Tallying Up the Difference in New York

Following the Fed’s two emergency rate cuts, mortgage originations spiked. However, the impacts of the coronavirus pandemic have begun to manifest in other ways.
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The impacts of the ongoing paradigm-shifting COVID-19 pandemic on commercial real estate are coming into sharper focus each day, as struggles mount in different sectors of the economy. Even as the crisis continues to escalate and mid-term outlooks for particularly exposed sectors—especially hospitality—appear increasingly grim, not all news is bad news.

Following the Fed’s unprecedented mid-March emergency rate cut, borrowing costs dropped overnight to historic lows. Borrowers acted immediately—even in the face of prepayment penalties—moving to refinance existing debt. On the other hand, lenders have begun to pull back from many asset types that had long been seen as safe plays over concerns stemming from pandemic-related delinquency fears. Additional structural issues, including the full or partial closure of many of the country’s recorder offices, have slowed or even stopped real estate transfers and financing in many parts of the country.

As one of the country’s top gateway markets—and focal points for foreign investment—Manhattan can offer us a glimpse into the mindset of investors and borrowers through the past few weeks.

The following analysis investigates changes in volume from the week ending March 24, 2019, to the week ending March 22, 2020. Data, all freely available, was retrieved from the City of New York’s finance department and department of buildings. Property sales and loans valued at less than $5 million were excluded from the data set to provide a more compact set.

Loan originations jump up

Perhaps unsurprisingly, loan origination volume moved significantly upward, as borrowers moved to take advantage of increasingly advantageous lending terms. Recorded mortgages exceeded $2.3 billion within Manhattan alone between March 16 and 20—an 85 percent jump over the same interval in 2019. Wells Fargo Bank provided one of the largest loans that week: $510 million for a 1.9 million-square-foot Lower Manhattan office tower. Mortgage volume fell back sharply the following week, however. In the week ending March 27, loan originations dropped 48 percent to $1.2 billion.

Although the aforementioned lender hesitancy could be an underlying reason behind the drop, other very likely causes are bottlenecks at the local government level. The City of New York’s county record offices had effectively closed their doors to the public, though electronically filed sales and loans were still being recorded, albeit with significant delays. The problem is not unique to Manhattan; data compiled by the American Land Title Association indicates that at the end of the month, more than a third of the U.S.’s nearly 3,600 county recorder offices had either closed or modified operating hours due to the pandemic.

Sales wave crests, then recedes

Manhattan’s sales volume jumped up during the week ending March 20, with 24 deals totaling $422 million recorded, compared to the $267.4 million recorded a year earlier. Similar to mortgage originations, the borough’s transaction volume fell in the following week—by an even steeper 70 percent—to $128 million.

The largest transaction closed during the last two full weeks of March was the $93.8 million sale of the 217-unit Tower West on the Upper West Side. The buyer, a consortium led by Jonathan Rose Cos., also landed one of the largest loans in the borough in the same timeframe, securing $74.5 million in HUD financing through Hunt Real Estate Capital.

Construction permitting slows

Manhattan’s massive development scene also warrants a closer look, where data is available. Data from the New York City Department of Buildings indicates that while building permits were still being issued at the end of the month, the number of permits appeared to be significantly lower than in March 2019.

Following an order from Governor Cuomo, on March 30, Department of Buildings Commissioner Melanie La Rocca halted all nonessential construction until, at the earliest, April 15. While multifamily projects with an affordable component of more than 30 percent are allowed to proceed, developments in most other sectors—particularly office and hospitality—have ground to a halt. Companies which need to complete emergency work on construction sites must first submit a request through the department.