Avi Schick, head of the Empire State Development Corp. for 2007 and 2008, has a bad idea in today’s Daily News. He wants to use our taxpayer-guaranteed state and city pension funds to prop up the teetering local construction and commercial-real estate industries. “How would this … work?” Schick asks.
Answer: it wouldn’t, and it would likely exacerbate our commercial real-estate problems while imperiling pension funds and thus tax dollars.
“New York should create its own fund to provide financing to critical real estate and development projects across the state,” Schick writes, saying that “office and residential buildings, warehouses and distribution centers can’t be financed, and those that need to be refinanced have nowhere to turn and will be in danger of default.”
Schick suggests state comptroller Tom DiNapoli and his city counterpart, William Thompson, create such a fund to “finance commercial real estate” with $2 billion in state and city pension money, to be matched by union pension funds and bank funding.
Schick thinks that this public money and the initial bank money could raise at least $5 billion in total. Further, he thinks that the money could attract additional Federal Reserve and other federal government money through the Fed’s new consumer- and commercial-lending bailout program.
O, what a tangled web we weave, when first we practice to deceive, with bad government structured finance on top of bad private-sector structured finance.
It’s hard to know where to start with what’s wrong with this idea.
First, commercial real-estate construction in New York has stopped for a good reason: there’s a glut of existing, empty real estate, and the glut is growing.
“Building values are dropping as unemployment worsens, offices empty, rents decline, credit remains tight and buyers expect higher rewards for taking on more risk,” the Times reported last week on the New York City market. As rents have fallen nearly 16 percent in less than a year, and as the vacancy rate has risen from frictional levels to double digits, office building values have fallen off a third or more.
And the real risk is future uncertainty, not just for the next couple of years as the financing market remains unsettled, to say the least, but for the indefinite future.
For the past few years, the Manhattan market has thrived on hedge funds, banks, finance-related law firms, and the like paying ever-higher dollars for premium space.
But as we’ve said repeatedly, Wall Street simply may not come back in anything close to its super-profitable bubble-era form. Yes,
New York, provided it keeps up public safety and the like, can attract new businesses to replace Wall Street — but they may not have the same level of cash. Rents and thus asset values may be permanently lower.
Second, 2006-era valuations were wildly speculative even based on a Panglossian scenario of ever-rising rental prices.
Think of 450 Park selling for $1,600 a square foot in early 2007, as the Times cites, when $1,000 a square foot had seemed outlandish just 18 months before. Even less outlandish valuations will suffer: the average class-A midtown building may be worth $350 a square foot today, down as much as 40 percent from 18 months ago, one of the Times’s sources estimates.
These lower valuations aren’t the problem; the higher ones were.
The commercial market simply needs to wring itself of its speculative excesses– very painfully. And the virtue of that workout is that unlike with overvalued houses, people won’t be evicted from their houses as part of that workout.
Owners and developers must adjust to sharply lower prices in the future. And banks who lent money against unrealistic valuations must take their losses, which are now the federal government’s direct fiscal responsibility, certainly not New York City’s.
Anything that New York City and State do to retard this process will delay the industry’s recovery. Moreover, anything that the city and state do to prop up commercial rent prices is bad for the rest of the city’s economy, as well. Too-high commercial rents are good only for owners. They are bad for non-Wall Street tenants, and thus for the city’s attempt to diversify itself away from a financial industry that has imploded.
All of Schick’s talk about attracting private dollars with public dollars is worrisome, too.
In the new world of “public private” financial partnerps, this idea means that the public sector likely would take on the risk. Otherwise, a terrified private sector would never step in (for good reason).
The state and city pension funds — and taxpayers — therefore would face a risk of significant losses as the market forces simply overwhelm the government’s relatively paltry amount of cash.
Ironically, if Schick and his predecessors at ESDC had done a good job at their last job — overseeing reconstruction at the World Trade Center site — they’d have alleviated a bit of this crisis. Developer Larry Silverstein could have easily got private financing to rebuild that site three years ago, or four years ago — but not today.
Ground Zero is the only city site where it’s even possible to argue with a straight face that the city and state governments should directly support reconstruction — because it’s a matter of rebuilding a neighborhood that terrorists destroyed.
But even here, as state and city resources become more finite, more public subsidies for Ground Zero become a matter of debate.
The cold, hard fact is that the city needs working subways more than it needs more real estate right now.