It’s been about four years since Brooke Astor, the doyenne of New York Society passed away at the age of 105. Mrs. Astor was known as a great philanthropist and was a major donor to the New York arts scene.
Her final years were marked by Alzheimer’s disease and a scandal around her son, Anthony D. Marshall and her attorney Francis X. Morrisey, both of whom have been convicted of grand larceny in the way they handled her estate. Mr. Marshall, now 86, is out on bail awaiting appeal of his conviction. The judge sentenced him to no less than 1 to 3 years in jail, a pretty long sentence at that age. It was great fodder for the New York Daily News and the New York Post while it was all unfolding.
The important story here is the fact that it took four years and as many price mark-downs for Mrs. Astor’s huge and lavish Park Avenue apartment to find a buyer. Originally put on the market for $46 million, it finally found a Wall Street hedge fund buyer in recent days at the Groupon coupon kind of marked down price of $21 million or 54% below the original asking price. One can argue that Park Avenue has been superceded in attractiveness in recent years as the wealthy have sought to live on the Hudson River or on the west side of Central Park. Even so, half price is dramatic in what is still a fine neighborhood even if it lacks a view of the Park.
Other cities, especially Las Vegas, Tucson and Phoenix; and just about the whole state of Florida have seen dramatic price reductions on property over the years since the collapse of Lehman and the market for bundled mortgage packages that made John Paulson so rich. New York has tried to pretend it is a superior place immune to such discount prices. It seems that is no longer the case.
As you might expect, high end New York City apartments in condominiums and co-ops are largely purchased by Wall Streeters or foreigners seeking a safer haven for their cash than the banks in their own countries provide. Foreign buyers had another advantage until recently while the dollar was weak and their local currencies were strong giving them an added discount compared to local buyers.
What is ominous for high end New York real estate is the unrelenting thousands of lay-offs of Wall Street workers that seem once again to be picking up steam. Over the last month alone, many thousands of additional job cuts have been announced. Think MF Global which laid off 1200 in one fell swoop in its bankruptcy filing. Think Citigroup which just announced another 3000 will go. The list is long and growing by the day and includes Barclays, BNP Paribas, Credit Suisse, UBS, Bank of America’s Merrill Lynch and others. Goldman Sachs is cutting, too, and promoted a smaller number to its coveted Managing Director level this month than it has in a few years.
In addition to job cuts, reports abound in the press that 2011 bonuses will be about 20-30% lower this year than 2010 unless you are a trader and your bonus might be cut in half. Many in New York used to use huge bonuses to pay cash or largely cash for big New York apartments. You can’t do that if the bonuses are small or aren’t being paid.
Add to that the fact that the New York City Council has voted to increase assessments more than once in the last few years pushing taxes up dramatically. The Sunday New York Times recently ran an important story about the fact that many apartment buildings built with tax easements granted years ago to spur new construction are now finding those are running out. The Times gave several examples of buildings where an apartment owner will see the taxes on their unit triple and quadruple forcing buyers to demand lower prices when purchasing the property. The argument there is that you will have a lower mortgage on which to pay interest with a smaller purchase price.
In summary, real estate prices around the country have fallen about 30% since the financial collapse. As more world economies falter and Wall Street finds trading and banking volume down and pay packages with it, prices in New York are now starting to reflect these realities more fully. Five years ago buyers were afraid they wouldn’t be able to afford a place if they didn’t buy this week. Now nobody is in a rush as prices continue to erode. What’s the hurry if you are buying something that is going to decline in value? There just isn’t that much allure to owning a declining asset.
Joan E. Lappin CFA Gramercy Capital Management Corp.
We own no securities mentioned in this article.
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