Sunday, March 27, 2005

What Happens If It Bursts?

BY MAREK FUCHS

AT cocktail parties these days, the chatter often involves a bit of bragging about real estate profits before it winds down to those famous last words: "The market might go down, but my area will maintain its value."

It's as if people think that an electromagnetic field of protection will shield a particular series of brownstones or cul-de-sacs from whatever might befall the market at large because of higher mortgage rates, mortgage defaults or an oversupply wrought by downsizing baby boomers.

Wishful thought, willful naïveté or irrational exuberance explain the extent of the conviction, according to many real estate appraisers, whose business it is to track sale prices and trends over time.

One has to look back only to the last time the real estate market's cabin pressure changed for the worse to see that every place loses value. In the late 1980's even areas as sought after as Greenwich, Conn., had go-go prices reversed. Controversies even raged about the number of "For Sale" signs staked into lawns, which some found gauche. A home built at 1 Round Hill Road, a showpiece address in the well-regarded back country section of town, stood unsold for months.

Although the most established enclaves of the most rarefied towns are not immune to market forces and psychology, the most intriguing areas to watch in downturns, said Jonathan J. Miller, the president of the Manhattan appraisal firm Miller Samuel, are those widely thought to have built and renovated themselves to a permanently new standing in the market. Frequently, Mr. Miller said, it is these areas that, despite the high expectations (or maybe because of them), are hit the hardest.

On the odd occasion, however, changes in an area will be so substantive that it will weather the downturn not with prices unscathed (a near impossibility, see: Greenwich) but with comparatively less pain.

Elliott D. Sclar, a professor of urban planning at Columbia University, said that the Upper West Side was at its low point in the 1960's and 70's, with single-room-occupancy hotels on many blocks, high crime and families moving out. Then came a sharp growth in restaurants, shops, renovation and co-op conversion in the 1980's - trends that some were convinced would prevent prices from plummeting, even when the stock market crashed in October 1987, limiting the cash flow of many prospective residents. The change did stick on the Upper West Side and prices held better than other areas, Mr. Miller said.

In the same era, the East Village was also thought to have gentrified its way to a new level of stability, but it experienced one of the sharpest price declines in Manhattan. According to co-op sales numbers prepared by Miller Samuel, prices in the East Village dropped more than 30 percent from 1987 to 1994. Though the East Village at the time was thought of as the latest, greatest frontier in Manhattan, Mr. Miller said the ensuing confidence overlooked important factors that could come into play during times of falling prices, like limited transportation.

Moreover, although there had been building and renovation, retail stores catering to the influx in new residents never caught up, as they had on the Upper West Side. When the gloss came off the real estate market toward the end of the 1980's, owners in the East Village suffered more than those in other neighborhoods.

But then came the upturn of the 1990's. Though there is still no Second Avenue subway, the East Village became one of Manhattan's hottest neighborhoods and with the increase in prices, the same old mantra returned: that the East Village finally had changed its stripes to the point that it could better weather a downturn.

This time, Mr. Miller said, such hopes might be realized. He points to the higher level of owner occupancy brought by the current wave of building and the increase in support services that followed. In order to test to how an urban neighborhood might perform in a down market, Mr. Miller said, one must look at whether essential services like supermarkets, dry cleaners and a choice in restaurants can be found within a several block radius of any given apartment. That wasn't the case in the East Village as the last flush market began to teeter. But now it more frequently is.

"If you are walking 15 blocks, those high prices get hard to justify," Mr. Miller said, when macro trends, like mortgage rates, turn against a market. "You need a certain base line to become a more stabilized community."

By this measure, Mr. Miller said, it is not the East Village but many Harlem neighborhoods that might be vulnerable in a downturn. Although residential prices have soared, commercial activity hasn't developed deep roots. "It's still early in the process there," he said, pointing to the long walks to pick up everything from greens to shined shoes. Likewise, he said, the far West 40's, where there has been a great deal of rental construction, reminds him of the far East 30's in the 1980's, where many rental buildings were built before the support services caught up.

Dr. Sclar of Columbia, who has a map of the proposed Second Avenue subway (circa 1955) in his office, said that transportation is a key to performance in bad markets and that because of that, he doesn't agree with Mr. Miller's forecasts. He said that because the subway still hasn't been built, the East Village may suffer again. And on the subject of Harlem, he also disagrees with Mr. Miller, pointing to the base line strength that good subway access brings.

Both Dr. Sclar and Charles Lockwood, the author of "Bricks and Brownstone" (Rizzoli International Publications, 2003), an architectural history of New York row houses, also point to the appealing housing stock in areas of Harlem like Strivers' Row. Demand for brownstones with space and elegant detail could help the area maintain its footing, they said.

The biggest risks, Dr. Sclar said, might be in changing areas in the industrialized margins of the city, like Red Hook and Williamsburg, Brooklyn. Brad Lander, the director of the Pratt Institute Center for Community and Environmental Development, said that fashionable areas where there was "fringe gentrification" were always harder hit, but that the influx of immigrants to the city in the past generation had pushed these patterns to Brooklyn and Queens. If prices come down in general, Mr. Lander said, buyers will be less willing to deal with the relative isolation, limited retail and school choice in a place like Williamsburg.

The hunches and guesswork involved in predicting which areas have changed enough to weather a downturn do not end at the city limits.

In Westchester, the heralding of the birth of White Plains as a legitimate small city have been a feature of several real estate runups. In the harsh light of a downturn, however, its limitations - like a traditional lack of life at night - come back to haunt it. But in the past several years, the development has reached a new level and given White Plains something it never had before: a skyline.

Marge Schneider, an executive vice president of Cappelli Enterprises, a developer of condominiums in the area, said her company has raised prices repeatedly because of demand and has also become partners with Donald Trump to sell apartments in the city. She said that White Plains will remain in good standing because the more than 2,000 luxury apartments in the center of town have put residents on the streets at night. Everything from big box retailers to restaurants and a new movie theater have opened, and teem with customers.

John Mason of Mason Appraisal Services in Yorktown said that the large number of corporations that have settled in and around the nearby Route 287 corridor speak well to the ability of White Plains to survive a bad environment for real estate.

But over all, he said, he is not confident in its prospects. Mr. Mason said that there is an inorganic element to a city built on the back of large development projects. He is more confident in the sustainability of progress in the northern city of Peekskill, which, unlike White Plains, has been settled by a burgeoning population of artists, taking advantage of available lofts and river views.

"The cultural beat in Peekskill far exceeds anything in White Plains and that could make a difference," he said.

In looking at communities outside Peekskill that sit along the Hudson, Mr. Mason said that there are often two narratives to a town's future: a rosy one you hear in good times and a more guarded one in bad; with this in mind, he said some of the river towns like Hastings and Tarrytown that have long anticipated redeveloping their waterfronts with recreation and retailing might lose hope under the umbrella of a bad market.

Though waterfront development has not materialized in areas of Westchester, the Midtown Direct train line that now links parts of New Jersey to Penn Station in Manhattan has changed communities from Maplewood to Madison. That change in transportation will keep demand much stronger than it otherwise would have been, said Jeffrey G. Otteau, president of the Otteau Appraisal Group in East Brunswick. The settling of so many corporate headquarters in the nearby Routes 78 and 287 corridor will also help. But ironically, he said, many of the fast-growing "exurbs," or outer suburbs, near the Jersey Shore may suffer. Their growth and rising prices are based on their easy commute to that north central corridor in New Jersey. There is no similar job source nearby to give the area its own base line.

When it comes to future prices, of course, all is speculation. And perhaps, just maybe, this will be the time when famous last words will come true and everything will be different. Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership.

"It is a new paradigm," he said.