Real Estate Slump Hits New York

April 28 2008 - In recent years, few issues have divided residents of Downtown Brooklyn more than the $4 billion, 22-acre Atlantic Yards project being developed by New Jersey Nets’ owner Bruce Ratner. Ratner’s company Forest City Ratner is in a deal with the city and state to develop a high-rise commercial office tower, affordable housing units and a basketball stadium, the Barclays Center, in the heart of Downtown Brooklyn in just a few years.

Local community groups and residents, concerned that such a large-scale development in a partially residential area could harm their quality of life and change the neighborhood’s character forever, have been attempting to stop the project in its tracks through litigation, seeking to influence public opinion and pressure decision-makers in City Hall and Albany to reconsider the project’s risks.

While these concerted efforts have proven unsuccessful, integral components of the development have now been put on hold for an indeterminate period of time — not because of public outrage, but rather due to increasing construction costs, a slowing economy sliding toward a recession and a tightening credit market.

To different degrees, the very same economic challenges facing Atlantic Yards are impacting real estate projects both big and small throughout the five boroughs. As the Metropolitan Transportation Authority faces a budget crisis, long-planned developments, such as the Fulton Street Transit Center, have faced dramatic delays and less ambitious revisions. The original plans for Hudson Yards have been thrown into disarray, while the construction of individual apartment buildings in Queens and Brooklyn have simultaneously been put on hold due to a lack of available financing.

As the economy takes tumultuous turns toward recession, developers, community groups and city officials alike are questioning whether these projects will go through at all or at least in the way many had previously imagined.

Rising Costs, Slumping Funding

While much of Atlantic Yards project is sliding to the back burner, the arena is moving forward for one main reason: The financing for this component is already in place. Unlike the private financing needed for the commercial and residential buildings, Forest City Ratner already has secured $670 million in tax-free bonds to cover the costs of the arena’s construction beyond the $200 million in subsidies already in place ($100 million from both the Empire State Development Corporation and the city). Additionally, unlike the commercial tower centerpiece, otherwise known as Miss Brooklyn, the stadium already has its anchor tenant lined up (the Nets) and Barclays has ponied up a reported $400 million specifically for the stadium’s naming rights.

What could happen to the project’s residential component is unknown.

This is a fate many large-scale projects and their previously indispensable components could meet in the near future, which might fundamentally change the ambitious development plans the city pushed for.

The very real credit crunch facing financial institutions that typically serve as lenders to real estate deals is making it extremely difficult for many developers to secure financing. There is unusual volatility in the financial markets as a result of banks that took on enormous amounts of debt and engaged in risky and complex financing activities. Economists are unsure when the situation will stabilize. Private lending is more uncertain now than it has been for decades, making it much more difficult to secure investments for speculative projects such as real estate.

James Parrott of the Fiscal Policy Institute said, “There are significant financing challenges facing New York real estate developers including difficulty rolling over debt and manifesting in a general reluctance to lend money on projects, because of the necessity of conserving capital to cover losses from previous loans.”

Additionally, the outlook also remains gloomy for employment in the financial services sector when a recession scenario estimates job losses at 30,000 to 50,000, not including the massive layoffs already in effect from JPMorgan Chase’s acquisition of Bear Sterns. The loss of these high paying jobs not only erodes tax revenues for the city, but also significantly lowers the demand for the expensive housing and commercial space, which comprises many projects.

At the same time, construction costs, including the price of concrete and oil, continue to rise — a result of both increasing global demand as well as decreasing supply from the construction boom experienced by New York City for the past decade. Turner Construction’s Fourth Quarter 2007 Building Cost Index shows that costs rose 10.6 percent nationally in 2006 compared with the previous year. This is a significant increase for builders attempting to hammer out large projects, according to the city Comptroller’s Chief Economist Frank Braconi.

Increasing labor costs may be yet another contributing factor to the possible demise of the city’s major projects. This is primarily a result of a relatively small pool of unionized, talented workers with experience in building large-scale projects in the city, many of whom are already booked for the next few years due to the city’s construction boom. According to Harry Chernoff, a professor at New York University’s Stern School of Business and a real estate developer, it is unlikely that we will see an increase in this labor supply in the near future because of the practical difficulties of bringing in workers outside of the city. “If you are a builder from another city or region, it is difficult to come here and do this type of work without having the prior experience of working in New York market,” said Chernoff.

All of this has taken its toll on some of New York’s high profile projects.

Real Estate Slump Hits New York
by Steven Josselson | Gotham Gazette