Surviving the Big Apple slowdown

NEW YORK - Israelis adore New York, to generalize. The sprawling, vibrant city has long attracted locals looking for opportunity, and not a few focused on its real estate sector. But today, as the world reels in financial shock and American property prices spiral down, Manhattan seems to exist in a fragile bubble. New developments have all but stopped, developers are scrambling to find money to complete projects already begun - yet prices refuse to drop. So far. And bankruptcies among local developers in the Big Apple remain rare.

Which doesn't mean anybody's popping champagne corks. "Everyone is in shock. Half the day I work in an office as a real estate investor trawling for opportunities, and the other half, I sub as a psychiatrist," quips Ofer Yardeni, one of the more successful Israeli real estate developers in New York. "I meet with friends in the business world and with colleagues and try to encourage them. But their anxiety is sky-high.

"A year ago it was fashionable to invest. Today the fashion is not to invest," he quips. "I present joint venture proposals, but everyone's terrified. Even the ones with money."

The New York real estate market has ground to a standstill, Yardeni believes. "No one wants to buy anything. Buyers suspect that tomorrow prices will be lower, so why buy today? This is a real problem, because there are 10,000 available apartments in the city, most of them luxury dwellings intended for well-heeled people such as Wall Street employees."

Despite the high prices, the Manhattan market had been turning over 3,000 apartments every quarter, Yardeni says. That was then: "In the last quarter just 1,900 apartments changed hands." Yet, a tad bizarrely, he says: "Prices have not come down."

Several dozen Israelis operate in New York's real estate market, most of them making the leap during the boom of the last decade. Israelis, from giants such as Lev Leviev and Yitzhak Tshuva to minnows, have poured tens of billions of dollars into the American property scene. Naturally, most of the money was borrowed, a fact not doing them any favors these days. Yet although about 85% of the investment was made with partners or through bank financing, the numbers are still staggering.

But the American real estate market has been retreating (or worse) for a year now, and the downward slope has just grown steeper.

"The turning point was the collapse of Lehman Brothers," says Yardeni. "Everyone knew Lehman had problems, but no one believed a hundred-year-old investment house could disappear in a single day. Then people realized that if Lehman could collapse, much worse things could happen."

Yardeni and his partner Joel Seiden own 20 residential rental properties worth $2.5 billion. The crisis in the real estate sector has not left them unscathed. "The banks are demanding more equity funding. Local developers have to put up 30%, and foreign developers 50%. Go find people who have that kind of money. And if they do, they are afraid to invest right now," Yardeni says. He doesn't try to hide the troubles facing his own empire.

"We're still renting apartments, but didn't raise rents this year," he says. "Each year we'd raised rents by 5%-10%, but this year we will have to absorb the increased costs."

Picky, picky

Strapped for cash themselves, potential tenants have also become pickier. But so have the landlords, Yardeni relates.

"We used to rent to every sixth person who came looking for an apartment. Now we rent to one in 20, and that involves a lot more work. People have also stopped paying on time, on the first of every month. Now they're paying on the 15th or 20th of the month, which means we have to work more with lawyers," he says.

Even so, Yardeni remains optimistic. Some of his friends have lost as much as a quarter-billion dollars, but still admit they are in better shape now than they were 10 years ago. How's that? The Israeli businessman begs to put things into proportion.

"Things are much better now than when I started out in the real estate business in 1995, or after September 11, 2001. Many people made good deals, so now they're losing a little, perhaps even a lot. But it's not a disaster," he says.

New York is still clean and the crime rate is low, he adds. "So we have a financial meltdown. It will pass and the city will prosper again. I want to continue investing. In the past year I have raised $500 million for real estate investments, and spent $300 million of that on acquisitions. Now I'm looking for investment opportunities for the rest of the money."

Yardeni does not foresee any change for the better until after Barack Obama is sworn in as president. "Uncertainty prevails," he explains.

Yoav Oelsner, a broker to the stars who specializes in medium-sized buildings and brokered Yitzhak Tshuva's purchase of the landmark Plaza Hotel by Central Park for $625 million, admits that even he's hurting right now.

"When the market slumps, everyone feels it," he says. "Prices are down, sales are down, it's hard to keep projects going, but there is no systems collapse. The Israelis, just like everyone else, are just trying to finish projects they started. There are no new building starts."

All over the United States real estate developers are going bankrupt, but that at least hasn't happened in New York yet, says Oelsner. He knows of one developer who lost his buildings as he defaulted on debts in the billions. In some cases, banks have foreclosed on buildings, but bankruptcies are not the rule because of changes in the way projects were built, Oelsner explains.

"Today every building is a separate company. If one building gets into trouble, it doesn't necessarily affect other projects. To go bankrupt you'd have to lose your properties one after the other."

What about financing for new projects?

"The market can't handle big projects costing $500 million. Some banks will lend $10 million, 50 million, but they're out of liquidity and aren't even lending to one another. It's easier to get loans for income-yielding propertie, because the banks can see the revenues, but if you have other development plans it is very difficult."

Amir Halutz, an Israeli developer who has been operating in New York for about 20 years, says the financial crisis has changed the rules of the game.

"In the good years you could get an 80% loan and a 10% mezzanine loan," says Halutz. "Today many lenders are lying low or have even disappeared. Lehman Brothers, for example, lent heavily to the real estate market, and now it has simply disappeared. Wall Street investment banks have stopped approving loans, as have regular banks. If you want a loan, you can go to savings and loan banks that have money from depositors."

Halutz also says the ceiling on big loans has come down to $50 million. "If you need $200 million for a project, you'll have to borrow from four banks," says Halutz, adding that the banks are also demanding larger personal equity in each project.

Have you heard about any bankruptcies?

"No, but you need to define 'bankruptcy.' I view it as when the bank takes over the building you put up. To get to that state, prices have to go down considerably, by 25%-30%. Prices in New York have fallen 5%-15%, which is essentially the developer's profit margin," Halutz says.

Problems can arise if a project is delayed and apartments are not sold in time to repay loans. Then the developer has to lower prices or dig into his own pocket, he says. "If the apartments don't sell at the asking price, and he lowers them below the cost of the project, then he has to either ask the bank for an extension or the bank will take a building and have to lower the prices anyway."

Cold ice on troubled waters

Israeli developer Yair Levy found himself featured in a full-page article in the New York Post. According to the article, Levy assaulted his partner, Kent Swig, in his lawyers' office during a spat over the sale of a problematic property the two had purchased for $54 million in 2005. After investing more money in the building, they sold it for $61 million, at a net loss. Levy apparently threw a bucket of ice at Swig and someone called the police.

"They made a big deal out of nothing," Levy shrugs. "Partners argue and shout at each other, and they keep it to themselves. This time it got out, but whatever happened is over."

Levy had worked in the clothing business but went bankrupt in the 1990s. He switched to real estate, where he became a prominent player. He and Swig had several joint ventures, the biggest of which was the 2005 purchase of The Sheffield, a 50-story rental apartment tower on 57th St., for $418 million. The two developers decided to convert it into luxury condominiums, spending over $200 million on renovations.

Now rumors abound that the building is in danger of foreclosure. Levy denies it. He says he has sold 300 apartments and has to sell 200 more.

"[Developers] don't go bankrupt in New York," says Levy. "The banks work with the developers and try to reschedule their debts so that everyone can keep working. There were very few buyers in October and the stock market conditions affected the mood, but things are picking up again. We were giving discounts of 5%, and some places are giving 10%, but all in all the [property] market in New York is stable."

The New York Times building is another project that is providing grist for the rumor mill. The 16-story building, which served the newspaper for nearly a century, was purchased by Lev Leviev's Africa Israel in April 2007, for $525 million. Leviev planned to invest an additional $175 million in renovations.

Now, however, hungry for liquidity, Africa Israel is negotiating with investors from the Far East to sell 49.9% of the edifice as well as stakes in other properties. Meanwhile the renovation of the Times building continues and Africa Israel is seeking commercial tenants to rent the office space. Informed sources say no such tenants have been found so far, citing the building's location, near Times Square, as a detracting factor.

A spokesperson for Africa Israel, however, says the renovations are proceeding as planned. "Africa Israel's New York offices are already in the building. This is a New York landmark, a very special building and a historic property in an excellent location. There no problems with bank debts or loans. Investors from the Far East approached Africa Israel to discuss joining New York real estate projects as a strategic partner, and Africa Israel responded accordingly."

The sides signed a memorandum of principles and now Africa Israel and the investor are working out the details, which involve several properties, and should be finalized by the end of the year.

Halutz is doing something decidedly unusual in these troubled times. In September he purchased a hovel on the Upper West Side, which he and his partners mean to knock down - and build an 18-story apartment building at an investment of about $400 million.

Up until a year or two ago, the story wouldn't have raised an eyebrow. Israeli developers were building all over the city.

Like everyone else, they obtained bank financing with relative ease and made a bundle. It's different now, in the bear market. New construction in New York is at a virtual standstill.

Only projects that received funding a year or two ago are continuing. Almost no one wants to take risks, and those who do will find it hard to realize their plans as banks have stopped financing real estate projects.

Yet Halutz decided to brave the crisis and embark on his project. He bought the land before the last earthquake that shook the stock market and managed to recruit funding for both the purchase and the first stage of construction.

Now he's trying to find financing for the next stage. He's feeling confident.

"This is a very special project," he says. "It will have about 80 apartments and is near 72nd Street, where there is very little new construction. People want to live in this area, and we'll provide them with high quality apartments. The building will also have two floors of commercial space and a three-story parking lot. These are the 'cushion' that will guarantee us the right mix."

Halutz believes the current slump in the real estate market will give him an advantage in two or three years, when his project is finished and the inventory of new apartments runs low.

"New York isn't Miami," stresses Halutz. "There, 30,000-40,000 apartments were built, mainly for investors. Then when the crisis hit, there was a massive inventory of unsold apartments. New York has no such inventory. Also, our target market includes people who have money."

One way or the other, the current mood in the New York real estate market is quite gloomy. Some pundits are starting to feel that the global crisis is turning a corner, that financial systems are stabilizing, that no more big banks are likely to fall (barring a complete collapse of pubic confidence). But that doesn't mean the American property market will swing right back into action. The bubble of New York's property prices may yet burst, and Israelis whose fortunes soared in the boom years may yet share the pain more acutely.