Tuesday, June 12, 2007

Developer Ross on the undertaxed rich, 421-a subsidies, and "workforce housing"

Stephen M. Ross, one of the city’s leading developers, is bullish on New York real estate, pointing to continued demand for high-end condos and office space. At the same time, as the chairman, CEO, and founder of Related told an audience at New York Law School (NYLS) three months ago, the market is pressed by escalating land and construction costs, and the city can’t keep pace in building middle-income “workforce” housing.

And Ross (right), who became chairman of the powerful Real Estate Board of New York (REBNY) in January, identified a new bogeyman in the quest to build affordable housing. He criticized the phase-out of 421-a subsidies—long seen by critics as fueling market-rate construction in city neighborhoods that need no incentives—as jacking up the cost of new buildings.

“The burden of the real estate tax system is placed on new construction,” he said in his March 13 speech, suggesting that residents on tony blocks like Park Avenue, Fifth Avenue, and Central Park West get are taxed too little. “REBNY is working with the state and city for a fair solutions,” said the billionaire Ross in a bit of auto-class warfare, “so we are not subsidizing the wealthiest people in New York any longer.”

Indeed, as the New York Observer recently reported, “Property-tax assessments for condos and co-ops would be as much as 5.2 times higher in fiscal year 2007 if the city used sales price rather than nearby rental comparisons as the measure, according to the [city’s Independent] budget office.

Affordable housing

Ross Sandler, director of the NYLS’s Center for New York City Law, pointed out that, a century ago, affordable housing was created by extending the subway. Now, he asked, where could new lines and land be developed?

Ross suggested that the extension of the 7 subway line, as well as the belated constructoin of the Second Avenue subway would add new capacity and support new housing. But he didn’t suggest transportation enhancements to increase density in the outer boroughs. (See, for example, Alex Garvin's suggestion about boosting development in the Bronx via light rail or bus rapid transit.)

Asked if he’d like to see the real estate industry step up to create more affordable housing, Ross suggested that that the city needs both “low income housing and workforce housing,” but dubbed the latter most critical. In 60 days, he promised, “You’ll see some announcements,” predicting that the plan “will be a national model.”

So Ross was predicting news in mid-May, apparently involving Queens West, which did surface in the face of some criticism, but has not been officially announced.

Happy days

“It’s a great time to be a seller of real estate,” Ross said at the outset. “I don’t know if I want to be a buyer.” His company, with a $15 billion portfolio, developed the TimeWarner Center and the Bronx Terminal Market, among others. He cited low interest rates and high liquidity as contributing to “the greatest moment for real estate in U.S. history,” though he suggested housing had peaked, with more defaults coming nationally.

What makes New York the global capital of real estate? He cited unprecedented construction, infrastructure improvements, a reduction in crime, and an improvement in schools.

He described a Manhattan-centric reality that diverged from Brooklyn. For example, developers can rent offices space for $60 per square foot in older buildings, and $100 per square foot in “trophy buildings.” (Meanwhile, in Brooklyn, as the Real Deal reported, office space goes for under $34 per square foot.)

Financial firms, Ross said, lack big blocks of space with large floor plates. (Actually, such space has recently been vacated at MetroTech in Brooklyn.) Picking up the slack, he suggested, would be massive developments around Penn Station and the Hudson Yards.

Ross said he didn't think the World Trade Center development wouldn’t depress the commercial market. Out of ten million square feet, he said, government would use two million, leaving eight million square feet, of which some would be be residential. “New York City needs the additional office space,” he said.

Residential market

He called the residential market “exceptionally strong, though we’re finding a lot of slowness in demand when prices exceed $1500 a square foot.” (Condos at Atlantic Yards would be $850 a square foot, according to a KPMG report prepared last December for the Empire State Development Corporation and released as part of the Public Authority Control Board's defense of the lawsuit challenging the AY environmental review.)

Steady profits on Wall Street, and the attendant bonuses, fuel all this high-end market. Still, Ross lamented, “a lot of inexperienced developers are not delivering the right kind of packages,” which he said include services, fixtures, and great architectures. “Buyers want classic design, not glass, unless the latter have great views.”

New rental buildings are projected to rent at $60 to $80 per square foot—again dwarfing projects for Atlantic Yards, where market-rate apartments are estimated by KPMG at $45 per square foot.

The storm clouds

After mentioning the strong market for retail and hotels—“I wish I could freeze it,” Ross said of the current milieu—he cited “some great storm clouds on the horizon.” Land prices have soared over 300% in the last three years. Construction costs have more than doubled in the last five years.

Condos in the “worst locations” in Manhattan must earn over $1100 per square foot just to break even, he said. (If the Atlantic Yards condos would sell for $850 a square foot, either Brooklyn’s a bargain, or the KPMG report was low-balling it.)

He cited the lack of “affordable housing for middle class,” citing the Empire State Development Corporation’s new plan for 5000 units at Queens West. “It is incumbent on us as an industry to help them built it efficiently,” he said, in apparently a bid of foreshadowing.

The city’s reform of 421-a has also stymied development, except for buildings that include 20% affordable units, he asserted, but neither the city and state have nearly enough bonding capacity to support such buildings. (Indeed, the deficit threatens Atlantic Yards.)

Then he launched into his criticism of the tax burden on new development and the light ride others get.

Other issues

Ross was asked if buildings should be “green.” He responded that it should become “a standard in all buildings” and that costs would go down if it were uniformly required.

Sal Galletta, chair of the American Engineering Alliance, noted that his group has promoted the concept of a Deputy Mayor for Infrastructure and asked if REBNY had a position on it. “Everyone recognizes the need to rebuild our infrastructure,” Ross responded, and suggested that the city’s new Office of Sustainability will be extended. But he didn’t endorse the Deputy Mayor concept.

CBA questions

Commentator Ross Moskowitz of the law firm (and breakfast sponsor), Stroock, Stroock & Lavan, mentioned the ongoing reassessment of Robert Moses, and cited the emergence of Commmunity Benefit Agreements (CBAs), which raise questions about the role of government in developments such as Atlantic Yards, Yankee Stadium, and the Bronx Terminal Market

Although CBAs “may be a necessary component,” he said, “many questions remain, primarily: Who is the community? Who defines what those needs are?” (Indeed, such questions have been raised regularly in Brooklyn.)

The success of a CBA may depend on the sophistication/expertise of the groups negotiating it, Moskowitz said, adding that it’s unclear how they fit into the city’s Uniform Land Use Review Procedure, or ULURP. (Note: Atlantic Yards bypassed ULURP because it’s a state project.)

Since then, others have criticized CBAs, notably at a panel in May on reforming city environmental review.

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