Confidence & capital return to NY market

Real Estate Weekly, Oct 5, 1994 by Robert P. Corso

According to a recent survey of 150 institutional lenders - mainly insurance companies, thrifts, commercial banks, conduits, and other investors - conducted by the Manhattan-based real estate sales and mortgage brokerage firm of Robert P. Corso & Co., almost all reported they intended to increase their overall investment level in the New York Metropolitan area, with particular emphasis on multifamily, retail and industrial properties.

It was also noted that investment by many overseas companies in New York continued to grow at a fast pace during the first half of 1994. Tourism got a boost with the repeal of the state hotel tax surcharge and hotel occupancy rate has increased, with the biggest volume of tourist coming from Switzerland, France and Italy.

Residential housing prices are firming and cooperative apartment prices have started to increase after a 5-year decline. Although not at their peak of 1988, they are above the price levels of 1991-92 and 1993. With little new residential construction, all residential rental markets are extremely strong.

Office Market

During the first half of the year, the office market showed good progress, with vacancy rates falling, absorption increasing dramatically and rental rates firming modestly. The market is stabilizing after 5 years of decline. More leases have been signed during the first 6 months of 1994 than the same period in 1993, with many companies leasing on concern that quality space is dwindling and rents are moving up. These facts suggest that we may see cranes in the sky before long, since new construction is now feasible, if not inevitable.

Retail/User Market

Retail space is also making a strong comeback, with many national chains taking advantage of opportunities that still exist. Space will continue to be absorbed by both "big box" retailers and "mom and pop" tenants. For the first time in several years, start-up companies in New York are growing and failures are on the decline. With this renewed health and confidence in the economy, many companies have emerged to purchase reasonably priced buildings to house their businesses. Sales in this end of the business have increased dramatically in 1994.

Mortgage Activity

The Banking Industry is recovering after some very shaky years with lots of downsizing. Income and assets have started to grow and bad loans have declined. Most institutional lenders have already worked out, sold at discount, or foreclosed on problem loans. Usually the taxpayer, through the R.T.C., absorbed the properties' plunge in value. Until recently, the mortgage industry had been on a binge, spawned by historically low interest rates, waves of refinancing, reduction and elimination of debt altogether.

All during 1993 and early on into 1994, the business boomed, with lenders closing a record number of loans and looking forward to ending 1994 as one of the busiest in recent memory. While interest rates were at their lowest level in decades, it allowed performing assets to be recapitalized and priced according to or closer to their true market value, attracting much needed new capital. Reflected in the benefits of these lower interest rates was positive activity and robust growth. However, the influencing factors for future real estate activity may be diluted somewhat by the five interest rate increases in less than one year by the Feds. It should be noted that rising interest rates historically have accelerated real estates appreciation and subsequent investment.

As the financing and supply of new product has slowed, the commercial mortgage business has seen lenders fighting among themselves for each new loan offering. This increased competition has put pressure on lenders to narrow spreads and in some cases loosen underwriting standards for "A" quality loans. The number of new lenders entering the market is greater than those leaving or sitting on the sidelines. As rates rise, it's a struggle to keep borrowers financing property and most lenders are scratching their heads as to how to stimulate more loan demand.

The explosive growth and formation of mortgage conduits will bring the best of times to borrowers, since they need loans to survive and grow, and they need these loans fast. Wall Street and traditional lenders are discovering mutual benefits in working together by forming mortgage conduit alliances. Banks know how to originate, service and fund loans more quickly than Wall Street, but Wall Street is not bound by rigorous regulations of capital reserve requirements, and can supply funds more cheaply than institutional lenders.

On the next year, mortgage conduits will expand to all types of properties, as well as specialized products. However, sooner or later as competition heats up, most programs will do almost anything to get deals. This will work to the advantage of borrowers in the form of better rates and maximum loan dollars.

For many owners this offers the potential to refinance one property, several properties or an entire portfolio at very attractive rates. Whatever the choice, underwriters still expect to underwrite only performing mortgages. If cash flow on the property wasn't good enough to cover the old rate, it's probably not going to do so at the new rates.