Some background: We reported earlier that the theater was in competition with the LAVA dance troupe over which organization would earn the right to build something crazy in the warehouse. LAVA opted for a pyramid that, crazy though it may have been, eventually lost out on the bid. The new plan came to be for David Walentas, who owns the space that currently houses St. Ann's, to build the new theater in the tobacco warehouse to make way for his controversial Dock Street project. Representatives for the National Parks Service, who thought they owned the tobacco warehouse, said this was O.K.

Now an injunction on behalf of the New York Landmarks Conservancy and the Brooklyn Heights Association, among others, claims the land wasn't the NPS' to give and the courts seem to agree, for now.

"Good coverage," wrote a commenter on the WNYC website. "One correction: the Tobacco Warehouse and the Empire Stores are within the Fulton Ferry Historic District and not DUMBO, which abuts the Fulton Ferry Historic District and which, in my opinion among others, has a disticntly [sic] different character from that of the Fulton Ferry Landing Historic District."

So, that's what we're dealing with here.

dduray@observer.com

For decades, the power structure in this city was firmly established, even calcified. The same people. The same agendas. The same outcomes. Which isn't to say that our business, political and culture leaders have been all bad; indeed, under their (usually) benevolent direction, the city thrived, in spite of it all.

But would it have killed them to mix it up a bit?

Now, the bad economy has done it for them. We are, at the moment, in the middle of one of the great generational shifts in New York power; the gang of greats who helped build the city is on the way out, and a new class of pooh-bahs is moving in.

This issue is our stab at chronicling that transition. While many of New York's iconic leaders still hold sway, check their rankings. Names like Henry Kravis and S.I. Newhouse and Leonard Lauder are still there, but they're nowhere near as high on our list as they would have been even a year ago. Others, like Barry Diller and Sumner Redstone, are off entirely.

In their place is a new crop of big shots who have moved in with breathtaking speed. Fred Wilson is the undisputed king of Silicon Alley. Mikhail Prokhorov is a surging sports presence. Preet Bharara is our next Eliot Ness.

In media, people like Hugo Lindgren and Josh Tyrangiel and Emily Smith are the new standard-bearers. Culture is now led by Philip Seymour Hoffman and James Franco. And an astonishingly creative new class of tech leaders, like Dennis Crowley and John Borthwick, are making Manhattan a legit contender.

Things haven't been in this much flux in our lifetimes.

Given all of this, our top choice, Mayor Michael Bloomberg, could be considered an anomaly--an old-style business leader, the second-richest guy in town. But in his way, Mr. Bloomberg is, too, representative of the new New York: post-partisan, new media, anti-patronage. We don't expect much argument for choosing him as our No. 1.

As for the rest of the list, a note on methodology: There wasn't any. This is a purely subjective, data-free ranking, though it does rely on the insights of Observer writers and editors, as well as New Yorkers whose opinions we trust. Your thoughts, and arguments, are welcome.

Check out The New York Observer's Power 150 below:

Part I (150-101)

Part II (100-51)

Part III (50-1)

Co-owner Steve Abrams says he expects the new online store to bring in $10 million a year, an estimate that actually sounds conservative when you consider the fact that Magnolia's biggest fans live nowhere near New York City.

The bakery opened a branch in Dubai in February and Mr. Abrams is reportedly scouting space for a second one there, and another in Abu Dhabi.

Check out the cultural highlights of 2010>>

With the shopping center-urban retail community out in full force this past week at the ICSC, and with Black Friday and e-Monday and such all in the frosty air, I figured 'tis the season for a column mainly aimed at those involved in retail and restaurant leasing.

Frankly, the getting-into-the-deal I leave to the many knowledgeable retail/restaurant brokers in our community. But the getting-out-of-the-deal should also be foremost in the thinking of retail tenants and their counsel. In fact, when I gave a continuing ed program for lawyers interested in this topic, the title of the program was (sit down, it's a long one):

"THE SAVVY RESTAURANT LAWYER--EXIT STRATEGIES IN LEASING OR 134 legal and practical pointers, tips and principles every restaurant leasing lawyer must know AS ... sooner or later your client restaurateur will want to sell the business and cash in his chips (his fish, too), or have to contemplate less balmy scenarios, such as a failing business; or the location no longer works; or the concept of the restaurant has become totally dated; or your client's a multi-location chain and is being acquired in a convoluted takeover play, and you want to/must transfer or terminate the lease."

So while this program was addressed to lawyers, the subject is relevant, and the principles apply to brokers and tenants of retail/restaurant (and office space) as well.

The harsh realities of restaurant leasing:

• Statistics say you have five to seven years; then your client's restaurant's concept is stale; or ...
• Client is faring poorly in that location; or ...
• Concept/ strategy has changed; or ...
• Tenant was acquired in a multi-store transfer, the acquirer now has three stores within a one-mile radius, and your location is the weakest; or ...
• Client has built a very profitable business and wants to retire, or maybe go to law school!

O.K., having established the need for some protection and the foresight to have a viable exit strategy, now what? Where do you go from there?

Be proactive in lease negotiations and plan ahead for the inevitable.

Assignment and Subletting 101

First, some definitions:

Assignment: transfer of tenant's entire interest in the entire premises for balance of lease term; landlord and assignee then have a direct relationship; post-assignment, assignor (original tenant) and assignee (assuming party-new tenant) have no direct legal relationship.

Sublease: transfer of less than the entire premises or less than the entire balance of lease term (even if the entire balance of the term less one day); subtenant has no direct relationship with landlord, only with tenant (sublandlord). (To throw in some legalese here, there are ancient concepts of privity and surety; that when there is an assignment, privity of contract, not estate, continues to exist between landlord and original tenant. The bottom line is that the original tenant, the assignor, remains liable for lease obligations--albeit secondarily. That's the concept of surety. Counsel will be looking to make sure the new tenant, the assignee, gives some ongoing indemnification of the assignor-transferer-seller, just in case assignee defaults and landlord demands that the assignor-seller, at this point in time likely long gone from the scene, step back in and cure.)

Next, let's talk about the sale or other transfer of a retail/restaurant location with the focus on favorable negotiation of assignment and subletting provisions and important related lease clauses.

If it's a sale and you're the buyer-transferee-assignee, with the lease already in place, then my best advice is make sure that 90 percent-plus of your due diligence time and effort is spent making sure you understand every business and legal nuance of the lease you're inheriting. As counsel, we look to measure "transferability" of a lease through the assignment or sublet clauses and the landlord-delineated qualifications (criteria) for the new tenant. We consider the impact of both the obvious (the length of time left on the lease, requirement for landlord's consent, etc.) and the not so obvious: so-called "silent" (not apparent from the four corners of the document) lease issues and (unhappy) consequences of not knowing where they're lurking.

Onerous restrictions on the transferability of the lease can make it all but impossible to sell the business. So, for example, be on the lookout for:

• Use limited to one type of cuisine ("Bulgarian kabob house and no other purpose").
• Signage limited to the original, named tenant.
• An obligation, per the use clause, to operate only under the "ABC" trade name.
• Recapture as triggered by the proposed assignment or sublease.
• Renewal rights that disappear if lease has been assigned.
• Ditto as to hard-fought-for Non-Disturbance Agreements from lenders that run only in favor of the named, original tenant.

In more detail, questions to consider include: When can a tenant assign? Landlord's consent required? Criteria for consent? Must landlord be "reasonable"? Does state law mandate reasonableness? How has "reasonable(ness)" been defined in the lease? (One side note: Some criteria, while reasonable on their face, can hamstring the exiting tenant. For example, a test of the minimum net worth of the proposed assignee, without due consideration of experience in the field, de facto blocks the successful restaurant manager who has a modest bank balance.)

In the franchise scenario, has the franchisor been recognized up front as a permitted assignee? How about whether the assigning party (original tenant) remains liable for rent under the lease? Recapture rights? Sharing of "profits"? How is "profit" then defined? Where does the transfer leave the original "good-guy" guarantor? And this is only a partial list. Or, with apologies to Bill S., much ado about much.

IT'S THE LAW: TENANT'S RIGHT TO ASSIGN OR SUBLET.

General rule: Absent a statute or express restriction in a lease, a tenant has an absolute right to assign or sublet. 

IT'S THE REALITY.

Landlord's restrictions on assignments and subleases, now in many cases running from a stark "Tenant shall not assign or sublet without landlord's prior consent" to a solid 10 pages of single-spaced verbiage, all aimed at limiting tenant's exit options.

So it's pretty easy to outline the traditional conflict in landlord's and tenant's points of view. The bottom line? Bargaining power determines the outcome. Landlords favor restrictions. No surprise there: "Give me the leeway to market my property without competition from my own tenants"--especially in the shopping-center context, where the landlord wants to control the all-important tenant mix. Sounds right. After all, the landlord, not the tenant, is in the real estate business.

The tenant's point of view--in one word: FLEXIBILITY. At very least: that consent to a proposed assignment or subletting not be unreasonably withheld (on the tenant side, I try to add "nor, delayed or conditioned"). Tenant position: free alienability--"I've invested, I've created value." Or as one ancient chain store tenant put it: "Hey, Mr. Landlord, as long as you're getting your rent, don't sideswipe my chariot." (Anonymous. Found on wall of Roman Forum Mall.)

NEXT MONTH, WE'LL drill down on what it means to be "reasonable" in New York City ("... like no other place in the world"); the intersection of corporate transfers and lease assignments; and the interplay of numerous other lease clauses on this important topic.

jamargolis@newyorkleaselaw.com

Jeffrey Margolis is the lease law columnist for The Commercial Observer. He is founding principal of the Margolis Law Firm in New York City where he specializes in "dirt law": buying, selling and leasing.

If you're a regular reader of my column, you know that I often discuss the relationship between the relative level of employment and the health of the underlying fundamentals of real estate. During this past recession, our economy lost approximately 8.4 million jobs, which had a significant negative impact on our real estate market. Since the recession officially ended, job creation has been lackluster, and this disappointing performance has been blamed significantly upon the tremendous uncertainty that exists within our economy.

This uncertainty has been based primarily on a lack of clear tax policy; no transparency or understanding of the true financial impact of the national health care program; and the yet-to-be-determined impact of the new financial regulation package. While the latter two impacts may take years to fully understand, last week we got a little closer to understanding what our tax picture might look like for the next two years.

This week, following likely Congressional approval, we should see President Obama sign a new tax package that demonstrates his ability to work with Congressional Republicans. Since the shellacking taken by Democrats in the midterm elections, the country has been waiting to see what tack the president was going to take with regard to his governing approach. Would he remain ideological and stay on the left, as Jimmy Carter did, or would he move more toward the center and get things done, the approach taken by Bill Clinton? So far, it appears he is somewhere in the middle.

Last Monday, the president reached agreement with Republican leaders in Congress on a far-reaching tax package that would allow present income tax rates to stay in effect for another two years, even for those in the highest tax bracket. The deal would reduce worker payroll taxes by 2 percent for one year; would provide incentive for business investment through favorable tax treatment; and would reinstate the estate tax, but at the 35 percent level with a $5 million exclusion, as opposed to a 55 percent level with a $1 million exclusion, as would be the case in the absence of an agreement. These were items high on the agenda for Republicans. In exchange, an extension of jobless benefits for 13 months was provided for the long-term unemployed.

Having the president endorse and agree to this deal is significant from both an economic and political perspective. The political ramifications have been profound, as the president's position has caused significant upheaval within the Democratic Party. During his first year in office, his almost singular focus on health care, at the expense of any tangible focus on job creation or the economy, caused him to lose support from the center that elected him. This was evidenced by the historical swing in the midterm elections, where independent voters shifted an amazing 24 percent, from 18 percent pro-Democrat in the 2008 election to 6 percent pro-Republican in the midterms. Never before had a swing of this magnitude been observed.

During his second year in office, President Obama lost support from some of his base, which has been disappointed with the lack of follow-through on many of his campaign promises and his perceived abandonment of his ideological keystones. His liberal base is upset that (1) he did not fight harder for the public option in health care reform; (2) Guantánamo Bay is still open; (3) the nearly $900 billion stimulus package was too modest; (4) he appeared too deferential to Wall Street in his financial reform package; and (5) we are still involved in wars in the Middle East and South Asia. The present tax deal proposal has Democrats, particularly in the House, revolting against the president.

In his news conference, when the president, trying to substantiate his position on the matter, said, "My job is to do whatever I can to get this economy moving," it was as if he were saying that tax rates matter to economic growth. This was seen as blasphemy from his liberal base. Astonishingly, it appears that he simply negotiated this deal with Senate Republicans without any pre-selling of the idea to his own party. It is inexplicable to Democratic political professionals that he either didn't know how to, or could not, win support within his own party (at least to this point). 

Clearly, this was not a compromise the president could have been happy about. A major theme for Mr. Obama while on the campaign trail in 2008 was ending the Bush-era tax cuts for the wealthiest 2 percent of Americans. But, in the words of Bill Clinton, "Sometimes you have to do what you have to do."

LAST WEEK COULD have been an opportunity for the president to finally embrace the bipartisanship he campaigned on. Having problems with the far left for not being liberal enough, and never being able to win over the far right, perhaps he thought this tax deal would make him more attractive to the center. Unfortunately, his position would have been better received had he appeared to believe that this centrist position was correct. He portrayed the deal as something that he truly believed was awful, but something that he had to do. There is no winning the center with this approach and, more importantly, particularly from the perspective of real estate, this means that this tax issue will be put on the table as a central theme in the 2012 election.

The implications of this tax deal on the commercial real estate market are not insignificant. Tax benefits for certain real estate developments will remain intact, as the bill extends for two years the special 15-year cost recovery for certain leasehold improvements, restaurant building and improvements and retail improvements. Being able to write off the cost of tenant build-outs over 15 years rather than 39 years is particularly important to commercial property owners who may have negative equity positions. Property devaluation, as well as increased demand for concessions from tenants looking for space, has created a negative feedback loop, where owners can't afford to build out space, keeping vacancy rates high, which exerts further downward pressure on value. This cost-recovery provision will help owners fighting this negative loop.

The proposed deal also calls for a two-year extension of the provision allowing favorable expensing treatment of costs associated with the cleanup of moderately contaminated brownfield sites. These sites can be significantly more expensive to develop than other sites. New York City has been particularly active in trying to create access to public funds and incentives for developers to clean up these contaminated sites, but help on the federal level is more than welcome.

The proposed deal also calls for a two-year extension of bonus depreciation to incentivize capital investment from business. Through the end of 2011, 100 percent deductibility will be allowed and in 2012, the amount will be 50 percent.

The most important impact on the real estate market is that the capital gains rate, under this proposal, would remain at 15 percent for the next two years. History has shown us that when a particular activity becomes more expensive, less of that activity occurs. An increase in the capital gains tax would have reduced building sales volume by a tangible amount. Ironically, the building sales market has been helped by the anticipation of an increase in the capital gains tax rate, as many sellers have decided to sell in 2010, to take advantage of this year's low rate. The process of selling a property is not something that can be done in a matter of hours or days, so many of the sellers motivated to take advantage of the present capital gains rates elected to place properties on the market in the summer or in the early fall. Many of these properties have already closed or are under contract for sale without an escape clause in the event that capital gains rates do not rise. This externality has provided the marketplace with a shot of adrenaline at a time when it needed one.

Based upon the way the present tax deal was presented by the president, it is a near certainty that a potential increase in the capital gains rate will once again be a concern for the real estate marketplace during the later part of 2012. This could lead to another positive wave of selling within the real estate market prior to another anticipated increase in capital gains taxes in 2013.

Another impact this proposed deal has on the real estate market is that it will keep dividend taxes at a 15 percent rate rather than the 39.6 percent one they were scheduled to reach in the absence of an agreement. This is a very positive development for real estate investment trusts looking to continue to access massive amounts of capital from the public markets. As expected, REITs have been among the most active buyers in New York City based upon their ability to access this public capital, and the lower proposed dividends tax rates bode well for the flow of capital into equities.

One issue affecting mechanisms within the commercial real estate market that has not been addressed in anything reported about the tax proposal is how taxes on carried interests will be treated. Throughout 2010, there was much talk about changing the tax treatment for carried interests from the capital gains rate to an ordinary income rate. This would have significant implications for the way syndication and, particularly, development transactions are structured.

From the perspective of New Yorkers, two things are noteworthy about this tax proposal. The first is that New Yorkers would get a two-year extension of Liberty Zone tax incentives for state bonds and deductions for mass transit expenses for commuters. The second is that Senator Charles Schumer has been conspicuously silent on this proposal. He had been trying to engender support from legislators to stand firm on allowing present tax rates to sunset for those earning more than $1 million per year. As has been the case for the past year or so, he's had his eye on Harry Reid's position as majority leader, and so he has not taken any transparent position against the administration, regardless of the impact on New York.

The bottom line is that this proposed tax deal, if approved by Congress, will be a very good thing for the commercial real estate investment sales market. Keeping the costs of transacting business from rising encourages more activity. This is true whether we're talking about building out space for tenants or selling investment properties. Let's hope that the adoption of this proposal will occur.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.

To the consternation of his Democratic base, President Obama reached a compromise with Republicans early last week that will see expiring tax cuts extended temporarily for Americans at all income levels. Among the many other provisions of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, employee payroll taxes will be reduced by 2 percent for the duration of 2011. For the unemployed, emergency unemployment benefits will be extended at their current levels for another 13 months. And in an effort to encourage business spending on capital and equipment, firms will be able to expense their 2011 investments in full.

There is something in the legislation for everyone, whether one is seeking an opportunity to claim victory in a perceived presidential concession or to bemoan the sorry state of political discourse in our great republic. In either case, the Senate was poised as of press time to pass the legislation over objections of more steadfast elements in both parties.

Extend and Pretend

Once the legislation has become law, current arguments over the fairness of the tax plan will be rendered academic. But within the academic realm, economics is better suited to addressing questions of efficiency rather than equity.

As for the latter point of disagreement, the estimation of fairness is a subjective question that we will now have to revisit in the lead-up to the 2012 election as the tax cuts reach their new expiration. Regrettably, and if the past few weeks are any indication, this means a presidential election debate that focuses inordinately on the issue of marginal tax rates and an abandonment of the principled commitment to fiscal responsibility.

Losing out will be the more important debate about how to bring government revenues and expenditures in line, so as to finally address our gaping deficit and its threat to our nation's long-term prosperity. On this issue, both parties have shown a willingness to capitulate in recent weeks. Barring a radical shift in elected officials' sense of accountability on this issue, both high-mindedness and hard decisions risk giving way to the sometimes base dialogue that has characterized the lame-duck session.

Revise Your Near-Term Projection

Many economists that have sounded warnings on the deficit and called for a measure of austerity are now responding positively to the tax compromise. The upside of a focus on the immediate future is a legislative package that will deliver a temporary but observable boost to economic activity, through an increase in personal consumption and the potential for accelerated business investment.

According to a Dec. 10 analysis by the Congressional Budget Office, the tax legislation will add $374 billion to the deficit in the current fiscal year and $423 billion in the next. Over the 10-year projection time frame, the net impact is to increase the deficit by $858 billion. Some of this total relates to new spending, but the vast majority relates to reduced income and estate tax revenues, the payroll tax holiday and the cost of the business investment incentive.

By putting money back into earners' pockets, and by doing so in a manner that is more impactful for income-constrained households, overall consumption activity will trend higher. The multiplier effect of the unemployment benefits extension should prove very high since this income will be spent on necessities and will not drive higher gross savings. The payroll tax holiday will have a stronger multiplier for lower-income households than their higher-income peers.

In each case, the effect of the policy will be to temporarily increase households' after-tax income, driving some measure of personal consumption. One danger is that state and local governments, many of which are facing large budgetary shortfalls, will seize upon favorable federal tax policies to enact revenue-enhancing increases of their own.

By design, the income and payroll tax adjustments do not lower directly the cost of hiring new employees. Wages are sticky, and these lower taxes will not mean a fully compensating adjustment in prevailing wages. As a result, the impact on overall employment will be indirect and on the margins.

There are other provisions that are helpful for business, however. The expense adjustment for business investment is well intentioned, in part because firms are holding record amounts of cash. As of the third quarter, cash as percent of corporate assets had hit 7.4 percent, its highest level since 1959, according to the Federal Reserve's Flow of Funds report. If some of that $1.9 trillion is channeled into investment spending, it could help to reaccelerate the recovery. The risk is that in the event that firms do not see a change in the underlying drags on the long-term outlook, they will not respond to the incentive but will continue to hoard cash and other highly liquid, low-risk assets. This risk is real given the degree of slack in the economy's productive capacity, which is prompting stimulative tax policy in the first place.

Outlook

In the near term, and holding all else equal, the tax compromise will support consumer activity and, by extension, the real economy. Businesses may invest more as well. But we achieve these results at a cost that is captured only in part by the Congressional Budget Office estimates of a wider federal deficit. Ultimately, consumer and business confidence is tempered by the perception of a political system that cannot resolve intractable fiscal issues with solutions that exhibit a degree of permanence. If our deficits exceed our rate of growth, the weight of our borrowing obligations on our economy is increasing. In choosing to delay any truly difficult choices and in calling that delay a compromise, we have opted to pay forward an even greater weight on our economy's potential.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

By the official measure, 18 months have passed since the end of the nation's longest postwar recession. Consistent with the modest pace of growth that has followed and with excessive slack in the economy's now idle resources, labor markets have registered only middling improvements during this year's tentative recovery.

The recalcitrance of the job market was underscored just last Friday, with the release of data for November measuring a rise in the national unemployment rate to 9.8 percent and a net gain of just 39,000 jobs.

With a qualified recovery in employment trends, it is no wonder that consumer confidence remains impaired, tempering the translation of earned income into the consumption activity that is the foundation of the domestic economy. As of October, real retail spending in the United States had recovered from its nadir but is still significantly lower than its pre-recession levels. The spending outlook is tempered by expectations that employment and income gains will be slow to develop momentum and that consumer wallets will tend to remain pocketed more so than during previous exits from recession.

The Retail Spending Outlook

In the most basic model, improvements in discretionary consumer spending, and its retail component, depends upon a combination of growth in employment and income, confidence in the stability of the future income stream and access to credit. Absent growth in overall employment, spending economy-wide can still rise if incomes are rising or confidence is improving, shifting dollars from savings to consumption.

Greater confidence in the recovery has been one of the missing puzzle pieces constraining discretionary spending growth. Consumer sentiment, as measured by the Reuters/Michigan Survey, has been slow to regain lost ground. The most recent measure shows that sentiment improved in November, rising to its highest level since June, but that it remains closer to its recession bottom than to its pre-recession trend levels. Most consumers believe that the near- and medium-term improvements in the economy will be too small to positively impact job security or income.

As a result of consumers' dim view of the recovery, marginal dollars have tended to feed savings rather than additional consumption. Efforts to spur investment and consumption with lower interest rates (and lower returns to saving) have failed, in part because prolonged periods of low growth and interest rates require that household increase the rate of savings for retirement given low returns on investment. This has been the case in Japan, where savings rates remain stubbornly high, in spite of negative real interest rates where savings lose value in real terms. Back at home, the savings rate remains between 5 percent and 6 percent, higher than the savings rate that prevailed during the recession and as compared to lows near 1 percent during the housing boom. 

Year-over-year through October, retail spending, excluding motor vehicles, increased by 6 percent. Some of this increase related to an increase in sales of building materials for home improvements, put off while housing prices were falling precipitously. Apart from this increase, the major retail gains have related to higher gasoline prices and, to the regret of bricks and mortar stakeholders, online retailing. Discretionary spending on items such as clothing has posted middling gains over the past year, in spite of specific gains reported by many bellwether clothiers. Department store sales have declined by 2.2 percent.

In the United States, as in Japan, the key to triggering more robust consumer activity rests in meaningful improvements in the pace of job creation and consumers' expectations that improvements will be sustained. On the national stage, retail-sector outcomes are inextricably tied to the labor market.

The City's Advantage

Employment in New York City climbed away from its recession low in the early part of this year, increasing in each of the first five months of 2010. Since then, however, the city's employment trends have fallen flat. Retailers are in good spirits, nonetheless, particularly in Manhattan's major tourist corridors.

The city is poised to report its strongest tourist year on record for 2010. Tourism has worked to offset some of the decline in spending related to local consumption, with visitors to the city filling restaurant tables and cashier lines in Times Square, along Fifth Avenue, in Soho and in other neighborhoods.

There are several factors supporting New York City's stronger retail picture, apart from the tourism that may abate in 2011, on account of a weaker economic outlook for Europe. Recalling the critical role of consumer confidence, the city's most crucial spending clique--employed in financial services and adjacent industries--now enjoys a far greater degree of stability than in late 2008 and early 2009. As compared to the depths of the crisis, financial services professionals are more apt to spend their dollars than save them, now that the imminent threats to job security have dissipated, and even if their ranks have failed to grow.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

In 2010, the retail and mixed-use property sectors have seen strong activity. The retail sector has seen sales-volume increases, both in terms of the number of properties sold and the dollar volume; this is not surprising given the extraordinarily low levels of activity seen in 2009. Within the mixed-use sector (mixed-use properties are those where retail tenants occupy at least 25 percent of their gross square footage, with residential apartments above), we have seen similar increases in the number of buildings sold and in the dollar volume of sales over 2009 levels.

In 2009, there were 143 retail properties sold in New York City, having an aggregate dollar volume of approximately $445 million. Through Nov. 15, there have been 160 retail properties sold, having a market value of approximately $760 million. These figures reflect increases of 12 percent in the number of properties sold and 71 percent in the dollar volume of sales, without taking into consideration transactions that will close in the last six weeks of the year. Within the mixed-use sector, in 2009 there were 238 properties sold, having a market value of approximately $416 million. Through Nov. 15, there were 286 mixed-use properties sold, having a market value of approximately $525 million. The increases here are 20 percent and 26 percent, respectively, without annualizing these figures.

Whether these percentage increases, and optimistic numbers, are reflective of positive fundamental developments within the retail sector, or simply a result of the expected increases from anemic 2009 levels can be determined by analyzing value trends within these sectors.

On a price-per-square-foot basis, within the retail sector, values have continued to slide in 2010 from 2009 levels. In the mixed-use sector, values, on a price-per-square-foot basis, have increased in 2010 in all submarkets over 2009 levels, with the exception of one. The residential component of mixed-use properties has clearly helped value within this sector.

If we take a step backward and look at how the retail and mixed-use sectors have performed over time, we see that they have been adversely affected in a tangible way by the recent recession. The erosion of consumer confidence and the evaporation of consumer spending drove value in these two sectors down significantly from their 2007 peaks. Mixed-use properties saw average price-per-square foot values drop by 46 percent in 2009 from their 2007 highs. Properties within the retail sector saw values decline by 49 percent from their peak.

It is not difficult to understand how these two sectors took such a beating if we consider how the recession has impacted consumer behavior. The Bureau of Labor Statistics shows that in 2008, consumer spending had increased 1.7 percent versus 2007. However, BLS statistics show that, in 2009, consumer spending was down by 2.8 percent from 2008 levels. 

THE UNITED STATES has also experienced a significant shift in savings patterns. In early 2007, the savings rate in the U.S. had reached minus 4 percent. In October of 2010, the savings rate reached 5.7 percent. This nearly 10 percent shift in savings habits has had a significant impact on our gross domestic product.

Consider that the U.S. has a G.D.P. of approximately $14 trillion and approximately 70 percent of that total is consumer driven. This means that roughly $10 trillion of output in America is the result of consumer spending. The 10 percent swing in the savings rate extracts about $1 trillion from our economy annually. That is a significant amount of consumption to do without.

Consumers are indeed saving more and are cautious about increasing discretionary spending based upon many factors that they are concerned about in our economy. For the average American, a home is their largest asset, and the level of equity in that home provides a "wealth effect" that has significant psychological implications for spending habits. In the bubble-inflating years of 2005 through 2007, financing terms were easy, and many homeowners used home-equity withdrawal to fuel retail purchases. As home prices declined, the use of houses as ATM machines was all but eliminated. Today, home sales remain sluggish, leaving consumers on edge.

Unemployment remains stubbornly high as job creation was far below expectations in November, with only 39,000 jobs being created and the unemployment rate increasing to 9.8 percent. Additionally, all the headlines and news reports about the massive U.S. deficit and deficit-reduction potions have Americans more aware than ever about the impact of debt on financial solvency. Consumers are less likely today to exploit credit cards than they were years ago.

Notwithstanding the facts mentioned previously, the National Retail Federation has projected consumer spending will increase by 2.3 percent in November and December 2010, versus the same period last year. This is due, in part, to the surge in retail store reward-bonus programs and store-loyalty incentives. Credit card companies have also aggressively increased their cash-back rates, and some have even initiated premium return-protection services to entice shoppers. An analysis of these programs shows that they are truly only beneficial if consumers pay off 100 percent of their balances each month and don't carry outstanding debt.

To the extent consumer spending does increase in line with the NRF's projections, it will enhance property value within the retail and mixed-use segments. Values within these sectors have been interesting to follow. Within the retail sector, value is surprisingly down on a price-per-square-foot basis from 2009 to 2010 (all data compares 2009 totals versus 2010 results through Nov. 15) in all five submarkets that we analyze. The submarket that has performed best is northern Manhattan, which has experienced just a 4 percent reduction in value on a price-per-square-foot basis, moving from a $324 average in 2009 to a $312 average in 2010. The most adversely affected submarket has been the Bronx, where value has dropped from an average of $341 per square foot in 2009, to $200 per square foot in 2010, a 41 percent decline.

Capitalization rates within the retail sector have been on a roller-coaster ride since 2007. For example, in Manhattan in 2007, almost any retail property or retail condominium could be sold at a 5 percent cap rate regardless of the creditworthiness of the tenants. The average cap rate in the first half of 2009 in the retail sector increased to nearly 7.5 percent; since then, cap rates within the sector have continued to decline, now averaging just over 6 percent. It is counterintuitive to see that the value per square foot continues to fall even though cap-rate compression is occurring. This is due to the fact that retail rents have seen sharp declines and are only beginning to stabilize.

NOTWITHSTANDING THESE GENERAL trends, well-located prime retail properties continued to be highly sought after by investors in the marketplace. The supply-demand imbalance that the investment-sales market is currently experiencing and the extraordinarily low-interest-rate environment that we are operating in have created circumstances under which some outstanding transactions are occurring.

Recently, James Nelson, a partner at Massey Knakal, and I represented the seller of six retail condominiums at 367-369, 382-384 and 387 Bleecker Street, located on the prime luxury retail corridor in Manhattan's West Village. The retail condominiums were fully leased to established, high-quality tenants, including Michael Kors, Marc Jacobs, Burberry, A.P.C. and Mulberry. These units contained a total of approximately 5,100 square feet and were sold for $34 million, or approximately $6,700 per square foot, one of the highest prices paid for retail properties in the United States. Even at this high price per square foot, the cap rate was approximately 6.3 percent based on the high rents commanded on this stretch of Bleecker Street

"New York City retail condos with credit tenants are rarely offered in this market," Mr. Nelson said. "As a result, institutional, foreign and local investors competed aggressively for this offering. After receiving multiple preemptive offers near the ultimate sales price, the contract was signed within three weeks of bringing this offering back to the market."

In another recent retail property transaction, Guthrie Garvin and I represented the seller of a 27,700-square-foot retail condominium at the base of Trump Palace on Third Avenue between 68th and 69th streets. This space was completely net-leased to Great Atlantic & Pacific Tea Company on a very long-term basis, at a rent well below today's current market. Given the tremendous amount of upside in this property, notwithstanding the exceptionally long duration of the lease, the buyer paid $21 million for this asset, yielding a 5 percent cap rate. This property was purchased by shopping mall developer Equity One.

In another noteworthy retail transaction, James Nelson and Clint Olsen, Massey Knakal's first vice president of sales, represented the seller of a 3,750-square-foot retail condo at the southwest corner of 49th Street and Second Avenue in the new Alexander Condominium. The space was recently net-leased to TD Bank and was sold for $11.1 million. At that price, the cap rate achieved on this transaction was about 6.5 percent. The buyer was a high-net-worth South American investor. 

Many other retail transactions are occurring at a very healthy pace, although location and, more importantly, the relationship between existing rent level and today's market is driving capitalization-rate fluctuations on these transactions. Clearly, the supply-demand dynamics and interest rates will significantly impact the value of retail and mixed-use properties moving forward.

Additionally, the state of the U.S. housing market and the overall performance of our economy will impact the behavior of consumers. As consumers feel more confident, they will spend more, leading to higher rents in the retail sector. As rents increase, upward pressure on value will be exerted, moving the market in the right direction. New York City is under-retailed by a wide margin relative to other major U.S. cities and is, therefore, poised for a significant comeback as economic conditions improve.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.

The default rate for commercial real estate mortgages held by the nation's depository institutions--including mortgages at least 90 days delinquent and mortgages in non-accrual status--increased to 4.36 percent in the third quarter of 2010, up from 4.27 at midyear.

While the default rate continues to trend higher, the most recent increase is the second smallest in three years. Growth in the balance of defaults at banks has slowed considerably in recent quarters, according to Real Capital Analytics' analysis of bank filings. The $604 million increase in the default balance in the third quarter is less than one-tenth of the $7.2 billion increase in the second quarter of 2007.

As property prices and rent measures stabilize in many markets, the increase in strain on bank health related to commercial real estate is also becoming more measured.

Reasons for Caution

The third quarter's 9-basis-point rise in the commercial mortgage default rate is the 17th consecutive quarterly increase. At the low point in defaults, in the first and second quarters of 2006, the default rate was just 0.58 percent. By comparison, the current default rate is just 19 basis points shy of its record high of 4.55 percent, reported in 1992.

As banks have worked through only a subset of these loans--there are $46.8 billion in bank-held defaulted commercial mortgages as of the third quarter--the potential for losses related to resolutions of distress remains a key feature of the marketplace.

Multifamily Default Rate Rises

The multifamily default rate increased sharply between the second and third quarters, jumping from 4.13 percent to 4.67 percent. Between the first and second quarter, the multifamily default rate had fallen by 50 basis points, the first such decline of the cycle, raising hopes that the bank stress related to real estate exposures might have reached its inflexion point.

Over the course of the downturn, the increase in the default rate for multifamily mortgages has been more dramatic than for commercial real estate. The current multifamily default rate is nearly 20 times higher than the 0.24 percent default rate measured in the first and second quarters of 2005. Banks' exposure to the multifamily sector is more limited, however, with total outstanding balances of $215.8 billion and mortgages in default of $10.1 billion.

Legacy Issues Constrain Bank Lending

The weight of unresolved distress is manifest in greater regulatory and supervisory oversight in making new loans, as well as adjustments in lending standards and many banks' willingness to extend new credit in the sector. Demand for loans has also moderated.

As a result of these shifts, banks have been drawing down their exposure to commercial real estate, making new loans at a slower pace than the pace at which maturities, amortization and distress have removed exposure from their balance sheets. In the third quarter, total commercial real estate mortgage balances fell by $8.8 billion. In 2010 year-to-date, balances have fallen by $18.5 billion. Multifamily balances increased slightly from the second to third quarter but also remain below their peak levels from last year.

Smaller Banks Exhibit Lower Default Rates

Default rates are highest at the largest institutions (those with $10 billion or more in assets), where the concentrations in commercial real estate are lowest and the capacity to absorb related losses benefits from diversification. At smaller institutions (those with less than $1 billion in assets), default rates are generally lower. For example, at banks with between $100 million and $1 billion in assets, the commercial mortgage default rate is 3.29 percent, 107 basis points lower than the national average. But concentrations in commercial real estate, multifamily lending and construction lending remain much higher at these smaller institutions.

Combined with the lagging recovery in values in secondary and tertiary markets, where these banks dominate lending activity, the greater concentration still implies a much more limited capacity to manage related losses. It is important to note that there is considerable variation in the default and loss experience of regional banks, in particular. Institutions of similar size and geographic footprints and with similar exposures to commercial real estate exhibit differences in losses that may relate to the effectiveness of workout strategies and not just the health of the underlying mortgages.

Implications for Credit Availability

As reported by Real Capital, increases in the lending activities of large institutional lenders, including life companies, have resulted in an improvement in credit availability in many of the largest and most liquid metropolitan areas and for the highest-quality properties. This trend will see further support from an increase in securitization activity.

But outside of the major metros--including New York, Washington, D.C., and San Francisco, among a select few others--transaction activity and credit remain constrained. The slowdown in bank-held commercial mortgage defaults suggests that the sector's contribution to bank distress may be nearing a plateau.

Nonetheless, banks still face serious challenges in drawing down their default and real-estate-owned balances and in working toward a normalization of credit in the markets where the bank-lending model is most appropriate.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

It seems we are all aware of how sluggish our economic recovery has been. Each day we hear about economic indicators that are simply lackluster. There is uncertainty regarding our future tax policy, uncertainty about the implications of financial regulation and uncertainty about the true costs of our new health care system.

Indicative of this uncertainty, a majority of Americans currently believe they will be earning less in six months than more. While the government is hopeful that exports will help stimulate the economy, little progress has been made on any of the pending trade agreements (perhaps a devaluation of the dollar is what the administration is hoping for to stimulate export growth). The majority of Americans believe that current legislators are anti-business; consumer spending remains below trend; the price of oil continues to increase; and gross domestic product growth continues its malaise, at less than 2 percent on an annualized basis. The housing market continues to limp along, and the all-important jobs market is not creating nearly the number of jobs we need for our recovery to gain strong traction.

Recently, the Federal Reserve's $600 billion "QE2" was implemented in the hopes of keeping long-term interest rates low. It appears that QE2 is nothing more than the proverbial "pushing on a string," as long-term rates have actually increased by about 10 percent since this program was announced. Clearly, the market's interpretation is that the $600 billion makes higher inflation more probable in the future, which has investors nervous and is diverting capital from the long-term bond market. This weakening of demand has driven bond prices down, thus increasing their yield. It also appears that this new government initiative is creating a major distortion in the allocation of capital. You could say it is nothing more than a Band-Aid to cover up some very bad public policy.

On a federal level, the administration will push its platform as it sees fit. However, it is important to realize that individual states have significant powers and rights. Each state is a sovereign entity, with the power to tax and set spending levels. Simply put, states have the ability to straighten out their own affairs. The overwhelming majority of states are projecting massive fiscal deficits, putting them in positions where they will need to decide to raise taxes, cut spending or utilize a combination of both. With taxes at burdensome levels, controlling spending must be a focal point for legislators.

However, few have had the political will, thus far, to do so.

MANY STATES LIKE like California, New Jersey and New York already have significantly high tax rates, and sensible politicians are reluctant to raise taxes to bridge budget gaps, as this could potentially drive businesses and job-creating individuals out of their states. For many facing large budget deficits, the only method of survival will be to cut spending in a meaningful way. This, unfortunately, means inevitable tough battles against public-sector unions, which have been granted unsustainable collective bargaining arrangements and pensions systems that are driving municipalities into balance sheet insolvency.

Recently, the first of approximately 80 million baby boomers have begun to retire. This fact is placing a magnifying glass on the increasingly apparent fact that the United States is up against a pension crisis of unprecedented magnitude. Almost all state and local government pension plans are significantly underfunded; many large corporate pension plans have collapsed or are near insolvency; the Social Security system is a time bomb waiting to explode; and nearly half of all Americans have managed to save just about zero upon which to live during their golden years.

In order to make it through this potentially devastating problem, we must realize that we need to change almost everything we know about retirement. It is simply impossible to keep all of the financial promises that we have made to an entire generation of Americans, as we have promised to provide more than can be delivered to future retirees. This is particularly true when it comes to public-sector unions, which have negotiated packages that are oblivious to economic reality.

So at this point, you may be asking why a real estate guy cares so much about pension obligations. In this case, the dots are fairly easy to connect. To the extent pension obligations cannot be reformed and controlled, property taxes will increase. If property taxes increase disproportionately to other expenses, property value falls. If property values fall, history has shown us that transaction volume will fall. Any market participant that relies on transaction volume within the real estate industry for their livelihood clearly understands the relationship between transaction volume and their relative level of professional happiness.

The pension issue is one that must be dealt with and must be dealt with soon. On Capitol Hill, you know questions will be asked as to whether the federal government will bail out states and municipalities facing budget problems caused particularly by their overly generous and significantly underfunded pension plans. The options for the government, include (1) doing nothing, which will likely create emergency cost-cutting and increases in taxes, which will drive away businesses and jobs; (2) yielding to pressure from politicians and organized labor for condition-free funding; or (3) motivating states to straighten out their own affairs by providing resources that have restrictive conditions attached to them.

The catch with these scenarios is that even the possibility of a federal bailout will stop politicians from making the tough decisions that need to be made in dealing with these very real problems. Reforming pension systems is not an easy task and requires tremendous political will. Public-sector-union pension funds require fundamental reform, which is unlikely to come if potential bailouts are on the horizon. The current administration could take great strides in resolving this problem by simply stating that they will not provide the assistance that so many municipalities are praying for.

One of the most significant methods of reforming these pension systems is to switch from the current "defined-benefit" plans to "defined-contribution" plans such as 401(k)s for new employees. The current defined-benefit scenario is tantamount to a Ponzi-style system, where contributions from workers today are funneled to benefit retired recipients.

Recent published reports have indicated that in New York, we are doing relatively well compared with the rest of the country, as our pension obligations are "funded" at 107 percent, an amount that sounds more than adequate. However, this number, and all funding obligation percentages, are derived using hocus-pocus accounting. One of the major contributors to this fantasy is the assumption of a 7.5 percent annual compounded rate of return within the funds. This expected return percentage was recently lowered in New York from 8 percent, which is the national average.

Notwithstanding this lowered expectation, does anyone really believe that a 7.5 percent return is achievable given market conditions?

THESE LOFTY EXPECTATIONS persist despite the fact that the stock market is approximately where it was a decade ago; the 10-year treasury note is yielding approximately 2.75 percent; and inflation has been running at less than 1 percent on an annualized basis. As Bernard Madoff is unavailable to consult with the state and produce these types of returns, perhaps a more reasonable expected yield should be utilized.

In another baffling smoke-and-mirrors mechanism, New York's pension-fund protocol allows local governments to borrow against future pension-fund gains to defer a portion of their contributions for up to five years. This is like a homeowner who can't afford to make mortgage payments increasing their already underwater mortgage balance in order to make the monthly payments. Some studies that use honest accounting indicate that New York's state pension funds are underfunded by anywhere from $30 billion to as much as $80 billion. This is significant compared to an approximate aggregate balance of $150 billion.

Addressing public-sector pensions, and associated health benefits, is likely to be among the most daunting tasks for Governor-elect Cuomo. During his campaign, he proclaimed pledges of "no new taxes" (which he subsequently clarified as not including any increases on old taxes) as well as a 2 percent annual cap on property taxes. If he expects to keep those promises, he must go head-to-head with the public-sector unions and their unsustainable collective bargaining agreements. For too long, these special interests have had the loudest voice in Albany and have therefore, singularly, placed themselves in a position to bankrupt the state. 

In order to succeed, Mr. Cuomo will need cooperation and assistance from the business community as well as private-sector unions (the heads of which he specifically acknowledged and thanked for their support during his election-night speech). Although the help of private-sector unions may seem initially counterintuitive, it is important to remember a tangible difference between public-sector unions and private-sector unions: Private-sector union members pay taxes; public-sector union members are paid with taxes.

Surely, when a first shot is fired over the bow of the teachers' union and the health care workers' union, we will see millions of dollars in TV ads complaining of the devastating impact that spending cuts and tangible reform will have on the state. Therefore, it is important that an equally vociferous campaign is implemented to support these essential reforms.

Simply stated, we can't credibly expect tax caps, whether they are real estate taxes or personal taxes, without significant reforms to the collective bargaining provisions that now make it so difficult for local governments and school districts to control their labor costs. Public-sector pension obligations are about to skyrocket to levels never before seen in New York, and these increases are sure to crowd out programs of great importance to our residents.

New York's huge unfunded pension and health care promises, granted by past governments and exacerbated by deceptive pension-fund accounting that understates liabilities and overstates future investment returns, is a disaster looming over our economic future.

Reforming public-sector employee compensation and benefits won't close next year's $9 billion budget deficit. It will, however, protect the next generation of New Yorkers from suffocating financial burdens. In the short term, seeing tangible reform will provide a comfort level for the idea that massive tax increases will not be the mechanism utilized to bridge these gaps.

It appears Mr. Cuomo is well aware of this. To the extent he has the support, determination and political will to do what needs to be done, our economy and our real estate market will be much the better for it.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.

Rekindling popular concerns that current monetary policy interventions will ultimately foment an uncontrolled rise in inflation, the Federal Open Market Committee announced on Nov. 3 that it would purchase $600 billion in long-term treasury securities by the end of the second quarter of 2011. In choosing to renew a program of quantitative easing--formally, an expansion of the Fed's balance sheet through the creation of new money that is used in the purchase of the government's own securities--the voting members of the FOMC are necessarily conceding that the economic recovery remains unusually fragile and that underlying inflation trends are below optimal levels.

It is entirely unclear if quantitative easing will be effective in supporting conditions favorable to enhanced economic growth or the implicit target rate of inflation, even if it results in marginally lower long-term interest rates during the window of bond-buying activity. Business investment is more closely tied to the economic outlook, which remains weak, than to a short-term but supportive shift in borrowing costs. Similarly, the risk of overshooting the inflation target in the near term is understood to be low, though there is considerable slack in real economic activity.

In the long run, however, the risk of heightened inflationary pressure is credible if the Fed does not tighten its current bias. For commercial real estate investors, lenders and operators, the potentiality is of immediate significance given the dynamic relationship between inflation and property performance and the implications of rising inflation for the cost of financing.

Inflation Trends Lower

In contrast with concerns about the potential for a rise in expected inflation or shocks from unexpected inflation, current inflation trends are subdued by historic standards. In fact, the most recently reported measure of core consumer price inflation is at its lowest level on record, since the Bureau of Labor Statistics began tracking the series in 1957. In part, this reflects the large gap between current and potential economic output--a slack in economic activity generally precludes strong inflation. The concern among policy makers now is that inflation is too low, precariously close to the tipping point at which a sustained decline in the prevailing price level might vex monetary policy.

In a Nov. 4 Washington Post op-ed, Chairman Bernanke reminded the readership, which undoubtedly included the leadership of both parties, that there are risks from a decline in price levels. He points out that "... although low inflation is generally good, inflation that is too low can pose risks to the economy--especially when the economy is struggling. In the most extreme case, very low inflation can morph into deflation, which can contribute to long periods of economic stagnation."

Ideally, quantitative easing will foment inflation, but not too much. In the latter case, policy makers have ample tools at their disposal to sterilize the increase in the money supply. We must understand that these tools have the potential to be costly. 

Daniel Thornton, vice president and economic adviser at the St. Louis Fed, wrote about this on Nov. 10: "Given that additional quantitative easing may have only modest effects on economic growth, employment, or inflation and the potential to significantly exacerbate the FOMC's problems when the time comes to restore its balance sheet to a more normal configuration, it is easy to understand the considerable disagreement about the desirability of such a policy."

Why Quantitative Easing

Given the risk of a costly unwinding and questions as to the effectiveness of the policy in the short term, why quantitative easing? In a 2004 paper published in the economics profession's foremost peer-reviewed journal, Chairman Bernanke and Vincent Reinhart addressed the question of monetary policy in a low-interest-rate environment, acknowledging the central fact that "when the short-term policy rate is at or near zero, the conventional means of effecting monetary ease (lowering the target for the policy rate) is no longer feasible." Years before they could have imagined the exact circumstances that have prompted quantitative easing in the United States, the authors describe just such a program as one of the "strategies for stimulating the economy at an unchanged level of the policy rate."

There is clearly an element of art as well as science in pursuing these strategies since "... it is also true that policymakers' inexperience with these alternative measures makes the calibration of policy actions more difficult." It is in this calibration that reasonable questions arise about unintended consequences of current actions. These concerns are not lost on monetary policy makers, although the balance of the FOMC's thinking has weighed in favor of action. In his aforementioned column, Chairman Bernanke addresses the issue forthrightly, stating as follows:

"Although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are overstated. Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation. Our earlier use of this policy approach had little effect on the amount of currency in circulation or on other broad measures of the money supply, such as bank deposits. Nor did it result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time."

Chairman Bernanke would have us proceed without timidity in the conduct of monetary policy. In a speech last Friday at a meeting of the European Central Bank in Frankfurt, he stated that "... the past two years have demonstrated the value of policy flexibility and openness to new approaches ... as the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses."

Thomas Hoenig, president of the Kansas City Fed, takes a dissenting view, arguing in an October speech before the National Association of Business Economists that "the FOMC must be mindful of this fact and be cautious in pursuing elusive short-term goals that have unintended and sometimes disruptive effects." 

He went on to question the efficacy of the exit tools, offering that "while I agree that the tools are available to reduce excess reserves when that becomes appropriate, I do not believe that the Federal Reserve, or anyone else, has the foresight to do it at the right time or right speed."

Will Quantitative Easing Stoke Inflation?

With the decision made, arguments for and against QE2 are now largely academic. The challenge is now in charting the outcomes, both probable and possible. The idea that inflation is related to monetary policy has a long intellectual history. Every undergraduate economics student--whether enrolled at Chicago or the Saltwater Schools in Philadelphia, Cambridge, New Jersey or New Haven--has heard Milton Friedman's dictum that "inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." If quantitative easing is causally related to a dramatic expansion of the money supply, price instability will necessarily ensue.

Professor Friedman's explanation of money supply's role in driving inflation is instructive in our assessment of the QE2's downside. That is because broad measures of money supply, including credit, are not growing rapidly. Chairman Bernanke made this point in his Nov. 4 apology. The same point was made earlier this year, by then San Francisco Fed President Janet Yellen, who wrote in a March 29 Economic Letter that "... expanding the Fed's balance sheet has not, in fact, led to a surge in credit. Lending has been quite restrained. Banks have been cautious as they seek to return to financial health, keeping much of the money created by this expansion in their accounts with the Federal Reserve."

Taking the pragmatist's position that inflation outcomes are also determined by inflation expectations, Mr. Hoenig questions the consensus view, offering that "the FOMC has never shown itself very good at fine-tuning exercises or in setting and managing inflation and inflation expectations to achieve the desired results."

The net result is that the outcome is uncertain.

Is Inflation Good or Bad for Real Estate?

The disagreement among leading policy makers on the inflationary impact of quantitative easing behooves us to consider the implications for commercial real estate. Our baseline expectation may be that inflation will remain in check. We cannot, however, ignore the possibility of surprises while in terra incognita.

Conventional wisdom dictates that commercial real estate offers a hedge against inflation. We must be careful what we wish for. The relationship between property performance and inflation is not invariant. Real estate can offer a partial hedge against expected inflation, but it is generally ineffective in hedging unexpected inflation.

Even in the first case, the efficacy of the hedge depends upon operators' pricing power in the relationship with tenants. If fundamentals are weak, inflation will undermine real returns. As described by Glenn Mueller 20 years ago, "while real estate clearly provides an effective inflation hedge, it does so primarily when the real estate market supply-demand equation is in balance." Some investors will be concerned with the inflation-hedging effectiveness of public REITs rather than the specifics of property-level performance. Research shows that REIT returns generally decline in inflation. The equity component of REITs plays a role in this result.

As showed by Eugene Fama almost 50 years ago in his famed treatise on Wall Street's random walk, there is a negative relationship between stock returns and inflation, generally considered a proxy effect that captures the negative impact of higher inflation and higher interest rates on macroeconomic performance. 

The REIT findings hold years later. Joe Gyourko and Peter Linneman find that "REIT returns tend to be strongly negatively correlated with inflation. In this respect, they look more like traditional stocks and bonds than any other type of real estate."

Ultimately, the investor who anticipates a slow return to job creation or who might opt to seek safe haven in REITs, instead of properties, should wary of inflation's specter.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

Expectations are low for the final weeks of the 111th Congress, which convened yesterday for the first time since before the midterm elections. It is unclear how much legislative business will be brought to closure given the entrenched positions of the parties.

For Republicans, there is an advantage in delaying the most legislatively contentious battles until after the new year, when they take control of the House and the breadth of committee chairmanships. For Democrats and Republicans, however, there is urgent legislative business-relating to taxes and the budget, in particular-that requires immediate attention. Commercial real estate investors should be watching closely: Tax policy and federal spending priorities will impact the outlook for the sector through direct and indirect channels, as will global bond investors' reading of our resolve in tackling the budgetary imbalance.

Foremost in the minds of voters and many businesses, the pending expiration of tax breaks has added to the prevailing environment of uncertainty that has distorted consumers' and firms' consumption and investment decision making.

Just as important as the unresolved question of tax rates, Congress has yet to pass a budget for the fiscal year that began more than a month ago, on Oct. 1. In a recurring ritual that speaks to the dysfunction in the political process, the government is currently operating by virtue of a short-term continuing resolution that holds expenditures at last year's levels and that expires on Dec. 2. Positioning themselves as the party that will rein in government spending, Republicans are set to demand a durable extension of tax breaks and concessions on visible discretionary expenditures in the next round of budget arguments.

Deficit Management to the Fore

The negotiation of tax breaks and the current fiscal year's budget will take place against the backdrop of a larger debate over government spending and the deficit. There is increasing agreement in Washington that the trajectory of fiscal policy in this country is unsustainable and that a serious reevaluation of long-term tax policy and spending priorities must occur posthaste. Acting on that recognition, a series of new proposals for curbing the deficit has come to the table in recent months.

The most visible assessment of policy options for addressing the deficit was released in draft last week, by the co-chairman of the bipartisan National Commission on Fiscal Responsibility and Reform. The report proceeds from the sound premise that unconstrained growth of public debt will limit the long-term growth potential of the American economy. On our current path, debt interest payments could rise to $1 trillion per year by 2020, we are told. In nominal terms, that is roughly equivalent to the current federal budget in its totality.

To stave off the real possibility of a crushing imbalance that would crowd out private investment, the report details nearly $4 trillion in cuts and adjustments to federal programs between fiscal year 2012 and 2020. No constituency is left untouched, as the proposal makes recommendations in areas ranging from national defense to Medicare and from the retirement age to the size of the federal workforce. Personal income tax reform measures include a call for lower marginal tax rates but a sharp curtailment of deductions, including for mortgage interest on second homes, home equity lines of credit and mortgages larger than $500,000.

Investors should not plan based on the specific measures included in the new report. Ultimately, each of the cuts that is large enough to make a difference in deficit management is also large enough to trigger fierce opposition from powerful interest groups. Whoever sees such a plan through will pay a heavy political price for their part in its success.

As with previous efforts to grapple with the deficit, that success will depend on elected officials' willingness to alienate a part of their constituency. Absent that willingness, it will be left to external market forces, including the market for treasuries, to force the issue through the mechanism of market-clearing prices for our debt.

Battles on All Fronts

The parties' failure to come to an agreement on a budget plan in the few weeks before the holidays will push the debate into January. That will send the wrong signal to the domestic and global investors upon whom we have become so reliant in financing public spending.

On the political stage, leaders from the emerging markets and from Europe are expressing clear dissatisfaction with the Fed's most recent program of quantitative easing and its impact on currency exchange rates, let alone its distortion of interest rates and potential to foment destabilizing price bubbles.

If investors perceive that treasury issuance will continue to grow even after demand for treasuries' safe haven has abated, the risk of rising interest rates becomes another more credible threat to the economy and commercial real estate. For our sector, those higher rates mean downward pressures on asset values because of adjustments in yield spreads and borrowing costs.

At this juncture, with pricing trends still foundering outside of major markets and with pending debt maturities rising, these are pressures that we are ill-prepared to internalize.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

Notwithstanding its relative strength, even this segment proved it was not immune to the disappointing results seen in the third quarter of 2010 (3Q10) in New York City's building sales market. Clearly, the multifamily market in 2Q10 performed much better than it did in 2009. In 2009, there were 435 multifamily properties sold. In 1-3Q10, there were 391 sales in this segment. On an annualized basis, this is a 20 percent increase over 2009 levels. Unfortunately, after 2Q10 this number was running at approximately 40 percent on an annualized basis.

In 2009, all multifamily buildings sold contained a total of 9,888 apartments. In 1-3Q10, we have already surpassed that number, with 10,951 units sold. On an annualized basis, this increase reflects a 48 percent jump in units sold. After 2Q10, the number of units sold in 2010 was on pace for a 76 percent annualized increase over 2009 levels.

We have seen a similar shift in the dollar volume of sales. In 2009, multifamily property sales volume was approximately $1.26 billion. In the first three quarters of 2010, we have greatly exceeded that total, with more than $1.9 billion in sales volume. On an annualized basis, we are on pace to more than double the dollar volume of sales, which is currently projected at 101 percent over last year's totals. After 2Q10, we were on pace for a 151 percent increase in the dollar volume of sales.

LOOKING AT THESE three metrics, and how their relative levels have changed in just three months, we see how impactful the slowdown in 3Q10 has been market projections. This has been the case for both the walk-up sector and the elevator sector, although the walk-up sector's projections has been more adversely affected by third-quarter results.

In the walk-up sector, there were 348 sales in all of 2009, compared with 295 sales in 1-3Q10. These numbers reflect an annualized increase projected at 13 percent today, versus what was projected to be a 37 percent increase at the end of the first half of the year. In 2009, the walk-up buildings that sold contained a total of 5,022 apartments. In 1-3Q10, there were 4,187 units sold, leading to a projected increase of 11 percent on an annualized basis. At the end of the first half of 2010, the number of units sold was on pace for a projected 32 percent increase.

The biggest impact third-quarter results had on the walk-up market projections was in the dollar volume of sales. The 2010 sales volume has been approximately $550 million, representing a 15 percent increase on an annualized basis over the 2009 total. This projection is down from a 71 percent projection at the end of the first half of the year.

The elevator sector has held up much better. In 2009, there were 87 elevator buildings sold, versus 95 in 1-3Q10. These figures project an annualized 46 percent increase in the number of buildings sold as opposed to what was a 49 percent projection at the end of the first half of the year. Last year, the elevator buildings sold contained a total of 4,866 units. Through the first three quarters of 2010, there were 6,839 units sold, reflecting a projected annualized increase of 87 percent. 

A quarter ago, this projection was 121 percent. Through the first three quarters of this year, we have already more than doubled the dollar volume of sales in the elevator sector with $1.36 billion in sales volume, versus just $627 million in all of 2009. Here, we are on pace for a 189 percent annualized increase. This projection was 233 percent last quarter. 

As these numbers clearly show, the deviations in the elevator numbers are far less than observed in the walk-up sector.

THESE VOLUME NUMBERS are clearly disappointing, particularly given the fact that volume trends had significant momentum going into 3Q10, and this momentum evaporated with the lackluster quarterly results. On the value side, since hitting bottom in 2009, values have been volatile from submarket to submarket.

To fully understand value in the multifamily sector, we look at four main metrics. They are capitalization rate, gross rent multiple, price per square foot and price per unit. If we examine each of these metrics and compare 2010 results to 2009, on a submarket-by-submarket basis, we see no clear trends, with pluses and minuses sporadically across the board. The tables nearby show the volatile nature of the pricing metrics presently within the sector.

As the multifamily sector is having difficulty finding its footing, there are several uncertainties adding to its opaque future.

Recent court decisions have overturned long-standing market rules. These include the Roberts decision in which the state Division of Housing and Community Renewal's authority over the implementation of deregulating units in properties receiving J-51 tax benefits was upended. Notwithstanding nearly 15 years of HPD ratifying the decisions made by DHCR, the court ruled in the tenants' favor. In another startling decision, the court held that the DHCR improperly added low rent supplements to extraordinarily low regulated rents. Given the complexities of New York's rent-regulation system, it is important for property owners to have a source of authority that can be relied upon. Obtaining opinion letters from DHCR was the one resource owners felt they could rely upon, until now.

Additionally, the fate of which party will possess the majority in the State Senate is still up in the air. Within the first couple of days after the election, it was being reported that Republicans had 31 seats and Democrats had 28 seats, with three races too close to call. This would have assured Republicans of at least a split in the Senate. Several days later, one of the races was reversed, leaving the current tally at 30 Republican seats and 29 Democratic seats. It appears that Republican candidates have a slight edge in two of the three races that are still too close to call. To the extent Republicans take the majority in the Senate, it would provide some assurances to multifamily owners that no radical changes to rent regulation will occur, as 12 bills passed by the New York State Assembly are sitting in the Senate's in-box and regulation comes up for renewal in 2011.

The attorney general-elect, Eric Schneiderman, has, as one of his main objectives, pledged to crack down hard on tenant harassment. I certainly would never condone an owner harassing a tenant. Often, however, taking a tenant to court is the only way to find out if they are indeed rent-regulated tenants playing by the rules. Given that tenants rarely volunteer information indicating that their rent-regulated apartment is not their primary residence, that they are illegally subletting their apartment or that their annual income surpasses the threshold for high-income deregulation, an owner's only option is generally to commence litigation to determine the truth.

If politicians truly wish to stop much of the nonsense that occurs in the rent-regulated-housing market, all they have to do is simply create a system of means-testing to determine if tenants qualify for rent regulation. This rent-regulation subsidy is, essentially, a welfare program and should be administered as such. Advocates take the position that means-testing would be too cumbersome to implement. This is a ridiculous position. Any tenant receiving Section 8 benefits must prove that they qualify. Any tenant wishing to occupy the 20 percent component of an 80/20 building must prove that they qualify. A New York State income tax return could easily be the basis for such qualification. If tenants had to qualify for their rent-regulated status on an annual basis, the number of cases in landlord-tenant court would diminish significantly.

Notwithstanding the uncertainties and difficulties dealing with rent-regulated properties, they remain at the top of many investors' wish lists. Whether this remains the case into the future will be dependent upon public policy as much as economics. Next year could be an interesting one for this sector, and we look forward to watching things unfold.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.

A week has now passed since the Republican Party wrested control of the House and nearly succeeding in doing the same in the Senate. The Democrats' reversal of fortunes from two years ago has been framed in terms of voters' dissatisfaction with growth in government and the lack thereof in the private economy. In a 60 Minutes interview recorded last Thursday and aired over the weekend, President Obama conceded that "... first and foremost, it was a referendum on the economy." The president did not warm to the notion that it might also be a rejection of the basic policy agenda, reflected in efforts such as health care reform, that the administration has pursued with real success in moving through Congress.

In any case, his comments suggest a greater focus on the immediate issues of the economy and jobs.

Irrespective of whether Congress is gridlocked or effective between now and the next presidential election, incoming Republicans may benefit from voters' lack of discernment between correlation and causation. If the economy improves over the next two years in a manner consistent with baseline expectations, measuring modest but sustained gains in jobs, the midterm elections will almost certainly be positioned ex post as the trigger that pushed the economy closer to its potential growth trajectory.

As a cyclical reality, the next two years will be better than the last two, barring an unexpected or poorly managed shock. As the administration retools to focus more visibly on jobs and deficit fighting in response to voters' Election Day message, Democrats worry that Republicans will claim undue credit for the resulting progress.

On both sides, the incentives for cooperation are mixed, and moderates have been marginalized in this election.

What Happens Next in Washington

While the president travels through India, promoting American business interests while en route to the G20 meeting in Seoul later this week, commentary at home has focused on the implications of the election results for the domestic policy agenda.

Unsurprisingly, given the upset of Democratic control, the election results are reverberating through Washington as party strategists on both sides now refine or refashion their agendas to reflect the shift in voter sentiment.

For the commercial real estate investment sector, that may imply more favorable near-term outcomes on the industry's key issues of concern, including tax structure and regulation, and better visibility into the changing business climate.

Monetary Policy

Fed Chairman Ben Bernanke has his share of detractors among the freshman members of Congress, including visible figures like Senator-elect Rand Paul. The announcement last week of a new round of quantitative easing has stoked debate over the medium- and long-term impact of Fed policy, including the potential for above-target inflation.

Nevertheless, we are unlikely to see any change in the current course of monetary policy as a result of an increase in politician pressure. Congressional committee members will have the opportunity to question the Fed chairman during his regular testimony before Congress and will undoubtedly debate the merits of Federal Open Market Committee votes when speaking with the press or joining the Sunday-morning talk show circuit.

But Mr. Bernanke's appointment has only just been renewed, limiting any direct threat to the leadership of the FOMC and in spite of well-articulated dissenting views within the committee.

Business-Friendly Choices

While it is unlikely that Congress will impinge on the general independence of the Federal Reserve, it can shape regulatory outcomes through oversight of agencies and its funding authority.

Given the extent to which the landmark Dodd-Frank legislation delegates authority for its refinement and implementation, we may see that financial-services regulation is ultimately more lax than if Democrats had retained control of both houses.

Similarly, many of the issues pertaining to commercial real estate will be decided in lower-profile arenas than the obvious flash point of income tax break extensions and the potential decoupling of middle- and high-income tax break time frames.

Among the issues to watch, the embedded negotiations over dividend and capital-gains taxes and carried-interest taxation stand a better chance of being decided in a manner favorable to investment.

Still, do not expect these issues to be resolved immediately, even if the Democrats prove more pliable in the aftermath of the election. Congress resumes in a so-called lame-duck session on Nov. 15, only to be interrupted by the holidays before concluding. Depending upon how much time lapses in the staking of new political battle lines, it is unclear if any real progress will be made until well into 2011.

schandan@rcanalytics.com

Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.

A note first: It is important for me to state that I'm not making any political endorsements here. I mention politics occasionally in my writing, but I am merely trying to express opinions regarding the impact policy is likely to have on our real estate market. I am a registered independent who has equal dissatisfaction for politicians from both parties when bad policy is endorsed and, conversely, I have financially supported, and voted for, independents as well as Democrats and Republicans. More appropriately, I like to think of myself as a "Realestatetarian," always considering the implications of government policy on what I do every day: selling buildings.

At press time, Republicans had gained 61 seats in the House and six in the Senate. Democrats also lost, on a net basis, at least seven governorships and 24 legislative majorities. The potential margin of victory was underestimated by most, as even the most right-leaning political pundits assumed that the Republicans would gain 50 to 55 House seats.

The cause of this significant swing was a colossal shift among independent voters. The percentage of U.S. voters registered as Republicans, Democrats and independents has remained fairly consistent over the past decade or so. Independents make up approximately 28 percent of the voting population. In the 2006 midterm elections, independents favored Democrats by an 18-point margin. In the last presidential election, independents voted for President Obama over John McCain by a margin of 16 percent. Last week, independents favored Republicans by 8 percent. This massive 24 percent swing in just two years was unprecedented.

Given the powerful message delivered to the White House by these results, it'll be interesting to watch if the administration will now see things more pragmatically or continue on an ideological track. The implications for our economy and, therefore, our real estate market are significant.

For the first time, toward the end of last week, the administration started to indicate that they may consider coming off their position of strongly supporting tax increases for all Americans making over $250,000 per year. While never directly addressed, the implication is that capital-gains-tax increases and dividend-rate increases would go hand-in-hand with those proposed tax increases.

From an economic perspective, the more expensive a certain activity becomes, the less that activity occurs. Therefore, we would expect that if capital-gains taxes were to rise (scheduled to increase from 15 percent to 20 percent), thereby increasing the cost of selling a property, sales volume would decrease. Based upon the anticipation that capital-gains rates were going to increase, many discretionary sellers placed properties on the market beginning this past summer with the objective of closing prior to end of the year to take advantage of this year's lower rates. Other issues impacting the real estate market include what will happen with taxes on "carried interests" and taxes on dividends rising from 15 percent to 39.6. The latter of these could have profound implications for REITs, which have been among the most active market participants of late.

It will be interesting to see if anything gets settled in the lame-duck Congressional session. The looming uncertainty over tax rates has been a contributor to stymied growth in gross domestic product and job creation. Fortunately, this tax rate issue is something that can be resolved very early in 2011, if not addressed before the end of this year. The uncertainty created by the health care bill and the new financial regulation package is something that is likely to remain for years as the true implications of each of these far-reaching programs is determined.

On a federal level, there is once again a balance of power in Washington. Some believe this may lead to gridlock, others not so much. Regardless, markets will view this balance favorably, as radical legislation is unlikely to be passed given a split Congress. The biggest fears exist when one party, be it Republicans or Democrats, hold a super-majority in both houses. It is under these circumstances when radical legislation is likely to pass.

IN NEW YORK State, Andrew Cuomo won the governor's race handily over Carl Paladino. The governor-elect will certainly have his plate full when he takes office. He has vowed to clean up Albany and even indicated that, if his initial attempts are unsuccessful, he may resort to using the Moreland Act, a 103-year-old tool available to the governor. This would provide him with unfettered power to dig into any aspect of state government. Rather than using this tactic as a backup plan, perhaps it should be upgraded to Plan A. While it might ruffle a few feathers, something must be done to end the pay-to-play culture that our Albany lawmakers seem to be addicted to. Correcting the dysfunction within Albany will be no easy task.

Neither will be solving the state's financial woes. Mr. Cuomo faces significant financial hurdles in dealing with the state's $135.3 billion budget. In fiscal year 2011-2012 (beginning on April 1), the projected state budget deficit is $9 billion. This is exacerbated by the fact that a large revenue drop-off is anticipated by the evaporation of federal stimulus funds and the expiration of last year's income tax hike on our wealthiest residents. Things get only worse as the projections are extended. In the 2012-2013 fiscal year, the deficit swells to $14.6 billion. In 2013-2014, the deficit increases again, to a projected $17.2 billion. 

These massive deficits are the result of currently enacted spending requirements of 6.9 percent annually through 2013-2014. At the same time, receipts are only expected to grow by 4.3 percent.

Mr. Cuomo's first budget is due on Feb. 1. In an age where campaign promises are forgotten at the speed of light, it'll be interesting to see if he keeps to his campaign pledge of holding the line on spending. He also promised "no new taxes" and a 2 percent annual cap on property tax increases. It would appear that the only possible way he can stay true to those promises would be to go head-to-head with the powerful public-sector unions. Health care costs and education spending make up approximately 50 percent of our state budget. The teachers' union and the health care workers' union will undoubtedly spend millions on TV commercials in opposition to any attempts to reduce spending in these areas. 

Without the intestinal fortitude and political will to withstand this barrage, meaningful spending cuts will be impossible and our tax burden, which on a per-capita basis is the highest in the nation, will likely increase even further. It would be unfortunate to see New York State income taxes rise significantly, only to be told that the New York State income tax is an "old tax" that is being increased, not a "new tax." And even if the 2 percent annual cap on property taxes is implemented, it is important to realize that residential and commercial real estate tax bills will still increase by more than 2 percent per year, as the calculation of taxes consist of the tax rate and the property's assessment. Even if the rate was capped at 2 percent, due to annual assessment increases, taxes will rise higher than the capped percentage.

Property tax caps should be the governor's priority. Needless to say, Sheldon Silver will have something to say about that. Notwithstanding, tax caps should be enacted and must be coupled with changes in collective bargaining agreements so that local governments and school districts can control labor costs. Fundamental reforms of public pensions, which are about to skyrocket to levels never seen before in New York State, are also essential.

FOR OUR MULTIFAMILY sector, the elections produced some pros and cons. On the pro side, at press time, Republicans were sure of at least even 31/31 control of the State Senate. With Republican control of the Senate, the bills routinely passed by the New York State Assembly, which are extraordinarily pro-tenant, are not likely to gain much traction. These bills include raising the threshold for high-rent deregulation from $2,000 per month to $2,700 per month, and re-regulating any units that had been deregulated and now rent for $5,000 per month or less. These provisions would hamper the condo conversion market and would lead to even larger subsidies provided to every regulated tenant by every non-regulated resident. 

While these pro-tenant bills are proposed and passed by Democratic legislators playing up to their constituencies, it is interesting that for the past two years, the Democratic-controlled Senate did not calendar these bills for a vote. Could it be that they knew the deleterious impact they would have on the marketplace so they just left them collecting dust? Proposing a bill that voters would like, but that legislators know has very little chance of actually passing, can be an effective vote-getting mechanism. Were some of these legislators fearful that their bills might actually become law? If they understand economics, they just might have been.

On the con side for the multifamily industry, Eric Schneiderman won his bid to become attorney general. One of his stated top priorities was addressing the tenant harassment issue. I certainly would never advocate that harassing tenants is acceptable. However, our rent-regulation system is dysfunctional, and leaves owners with little choice but to start litigation to determine a tenant's income level or whether his or her regulated apartment is the primary residence. The day tenants start marching into managing agents' offices, announcing that they really live outside the city and only use their regulated apartment as a pied-à-terre, or that they are illegally subletting their apartments to make a profit, and turn their keys in will be the day that owners can stop litigating with tenants to find out the truth.

Last week, some things became clearer, and some things remain fuzzy. One thing is, however, certain, and that is that we have a long way to go before the economy is growing at an extent to which meaningful job creation is possible (by meaningful, I mean 350,000 to 450,000 jobs per month). It will take that type of job creation to tangibly enhance the underlying fundamentals of real estate. Let's hope our new legislators are able to implement policy that will make that happen sooner rather than later.

rknakal@masseyknakal.com

Robert Knakal is the chairman and founding partner of Massey Knakal Realty services and in his career has brokered the sale of more than 1,100 properties, having a market value in excess of $6.8 billion.