Multifamily Report: Crisis Contained?

"The biggest impact for us has been a lot of negative press putting a chill on the buyers," says Sidney Whelan, a broker with Halstead Property in Manhattan. "That's nothing new for us."

Currently, Whelan is pre-selling units at the Bridges, a two-building condominium at 2279-2283 Third Ave. near 124th Street that's scheduled to open in 2008. "It's certainly a challenge bringing a condo on right now because buyers are a little spooked," he says. "That's something we have to address with every customer that comes in, but we are getting a lot of traffic. Regardless of fears, many view purchasing in Harlem as a wise investment."

Brendan Aguayo, head of business development at Aguayo & Huebener Realty Group, agrees. "I think in general that the press has done more damage than what actually happened" in the credit markets, he says. "A lot of people got scared. If a buyer gets scared, it creates a domino effect."

Arthur Collins, co-founding principal of Collins Enterprises, also maintains that media reports are "making a big deal out of something that is pretty well contained." He says that despite any troubles, real or perceived, "The New York market is pretty resilient and strong" and hasn't been affected as much as other parts of the country by the subprime meltdown.

Still, a sharp rise in foreclosures and subprime lenders filing for bankruptcy can't be completely overlooked and lessons have been learned, brokers say.

From the standpoint of development, the subprime meltdown has eliminated a huge number of banks that were in the construction lending business, says Norm Kaish, managing partner of Kaish and Taub Development Group.

When the extent of the subprime crisis became clear this past summer, "We had cancellation of a land acquisition loan with Dillon Read, a private banking division of UBS AG," Kaish says. "We were doing assemblage in Gramercy Park. We had completed part of the process and Dillon Read went out of the lending business for real estate. Shortly after that occurred, we started running to other banks to fill our needs for the completion of the assemblage and we found banks willing to make the loan. Then UBS came back to us and offered to complete the assemblage as well provide mezzanine and construction financing.

"We spent a number of weeks providing them with all the info necessary to secure those loans, and we were able to finalize the loans to complete those assemblages to the land acquisition," Kaish continues. "In mid-October, UBS said they were writing off $3.6 billion of their debt and cancelled all construction applications that were pending. We lost $94 million in construction loans."

Still, Ari Shalam, senior vice president of acquisitions at Taconic Investment Partners, points out that rental or sale product for middle-income residents is a challenge for developers. "There are lot of things pushing people to the edge right now," he says. It's much easier for developers to focus on low-income housing and build with tax credits or go for high-end residential properties, leaving the hard-to-define middle class multifamily market on the backburner, adds Shalam.

Underwriting criteria in banks have also changed, says Peter Von Der Ahe, director of the national multihousing group of Marcus & Millichap Real Estate Investment Services in New York. "Before the adjustment in the lending market occurred you could easily get interest-only loans at one-to-one coverage ratio," he says. "That's pretty risky because if the building doesn't make it, the payments to the bank are still the same. It has to come out of pocket."

Loans under those terms are no longer available, says Von Der Ahe. "The debt coverage ratios have expanded while the underwriting criteria have become more stringent and brought some normalcy," he adds. "You can still get 6% loans, but the banks are not going to lend you as much. The buyers are going to have to come up with more cash out of pocket."

To prevent foreclosures, brokers on the selling end are paying even more attention to prospective buyers. While many buyers will still fit the desired profile and move swiftly through the closing process, other would-be residents may not have belonged in the market even before the subprime meltdown.

"We're looking at very fiscally conservative buyers," says Whelan. "They go for conventional 30-year fixed loans and have high credit scores. A broker will know pretty quickly whether a buyer is going into jeopardy or not. Responsible brokers will tell people, 'This isn't for you.' It's a disservice to my seller if I get them an offer from someone is going to crash and burn."

He calls use of the subprime mortgage "a risky thing. It was only ever good for people who did have high earnings and were really sophisticated about finance and real estate. It was never a good product to use simply to get your monthly expenses reduced in the short term. That's where it got people into trouble."

Aguayo says he hasn't seen any meltdown fallout, but that's "because there haven't been any buyers who haven't been pre-approved" at the group's latest development in Brooklyn's Park Slope neighborhood, the Vue at 162 16th St. "At all of our new construction we have mortgage brokers who are more stringent in what they're requiring," he says. "They want a high credit rating. In some cases, I think they're asking for a larger down payment if the score is lower than what they would like."

Stephen Kliegerman, executive director of marketing for Halstead Property, says his company is working with Wells Fargo on-site. "We're pre-qualifying buyers and counseling buyers, talking to them about going to family members and getting credit assistance so that they don't run into problems," he says.

This also helps sellers weed out undesirable candidates. "There are people who, regardless of the subprime market, would still be borderline," Kliegerman says. "Developers may not have done a deal with those people anyway based on economic status."

Kliegerman feels that the meltdown has had more of an effect on the single-home market, "where there is no gatekeeper," than on multifamily. "In the single-home market, there's no developer that has tens of millions of dollars at stake and no on-site banker pre-qualifying," he says. "In New York City, we haven't seen a lot of the predatory lending that affected the subprime market. The buyers tend to be a little more sophisticated and go with more established brokers. When you're out in a less sophisticated market you'll see signs for teaser interest rates, but in Manhattan we'll ask the buyers who they've been pre-approved by; we'll ask them to be approved by our banks."Von Der Ahe thinks the market will also see a "slowing of velocity. Buyers are becoming more choosey in terms of quality and location."

If people are liquid enough, says Collins, there will be enough good properties to choose from at fairly reasonable rates. "There will be some foreclosures and banks taking back, and it's really a matter of where's the bottom in terms of the pricing for this stuff," he says. "We found that things are going to be moving on the very low end and very high end."

Cancelled loans, abandoned dreams of homeownership--has anyone benefited from the subprime meltdown? Of course.

"Subprime is probably good for the rental market," says Shalam. "It will mean more renters, fewer buyers. The halo effect is a really strong rental market across the city that will cause some owners to think twice about converting rental properties. This might absorb some of the planned inventory that was coming to the market."

As homeownership is pushed further out of reach, more pressure will be placed on rents. "That's an interesting point," says Von Der Ahe, "because in past credit meltdowns, you've also had economy troubles and you had to lower rents. Now rents are actually continuing to go up."

Figures in a recent apartment research report by Marcus & Millichap support this prediction. According to the report, "Employers are expected to add 52,400 positions by year's end, a 1.4%-gain and up from 46,200 new hires in 2006; asking rents in the market-rate rental sector are expected to rise 5.5% to $3,622 per month by year's end, while monthly effective rents will advance 5.8% to $3,528 per month; and the median price of properties sold over the past year is $228,300 per unit, a gain of 16% from the preceding 12 months."

It remains to be seen whether the impact of the subprime meltdown on New York City's multifamily market will have long-lasting effects or if those effects truly exist on a greater scale. "This sounds like spin, but we really have not seen a negative effect from the fallout in the rest of the country," Kliegerman concludes. "It's been more isolated to other markets in places where people are not so sophisticated."