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February 25, 2009
The Developers’ Bailout
City Journal
by Nicole Gelinas
Free-marketeer Nicole Gelinas eviscerates the plan put forth in Saturday's Daily News by former ESDC honcho Avi Schick for bailing out the imploding commercial real estate industry, which seems to be a recipe for creating a new, unsustainable bubble.
In yesterday’s Daily News, Avi Schick—the former head of Albany’s economic-development agency, the Empire State Development Corporation—unveiled a truly awful idea. And that’s really saying something these days. Schick wants to use taxpayer-guaranteed state and city pension funds to prop up the city’s teetering commercial real estate. His proposal would likely exacerbate our commercial real-estate problems, while imperiling pension funds and thus tax dollars.
...What’s wrong with this idea? It’s hard to know where to start. First, subsidizing new construction would add to a growing glut of empty real estate in New York. “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 New York Times reported last week. The commercial vacancy rate has risen from under 6 percent to double digits in less than a year. Why create even more “critical real estate and development projects” that nobody wants?
Second, preventing buildings from falling into default isn’t the noble goal that Schick suggests. When buildings default, their prices fall, and that leads to lower rents for tenants. Over the past several months, office-building values in New York have fallen off a third or more, and office rents have dropped nearly 16 percent. This correction is necessary. For the past few years, the Manhattan real-estate market had sizzled as hedge funds, banks, finance-related law firms, and the like paid escalating amounts for premium space. In 2005, 2006, and early 2007, owners bought buildings—and lenders financed them—based not on income from current rents, but on the expectation of ever-rising rents.
Now, every Wall Street firm and nearly every commercial bank that has failed, or nearly failed, needs to shed office space. Citigroup, Merrill Lynch, Lehman Brothers, Bear Stearns—their imploded profits have all left behind acres of empty space overlooking midtown and downtown Manhattan. Wall Street may not regain anything close to its super-profitable bubble-era form; and though New York, provided it keeps up public safety and the like, certainly can attract new industries to replace Wall Street, those industries almost certainly won’t be so flush with cash, so lower rents are inevitable. The commercial real-estate market needs to purge itself of its speculative assumptions built on twin bubbles in credit and in the financial industry—and that will hurt.
The good news, though, is that lower commercial rents are not a bad thing for New York. Excessively high commercial rents benefit only owners. They hurt tenants, and thus the city’s attempt to diversify itself and move away from a financial industry that has imploded. Anything that New York City and State do to prop up commercial prices thus will not only delay the industry’s recovery; it will injure the rest of the city’s economy, too.
...One final problem: who will decide which real estate projects are “critical”? Schick notes loftily that “lobbying must be prohibited. . . . If pension funds are on the line, it must be all about the numbers, not who you know.” The state pension fund, though, has a history of allegedly choosing managers based on political contributions, as investigations into former New York State comptroller Alan Hevesi have shown. Plus, developer Bruce Ratner is lobbying heavily for federal “infrastructure” stimulus money for his Atlantic Yards condo and basketball-stadium project—a centrally planned Brooklyn boondoggle that already benefits from hundreds of millions of dollars in public subsidies.
Atlantic Yards Report, Avoiding AY example, Schick, former ESDC leader, proposes "transparent" investment fund for commercial real estate
Norman Oder picks up the Atlantic Yards thread from Gelinas, and expands on it.
Schick's idea has drawn severe criticism for ignoring market issues and for serving to further the interests of Daily News publisher, Mort Zuckerman.
But first let me point out how Schick's guidelines for public investment set out--at least on paper--a severe contrast with the way his former agency has shepherded the Atlantic Yards project.
Contrast with AY: transparency
Schick recommends:
* Investment guidelines, including the expected cost, timing and return, must be publicly articulated before any financing is provided. This transparency will help guarantee that investment decisions will be guided by professionals, not politics.Only a vague "expected" timeline was provided by the ESDC in its approval of the Atlantic Yards project, and there was no assessment of the expected return--an issue in eminent domain case heard in state appellate court Monday.
In other words, Schick is setting out a higher standard. And while the justification may be a larger percentage of direct public investment in a project, the widespread special benefits for the Atlantic Yards project constitute a significant amount of publicly provided advantage.
Contrast with AY: no lobbying
Schick writes:
* Lobbying must be prohibited. The news that the banks receiving TARP money lobbied Treasury was one more sign that it was still business as usual in D.C. If pension funds are on the line, it must be all about the numbers, not who you know."Who you know" has been a watchword of developer Forest City Ratner, which has long been one of the state's top spenders on lobbying and has a particularly cozy relationship with all-powerful Assembly Speaker Sheldon Silver.
Lately, the developer has deployed former Senator and uber-lobbyist Al D'Amato, apparently to direct federal stimulus funds to the Atlantic Yards project.
Contrast with AY: equity stake
Schick writes:
* The fund must be given an equity stake in projects that obtain financing. The government will create substantial value by establishing this fund, entitling it to capture a portion of those profits when it exits the investment.As noted above, while this may represent a larger percentage of direct public investment in a project than in Atlantic Yards, the widespread special benefits for the Atlantic Yards project constitute a significant amount of publicly provided advantage.
Indeed, Schick's formulation highlights Brooklyn Borough President Marty Markowitz's stunning willingness to direct federal money to the project without any attendant public share.
NoLandGrab: Trying to pump more air into a bursting bubble with public money seems like the just the thing a former ESDC president would propose. And forgive us if we find his calls for "transparency" a wee bit comical.
Posted by eric at February 25, 2009 10:32 AM