CEO & Preside Procida Fundong & Advisors
As I wrote and predicted in my article, “Four More Years, Four More Years,” published in Real Estate Weekly in August 2014, the $10 million and above condominium and housing market in New York City and other major cities have declined sharply and will continue to do so due to the substantial oversupply that will continue to come on line in 2019 and 2020.
As I pointed out at the New York City Real Estate Expo in April 2018 and later in, “A Time For Pause & Urgency,” published in REFI Magazine in September 2018, if you are in construction— hurry, finish, and cut prices early before the next guy. If you have dirt, sit on it, and think about redesigning your project for the realities of the next cycle.
Back to the oversupply issue facing our major cities. Let’s be clear— the oversupply is mostly in megaprojects. It’s mostly in the $5 million to $10 million and above market, and there’s no easy solution to it because it’s not just simply reducing prices. There’s simply not enough people on Earth to afford all the $10 million and above units coming, the thousands just delivered, and the ones that pre-existed. The same goes for the single family market. Wells Fargo & Co. just changed the down payment requirement in Connecticut’s Fairfield County requiring 25% from the standard 20%, and they’re not wrong. The days of the 10,000 to 20,000 s/f houses are over. And for those who want that, there is more than enough existing product available.
The conundrum in both cases (condominiums and residential above $10 million in New York City and over $3 million in other markets) is that the carrying costs, taxes, and upkeep don’t change so the old school “just lower prices” may not work.
Solutions will require lots of creativity. The good news is when it comes to real estate, this is the only scary sector. Of course spec office and retail development is always an issue, but for the most part in this last cycle, not much of that has been built.
So what’s to be expected in 2019 and beyond?
I think the stock market will continue to correct, and as it corrects, and as it has happened in every past cycle while I’ve been in business (starting in fall of 1980), corrections produce black swans and systematic defects in the financial markets (greed cover-ups and market wide conspiracies). In the 80’s, it was the crash on Black Monday, October 19, 1987, which resulted in margin calls that uncovered the savings and loan crisis.
In 2007, it was the Subprime Mortgage Crisis that uncovered Wall Street and banks being wildly over leveraged and basically defrauding investors. Virtually every financial institution has now paid fines, gone bankrupt, and in some cases, gone to jail for these bad acts.
In this last cycle, I’ve actually not seen anything crazy—except for the super luxury megaprojects, which as part of the overall market is actually small.
We need corrections in all industries to weed out the bad folks, the incompetent folks, and most of all, the greedy.
Crashes and corrections also make way for the next generation to come in.
So what does the future have in store? Sometime in 2019, there will be a scare. The scare will then get exaggerated by the press. The banks will over react, the government will think they need to step in and will. Then a year later, people will stick their toe in the water. Then everyone will get in the water, as I wrote in, “Things Are Just Fine. Now Let’s Not Screw It Up,” Real Estate Finance & Investment, May 2013. Then the greedy and incompetent will screw it up again, seven or eight years down the line.
In the meantime, there are a lot of low income neighborhoods that need fixing. So let’s fix them. The new Opportunity Zone Program should help with that.
The millennials and new technology are changing things so fast it’s hard to keep up. Thankfully, it still takes humans to build and renovate buildings so I should still have a job in the future.
Of course terrorism and Mother Nature, continue to be our biggest challenges.
No matter — I’m happy to be American. I love our country. So spread the love, think of others, stand up to bad people, and help who you can. Let’s fix our country. For us real estate folks, we should have one simple goal: Fix every vacant building in this country, now. I’m doing my part. Peace and love all.
Billy Procida is the president/CEO of Procida Funding & Advisors, Englewood Cliffs, N.J.