widely depending on the condition and quality of the houses.

Once a mainstay for Hudson weekenders, decent fixer-uppers have become harder to find. Some, however, still exist in the burgeoning Armory District, near Washington, Prospect and Clinton Streets. They usually cost $175,000 to $250,000, agents say, but could require new floors, roofs and siding.

Prices in Hudson peaked last fall, according to Marcy Heintz, an agent with Chatham Properties who has sold houses in in Columbia County for 21 years. By then, some had tripled in value over the preceding three years, she said.

Now, in step with many national markers, the market has cooled, and some buyers have had to reduce prices two or three times before selling, she said. It’s also not unheard of for a house to sit on the market for a year. Still, the 13 houses priced above $300,000 sold since January 2005 were on the market for an average of about five months, according to Ms. Heintz.

“The interest in Hudson has held better than weekend homes for the rest of the county,” which includes more rural towns like Chatham and Claverack, Ms. Heintz said. “But nobody can predict what will happen.”

Lay of the Land

POPULATION 7,524, according to the census, but swelling significantly when weekenders are in town, which is year round.

SIZE About two square miles.

WHO’S BUYING New York City design buffs, Los Angeles transplants and people who can work out of home offices a few days a week.

LOCATION Hudson is about a two-hour drive north of New York City, 50 minutes south of Albany and three hours west of Boston.

GETTING THERE From the New York area, take the Saw Mill River Parkway north to the Taconic State Parkway and continue north. Exit onto Route 82 north, which will become Route 23 west, and turn right onto Route 9 north into Hudson.

WHILE YOU’RE LOOKING The St. Charles Hotel (16-18 Park Place, 518-822-9900; www.stcharleshotel.com) offers 32 rooms in a brick three-story building facing Seventh Street Park. On weekends, a room with a double bed costs $79 a night. Bridges (518-822-9902), a relaxed ground-floor restaurant, opened there in May.

Also, the Country Squire Bed & Breakfast, which opened in February 2005, offers five rooms in a Queen Anne-style building, formerly a convent, starting at $150 a night. Breakfast includes locally made yogurt and muffins (251 Allen Street, 518-822-9229; www.countrysquireny.com)

By C. J. HUGHES

Housing Slump in U.S. May Lead to First Drop Since Depression

2006-11-05T02:16:00.000-05:00

Sept. 18 (Bloomberg) -- Nancy and Brian Christopherson are
asking $389,900 for their eight-room Colonial Revival home in
Westford, Massachusetts, featuring a new kitchen with maple
cabinets. Even at that price, they'll lose $14,100.

Monthly price reductions since they listed it in May for
$429,900 have lured no offers for the house, bought for $369,000
in 2004. ``It's getting scary,'' says Nancy Christopherson.

The sharpest slowdown in U.S. home-price growth in three
decades is trapping owners with mortgages they can't afford,
pushing unsold homes to a record 4.42 million and gutting profits
for builders such as Lennar Corp. and Toll Brothers Inc. The U.S.
median home price next year may fall for the first time since the
Great Depression, says Gabriel Stein, chief international
economist with Lombard Street Research in London.

Economists such as Nobel laureate Joseph Stiglitz warn that
the reduced sales may push the world's largest economy into
recession, and concern is mounting over economic growth in Europe
and Canada. The Federal Reserve will reduce its U.S. benchmark
lending rate, says Jan Hatzius, chief U.S. economist with Goldman
Sachs Group Inc. Last month, the central bank ended a two-year
streak of 17 increases that pushed the rate to 5.25 percent,
citing cooling home sales.

``The housing slowdown will be a large drag on economic
activity,'' Hatzius says. ``The Fed will cut rates to 4 percent
next year as the housing downturn starts to push up the
unemployment rate.''

Wealth Effect

Five years of record home sales and price gains supported
the U.S. economy through an Internet stock plunge, terrorist
attacks on New York and Washington, bankruptcies at Houston-based
Enron Corp. and Clinton, Mississippi-based Worldcom Inc., U.S.
invasions of Afghanistan and Iraq and a surge in oil prices. At
the New York Mercantile Exchange, crude oil futures for October
delivery more than doubled to $63.48 a barrel, as of Sept. 15,
from $28.81 on Sept. 17, 2001.

The housing boom lifted the U.S. median home price by 49
percent in the five years ended in 2005, the Chicago-based
National Association of Realtors says, adding to the net worth of
homeowners and creating a so-called wealth effect that spurred
spending as homeowners refinanced and took on more mortgage debt.

U.S. Treasury Secretary Henry Paulson, meeting G-7 finance
ministers in Singapore Sept. 16, said higher wages, ``strong''
company profits and business spending will offset a weaker
housing market to propel U.S. economic growth.

Stiglitz, a professor at Columbia University in New York and
winner of the Nobel Prize for Economics in 2001, is less upbeat.

``There's a real problem not just for the housing sector but for
the whole economy,'' he says. ``There is a significant
possibility of a slowdown so large that it falls into the
category of a recession.''

Deceleration

The median U.S. price for an existing home hasn't fallen
since the Great Depression in the 1930s, says Lawrence Yun, an
economist with the association. That's the estimate cited by
economists, based on extrapolations from the group's home price
data, the oldest set, going back to 1968.

``House prices could fall in 2007, with effects on both
growth and monetary policy,'' Stein says.

U.S. average home-price growth slowed to 1.17 percent
during the second quarter from 3.65 percent a year earlier, the
Office of Federal Housing Enterprise Oversight said in a Sept. 5
report. That's the sharpest plunge since the agency began keeping
records in 1975.

The National Association of Realtors may report on Sept. 25
a decline in existing home sales for the fifth straight month,
says David Lereah, the group's chief economist. The Commerce
Department reports new-home prices and sales on Sept. 27.

Pressure on Sellers

``For the next couple of months, we're probably looking at
between zero to a five percent drop in prices,'' Lereah says.
``The only way for home sales to come back, and for inventories
to start to diminish, is for sellers to start to bring prices
down.''

Not all homeowners are willing to accept less. Roxy Allen,
54, listed her four-bedroom house in Littleton, Colorado, for
sale in May. She dropped the price once to $339,900 from $352,000
and has refused to go lower. She hasn't received a single offer.

``The Realtor wants you to just make a deal with somebody
and sell it for cheap,'' Allen says. ``Why would I sell my house
for less and buy one for more?''

Owners such as Allen can stay put if they don't like the
condition of the real estate market. Peter Francisco, who owns a
three-bedroom ranch in East Harwich, Massachusetts, on Cape Cod,
has fewer options.

The U.S. Coast Guard lieutenant was transferred to Norfolk,
Virginia, in July and put his house on the market in August at a
price lower than he wanted: $379,900. The house across the
street, similar to his own, sold last year for $425,000.

Burning Equity

``If you have to go, you have to take what you can get,''
says Francisco, 29. So far, he has no offers.

Americans have already spent much of their new-found equity,
making them vulnerable to slumping prices. Homeowners cashed out
a record $243.9 billion of home equity with mortgage refinancing
in 2005, adding to the $483.5 billion extracted in the previous
four years, according to Frank Nothaft, chief economist of
McLean, Virginia-based Freddie Mac, the world's second-largest
mortgage buyer.

The money is often used to renovate homes, buy cars, and pay
credit-card debt, he says.

Recession Concern

Housing demand is important to U.S. economic health. The
housing industry contributed about $2 trillion to the U.S.
economy last year, accounting for 16 percent of growth as sales
of previously owned homes rose to a record 7.08 million, says
Thomas Stevens, president of the National Association of
Realtors.

When related purchases such as furniture and appliances are
included, housing accounted for 23 percent of 2005's gross
domestic product, according to the Joint Center for Housing
Studies at Harvard University in Cambridge, Massachusetts.

The housing slump may have consequences beyond U.S. borders.
The Bank of Canada left interest rates unchanged on Sept. 6 in
part because U.S. spending may ``slow more rapidly than
expected,'' the bank said in a statement. European Central Bank
President Jean-Claude Trichet cited the U.S. real estate market
last week as a source of economic concern.

Economic data show the slump is deepening. An index of
signed purchase agreements for previously owned homes in the U.S.
fell 7 percent to 105.6 in July, the biggest slide since the
Sept. 11 attacks five years ago, the real estate agents
association said this month. New-home sales, recorded when
contracts are signed, fell to 1.07 million on an annualized basis
in July, a drop of 22 percent from a year earlier, the Commerce
Department said Aug. 24.

Mortgage Index

An index measuring mortgage applications from people who are
purchasing homes stood at 410.2 for the week ended Sept. 8,
ticking up 5.3 percent from the previous week, though down 20
percent from the 513.4 a year earlier, according to the
Washington-based Mortgage Bankers Association.

``It's called `How low can you go?''' says Doreen Kelly, 52,
who has dropped the price three times on her Westport,
Connecticut, farmhouse to $799,900 after listing it in May for
$938,000. ``The gains the real estate market made in the last
three years just got wiped out on this particular house.''

Hatzius, the Goldman Sachs economist, estimates the housing
slowdown will cut 1.5 percentage points from U.S. economic growth
in 2007 as builders cut back on labor and materials and
homeowners spend less as home values erode.

Construction spending dropped in July by the most since
2001, the Commerce Department said in a Sept. 1 report. Horsham,
Pennsylvania-based Toll Brothers reported a 19 percent slump last
month in profit for the quarter ended July 31.

Builder Profits

Hovnanian Enterprises Inc., New Jersey's largest
homebuilder, said on Sept. 6 profit fell 34 percent in the same
period. In the past two weeks, Miami-based Lennar, KB Home of Los
Angeles, and Beazer Homes USA Inc. in Atlanta lowered profit
forecasts. The Standard and Poor's Supercomposite Homebuilding
Index of 16 stocks fell 28 percent this year through Sept. 15 as
orders for new homes slumped.

Existing home sales probably will fall 7.6 percent to 6.54
million this year and house-price gains may trail inflation for
the first time since 1992, rising only 2.8 percent, according to
the National Association of Realtors. New home sales, typically
15 percent of a year's real estate transactions, likely will
slump by 16 percent and price gains slow to 0.2 percent, the
smallest increase since 1991, the group says.

``With rising interest rates, homebuyers have become
exhausted financially,'' the associations' Stevens told the U.S.
Senate Banking Committee on Sept. 13.

As mortgage rates increased in the second quarter, making
financing more expensive, the median price of existing homes fell
in some areas, including Massachusetts, upstate New York,
Connecticut, Florida, Virginia and Ohio -- regional declines that
are likely to spread, the group says. The average U.S. rate for a
30-year fixed mortgage was 6.4 percent for the week ended Sept.
15, up from 5.7 percent a year earlier, according to Freddie Mac.

The Christophersons are in a bind after 27 showings of their
four-bedroom Massachusetts home, where they spent $35,000 on a
new kitchen. Brian is setting up his dental practice in Mesa,
Arizona, and Nancy and their five children have packed up and
moved there. So the family is now carrying two mortgages.

``We're going to hold on as long as we can,'' says Nancy
Christopherson, 36.

`In a Pickle'

Not all parts of the U.S. are suffering. Home prices rose in
the second quarter from a year earlier in areas such as Ocala,
Florida; Portland, Oregon; Port Arthur, Texas; and Farmington,
New Mexico.

Some sellers across the U.S. must reduce their expectations,
even those who don't move. Edward Brown, 47, a Florida real
estate investor, says he's financially overextended and needs to
sell a three-bedroom house in Cape Coral, Florida. He's asking
$579,000 -- $20,000 less than he paid for the property a year
ago.

``No one expected the market to drop so quickly,'' he says.

``There are a lot of people like me who are caught in a pickle.''

By Kathleen M. Howley and Matthew Benjamin

Reluctant Rally Still Has Life: Interview With James Paulsen, Chief Investment Strategist, Wells Capital Management

2006-11-05T02:09:00.000-05:00

A YEAR AGO, JAMES PAULSEN, STRATEGIST for Wells Fargo's institutional investment advisory firm, Wells Capital Management in Minneapolis, broke from the pack: He predicted that small-caps would extend their outperformance, oil prices would drop and stocks generally would continue to deliver superior returns. Paulsen was right, of course. Now, he expects more of the same as global growth stays strong and interest rates remain at manageable levels. A maverick throughout his nearly 25-year career, Paulsen is accustomed to making bold calls. His clients have the pleasure of seeing them borne out. And we give you the pleasure of hearing his views.

Barron's: We've come 180 degrees from last quarter in terms of sentiment. What do you make of the market and the economy?

Paulsen: A couple of months ago, there was the impression consumers were suffering under the weight of a stock market that was down 10% and being told everyday that their house values were going to hell. Mortgage yields had risen to their highest level of the cycle, job creation seemed like it was grinding to a halt and everybody was paying $3 at the gas pump. It was a disaster. Now, mortgage yields are back to where they were at the end of last year, the Dow Jones Industrial Average is at an all-time high, [former Federal Reserve Chairman] Alan Greenspan says the housing market has bottomed, and we found another 810,000 jobs we didn't know we had. Last night, when I paid $2.09 at the pump, it seemed cheap.

The nature of this whole recovery has been to switch sentiment every 120 days or so from concerns about an overheating economy to one headed for recession. But the undertow of the rally has been good throughout. In the short term we've come off the market lows of June and gone to new highs. Longer term, this recovery cycle started in March 2003. Before the cycle ends or truly peaks, there's got to be some increase in long-term borrowing costs. Right now, the 10-year-yield is at 4.80%, not much different from where it's been for four or five years. Yields were up to 5.25% in June but were promptly taken down again. One of the reasons the economy keeps going is we haven't sat on it with any kind of force, and some of the things that were biting at it have changed of late, mainly energy.

How long do low oil prices last?

In early September, I wrote that oil was going to break down and head back into the 40s because it is fairly valued around $50 a barrel based on what other commodities have done. Commodities are up a lot because of world growth, but oil went up a lot more than the rest of them. If it had gone up about as much as non-energy commodities, it would be around $50 now. The excess pricing of crude has come about because of speculative risk premiums and not fundamental supply and demand forces. As some of those risk premiums diminish, crude is going to go back to a fundamental price level and it will probably overshoot on the way down just as it overshot on the way up. I might get interested in that energy complex again if we break into the 40s. There is still quite a bit of risk there for equity investors, but there is nothing bad about that for the economy. The Goldman Sachs non-energy commodity price index is within 2% of breaking above its May highs and going to new cycle highs, and it has been going straight up the last few weeks. It is possible we could have a new high in non-energy commodity prices at the same time oil collapses. Watching that develop says a lot about oil, because if it were truly a global slowdown that is causing oil to pullback, as many people suggest, then it would also cause a pullback in other commodities.

A lot of these fear stories get so far ahead of themselves and into the pricing of the markets. There were worries about severe oil shortages and oil going to $100 a barrel, and I'm not sure supply and demand ever got that bad. There's been a long litany of items to derail the economy and the markets. Remember the bird-flu pandemic? Remember the jobless recovery? Remember, there was going to be a major blowup as soon as the yield curve inverted? It has been inverted for a year and no one mentions it any longer. Meanwhile, it will be another double-digit year for stock-market returns, and GDP [gross domestic product] growth is at 3½% to 4%. Job creation has been over 2% and income trends are good. That is on a domestic basis. The story gets better when you look at global trends.

Yet, investors seem cautious.
I'm looking at a corporate sector that is making profits faster in this decade than any decade in the postwar era. It makes the 'Nineties profit miracle look paltry. The result is tremendous excess cash flow relative to capital-spending trends -- it's off the charts and has been all decade long. Corporations have never made so much money, but they are also refusing to spend it. Every quarter they beat their numbers but say the future looks tough, just the opposite of the corporate culture that existed in 1999 and 2000. They are sitting on this boatload of buying power because they are cautious.

Investors, meanwhile, are happy with 5% money-market returns. No one cares that for the last four years running the stock market has beaten bonds and cash, by two to three times. The return for stocks off the cycle lows is better than 10% a year. Cash has probably averaged 3% and bonds maybe 4% in that time. So here we've got this asset class that, for the past three or four years, has beaten cash and bonds by double and yet it is still the least favored.

Are you surprised the Fed took a time out in raising rates?
For a 'Seventies economics student trained on the Phillips Curve, I never thought I would ever hear the Federal Reserve in this country use the words "patient" and "measured" in the same sentence with inflation ever. Yet those are the buzz words around their policy, because they don't want to hurt the fragile economy. Never mind that commodity prices have had their biggest move of any cycle in the postwar period. Never mind, we've never had more global powers contributing to global growth, ever. Never mind, we have full employment and 82% capacity-utilization rates.

So you see a tightening down the road?
We have got to go higher. We have core inflation and we are going to have a little more of that. But to go back to my last point, I think bravado and optimism begets bad times and chronic cautiousness paints a beautiful picture for the future. It is a low-risk, high-return situation created by cautious players. If businesses aren't spent out, that implies they can drive faster growth in the future. If investors are sitting in money-market funds, they can get enticed into the stock market as they keep reading about record highs. If policy officials want to be patient and measured, it just means they aren't stomping this sucker down and it can grow harder for longer than anyone thinks.

How do you square this bullishness with the massive trade deficit?
The trade deficit is real debt because it is owned by foreigners and we have to pay them back. And while the trade deficit is at record levels, the more important record in my book is the number of consecutive years we've run a deficit: 15 continuous calendar years. To me, what we've been through in the last 15 years with our trade picture is equivalent to the Marshall Plan after World War II, which was directed at rebuilding war-torn Europe and Japan. At the time, it was highly criticized as throwing money down a rat hole. But it turned out to be one of the greatest investments in U.S. history because it is still paying dividends today.

Today's trade deficit is exactly the same thing; it is a massive stimulative policy aimed at jump-starting economies and utilizing previously underutilized resources in the world. It has been an incredibly expensive policy. It has cost us jobs. It has cost us lost domestic spending growth for a decade and a half, and it is just now starting to bear fruit. Last year, our trade deficit with Malaysia represented 18% of their GDP. We gave China 9% of their GDP. In 2001 emerging-market consumption in U.S. dollar terms was 40% of U.S. consumption. In '05 it was more than 50%. I am not saying where the money is being spent, just that in a few years the emerging economies will exceed U.S. consumption in dollar terms.

In a few years, we will have entirely cloned the U.S. consumer. That is, we are creating a world of middle-class shoppers. The concern has been the U.S. consumer has been the sole locomotive for world growth. Well, we are no longer the sole locomotive. We are taking the Mall of America out of Minnesota and putting it in Indonesia. When we look back on this period we are going to look back on it as a stroke of policy genius.

Policy or unintended consequence?
Totally unintended consequence.
Won't that put us at the mercy of others?
People subconsciously realize the U.S. is no longer the world leader. But it is far better to be the third dog on a fast sled than the lead dog on a slow sled. We need to pass the torch to the areas that have the resource growth to maintain fast world growth. We are doing that, and it is a better deal for the next generation than trying to maintain a leadership position and grind worldwide growth to a halt.

What's your outlook for the trade deficit?
In the next 25 years we are going to have slow but steady improvement in our trade deficit, and that is going to be the dividend payback for the long period of investment we made in these other countries. In the past several years, let's say, our domestic demand has been growing 5% each year while we lost about 1% abroad. So our real GDP is growing at 4%. Let's say next year the trade deficit improves by a percent and our domestic demand is still growing at 5%; well, then GDP grows at 6%. We can go from 4% to 6% without any change in domestic spending trends. You can imagine what that does to wage demands and interest rates.

What's your view on the dollar?

Still a Small World? If the rise of emerging economies continues, it will produce continuing inflationary pressures. And that, says James Paulsen, would help small-cap stocks keep outpacing large ones.
The dollar is going a lot lower. The dollar is off about 30% against the developed world, mostly against the euro. It has done very little against Japan. It might be done weakening against Europe and Canada, but we've got a lot more coming against Japan and what hasn't even started yet is a move against the emerging economies. When these small economies become bigger players and want to play with the G-7, they are going to be required to do things that G-7ers have to do. There is no way China can continue to be a G-7 member and have a fixed exchange rate. We are in the process of forcing them to come off that standard, and we'll be successful. If they want to play in the G-7, not only will they have to float their currency but they will have to treat their employees better and put scrubbers on their factories. When we get through telling them all they will have to do to be in the G-7, we are going to find out their competitive standing won't be nearly as great as we think it is.

If the dollar is expected to go lower, shouldn't you direct money overseas?
Yes. The biggest risk in the bond market in the coming year is if the trade-weighted dollar breaks to new lows -- below its 2004 lows -- because when it does, non-energy commodity prices are going to go back to new highs, and that will feed into core inflation. Core inflation has already closed in on 3%, but if the dollar breaks, we're talking 4% core inflation and the interest-rate structure cannot handle 4%.

What do you make of the private-equity boom?
It tells you how much excess liquidity we have in the system. The only reason to be a public company is for liquidity purposes, and there are plenty of companies saying they don't need liquidity. We've had three decades of pretty strong merger and acquisition activity. The 'Eighties was debt-based M&A. The 'Nineties was equity-based M&A. And this cycle is predominantly cash-on-the-barrel based. The 'Eighties ended in a debt crisis. The 'Nineties ended in an equity crisis. Now, the question is how does a period fueled by cash mergers end? It ends in too many dollars chasing too few goods, and there is a risk of a melt-up in pricing.

What about the outlook for housing?
Greenspan has said the worst might be over for housing, and I have to agree. Refinancing applications have exploded to the upside and are at the highest levels since last year. Lumber futures are showing signs of bottoming. Mortgage yields are back down. Housing stocks have been rising since July even though the reports have been bad. Construction jobs have been up about 30,000 in the last two months, despite the so-called housing collapse.

Short-term there are a number of factors suggesting that things get better. Housing has rolled over and the economy is OK. Real residential housing is off about 1.2% in the last year, and yet overall GDP is up 3.6%. Year-to-date real housing spending is down over 5% at an annualized rate in real terms and the economy is growing 4.2% year to date. There are really two separate housing stories at work, one gets all the play and one doesn't. As residential housing has rolled over, non-residential construction is exploding to the upside. This tells you the slowdown in housing isn't primarily because of interest rates because higher rates would have also killed off commercial construction, and it didn't.

How do small-caps fare in your scenario?
In this decade, the leadership has moved to the emerging economies. These countries are comprised of small companies mainly involved in cyclical or industrial pursuits. This cycle has been led by small-cap stocks and industrial cyclicals, though everyone has been waiting for a rotation to large-cap stocks. If the leadership continues to be emerging economies, we may be surprised by how long small-caps continue to lead. This could be more of a secular play than a cyclical trade. If non-energy commodities go to new highs, what that says is the emerging story is back again and small-caps will do well.

But hasn't the shift to large-caps begun?
Let's talk about that because I hear and read that everywhere. The Russell 2000 has beat the S&P 500 by 2% to 3% year-to-date. Large beat small for a period from the May high to about the June low, but not since then. The Russell 2000 has outperformed the S&P 500 since mid-June. On days when the market is rallying, small has beat large for the most part.

I'm not saying we won't have periods where large-caps do well. But if growth continues at a pretty good pitch, this environment favors smaller companies. Large-caps dominated between 1980 and 2000, and that was because there was chronic disinflation. Large companies have got the ability to deal with excessive price competition because there is more bloat for them to cut. But a period of growth and pricing flexibility benefits the smaller company because it all falls to the bottom line.

Thanks, Jim.

By SANDRA WARD

Employment Rises Signaling Tightening Office Sector

2006-11-05T00:11:00.000-05:00

NEW YORK CITY-The US Department of Labor released its Employment Situation Summary this morning for the month of October. Employment increased last month by 92,000 while the unemployment rate fell to 4.4%.
“It’s pretty clear that the October report is an unambiguously positive report for the US economy,” says Ken McCarthy, managing director of New York area research for Cushman & Wakefield. “This runs contrary to the sentiment we have seen out there in the last couple weeks that the economy is slowing down; it’s not really strong but it is not dying either.”

October’s employment number was lower than September’s 148,000 and August’s 230,000. Of all the job types, manufacturing and construction lost jobs last month due in part to the slowing housing market and the struggling automotive industry. Professional and business services, health care, food service and mining all saw an increase in the number of employed.

The unemployment rate puts the country back to pre-9/11 rates. The 4.4% marks the lowest rate since May 2001. “We’re now back to the levels we were at at the end of the last expansion,” McCarthy says and he doesn’t see it ending there. He predicts modest, steady job growth over the next six months with the country adding about 120,000 jobs monthly during that time period.

McCarthy points to the office using employment level as a positive sign for the real estate industry. Nationally, office using employment is up by more than 500,000 from a year ago. Each person is estimated to need 200 sf of office space, which means there has been 20 million sf of office demand this year. “This is a big reason vacancy is going down. Employment is increasing and nationally we’re not seeing the supply we need to meet demand.” These factors and rising rental rates are tightening the office market across the country.

“The message of this (unemployment) number is that even though the economy has slowed down, it’s not falling out of bed,” McCarthy says. “The economy has slowed down, the housing sector which was the biggest threat has weakened, but otherwise growth continues at a steady and not very exciting pace.”

By Katie Hinderer