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Rent control issues to temper Manhattan investments.

The employment contraction that began on Wall Street has spread to other sectors in Manhattan. Not surprisingly, the greatest employment losses have come from industries tied directly to Wall Street. Over the past year, securities firms and business and professional services companies each have shed 24,000 positions.

Several locally based retailers also are feeling the effects of the economic downturn. Macy's, for example, cut more than 1,000 employees citywide in March. In Manhattan alone, more than 900 positions have been trimmed from the company's central headquarters, home store, corporate marketing and merchandising divisions during that period.

With the recession expected to push an average of 7,200 borough employees out of work each month, apartment demand will subside. Across all five boroughs, employers are forecast to cut 136,900 positions this year for a decline in total employment of 3.7%. Payrolls in Manhattan are expected to contract by 86,700 jobs, a 3.6% reduction.

So far in 2009, operating fundamentals have varied by submarket. In historically strong neighborhoods like the Upper East and Upper West sides, vacancy has remained relatively healthy, but owners have felt increased pressure to trim rents. In areas that have recorded temporary upswings in demand and redevelopment, such as Midtown West and Upper Manhattan, rent cuts have been more modest, but vacancy has spiked.

Also, threats from new large, market-rate completions will be elevated in these areas. Asking and effective rents are projected to decrease between 4 and 20% this year, depending on the location and quality of the product being offered. Last year, asking rents ticked up 0.1%, while effective rents slipped 0.1%.

Lengthy planning and building timetables have kept the borough's construction pipeline full, despite current economic conditions. Multi-family permitting activity has accelerated by more than 4% to 9,660 units over the past 12 months. Though the rise in permits would seem to portend growing housing demand, the increase is primarily attributable to the 6,900-unit surge in permit requests during the two months prior to the expiration of the 421 a tax abatement.

Developers will bring online nearly 3,200 market-rate apartment units in 2009, compared with 1,225 rentals last year. Owners are particularly concerned with inventory expansion around the Lincoln Tunnel and along the southern boundary of Upper Manhattan. Additional competition for tenants may come from the 3,700 condominiums expected to be completed in the borough this year, as some developers could convert these units into rentals to generate revenue. The potential for shadow stock will be pronounced throughout Upper Manhattan, the Financial District and Midtown South.

Reflecting sales at new developments that went into contract more than a year ago, the median price of a Manhattan condominium was $1.1 million per unit in the fourth quarter of 2008, up 1.8% from the corresponding quarter a year earlier. Listing inventory was nearly 5,300 units, a year-over-year gain of 31%, and the average time on the market increased 21% to 164 days.

Underpinned by the area's proximity to SoHo and the West Village and growing attention from young professionals, residential demand persists in Chinatown. While redevelopment efforts are proceeding, albeit more conservatively, rezoning projects that began in the Lower East Side may move southwest and cool construction activity.

The 75 Wall Street project is expected to be the year's largest condominium arrival in the borough. While some units already are being filled, the 350-condo development will be fully completed in the second quarter. Condominium construction is expected to peak in the second quarter with the delivery of over 2,000 units. The surge in development will likely strain the for-sale market, forcing a significant number of units into service as rentals.

Investment activity will be shaped by forces beyond the typical downside trends of a cooling market. Industry pundits are monitoring developments in the litigation involving J-51 tax abatements and rent decontrol. If appeals are unsuccessful, owners across the city could be forced to put rental units back under rent stabilization and retroactively reimburse tenants. As a result, operators with lower capital reserves may be forced into distress.

Concerns are elevated in Manhattan, as the difference between rent-stabilized and market rates can be substantial. Not all properties are affected by the J-51 issue, however, and sales activity in the borough will persist, albeit conservatively.

Cap rates are expected to rise into the low- to mid-5% range in core locations, while initial yields in fringe neighborhoods will need to start around the mid- to high-6% range in order to attract investors.

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Title Annotation:INSIDER'S OUTLOOK
Comment:Rent control issues to temper Manhattan investments.(INSIDER'S OUTLOOK)
Author:Von Der Ahe, Peter
Publication:Real Estate Weekly
Date:Apr 22, 2009
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