Residential markets remain strong in shaky economy

Real Estate Weekly, Feb 19, 2003 by Marc J. Freud

As the new year begins, the economic outlook is uncertain. The federal funds target rate is 1% and the Treasury note yield is 4%. There are segments of the regional residential market that continue to move ahead, albeit at a slower pace.

The Office of the Federal Housing Enterprise Oversight, a federal agency that regulates Fannie Mae and Freddie Mac, states that sales of housing priced above $300,000 per dwelling rose .84% during the third quarter.

This compares to an increase of 2.39% in the second quarter. This suggests that the velocity of housing sales has begun to decrease. The office's home price index (which reflects the price appreciation of residential property on a per annum basis) had been increasing at a rate of about 2% a quarter for the past two years suggesting that, although the velocity of deals has tapered, price appreciation of homes has increased during 2002.

In the New York metropolitan region this indicates a changing market, paralleling the national market, with home prices on average up 6.2% when compared to a year ago. According to fourth quarter 2002 statistics recently released by the U.S. Census Bureau, pricing of homes in New York City was up 4.91%.

The question that dominates the thoughts of many economists is whether the residential market will continue to be bullish. With the unprecedented amount of refinancing and an increase in consumer spending due to additional funds, the question is, 'if this continues, how will the macro economy be affected?' One factor behind the refinancing in 2002 is noteworthy.

When a homeowner executes a refinancing, does that party's additional deductions from higher interest rates, that inure to a household, siphon off much needed money for consumers to spend in the economy - if it gets credited back at the end of a tax year? Those funds are now not available due to the lower interest rate environment.

Though a very small amount, compared to President Bush' new stimulus package, those deductions could shrink by an estimated $10 billion causing homeowners to pay close to $1.7 billion more in taxes. Those taxes clearly would not be available and put forth in stimulating the economy.

This author concludes that before real estate professionals look at all the wonderful benefits of this low interest rate environment we should also consider some of the long-range implications of the monetary policies of our government. It is conceivable that refinancing of homes may level off, as consumers shift their attention to areas such as continuing to stay employed and seeking to cutback slightly on debit household expenses to make it through a wary and uncertain first two quarters of the year.

With that as a background to some of the challenges the U.S. economy and real estate markets face this year, Troutbrook Company looks forward to 2003 as a year in which we continue to forge forth in both the commercial and residential real estate markets.

Troutbrook Company will be selling 68-74 East End Ave., possibly the last remaining development site on this avenue. This 10,000 SF of prime Upper East Side property is presently comprised of four 25 footers with retail stores at grade. With all the air-rights in place, the future 100,000-SF development has an asking price of $12 million.

On the development front, our 55,000-SF redevelopment in downtown Brooklyn at 636 Pacific St. continues to secure condominium sales. Quality developments priced correctly are in demand. We believe that what defined our project at the outset was the money investment spent in high quality finishes. The Atlantic Art Building, as it is named, is now almost 85% sold out with an accepted offer on an apartment, right after New Year, at $434 per SF. Sellout for this project is approximately $14.5 million.

This market continues to be strong giving us comfort to forge ahead on other developments in Brooklyn. Troutbrook Company expects to commence two ground-up residential condominium projects. The first one, also situated in Downtown Brooklyn, is a 35,000-SF development near the trendy Smith Street located but two blocks from the F train and 10 minutes to lower Manhattan. We expect to command a sales price on average of $425 per buildable SF. Development will be commencing in the second quarter of the year.

The other project will be a 70,000-SF development deal in Williamsburg, Brooklyn, located but 12 minutes from Midtown Manhattan. Troutbrook, despite a competitive acquisition marketplace, believes what separates our development firm in winning bidding is the ability to move quickly to close transactions and our reputation.

We continue to actively look in Queens and Brooklyn for ground-up development deals, and existing buildings, suitable for residential conversion up to 150,000 SF.

In the Bronx we are aggressively marketing the ability to build a 60,000-SF commercial storage, distribution or mixed-use development at 135th Street and Canal Place. This existing 27,000 SF parcel is located several blocks from The Third Avenue Bridge and two blocks from both I-87 and the #4 IRT train, that is a 14 minute ride to Grand Central Station. Lastly, the past quarter saw the end not only of 2002, but also that of the operation of one of the longest running Jewish restaurants on the Lower East Side of Manhattan Ratners. Ratners was a main staple of a generation and gathering spot for President Kennedy, Governor Rockefeller and many other dignitaries and celebrities. Troutbrook sold the operating business of Ratners to King Kohl of Chicago, in a transaction that closed in the last months of 2002.