15.03.2014 02:12


“Chuck Prince yesterday dismissed fears that the music was about to stop for the cheap credit-fuelled buy-out boom, declaring that Citigroup was "still dancing".

The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity at the moment it would not be disrupted by the turmoil in the US subprime mortgage market.

He also denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back, in spite of problems with some financings. "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing," he said in an interview with the FT in Japan.

His comments come amid fears that the problems in the US subprime mortgage market, rising interest rates and concerns about loose lending standards could lead to a downturn in the leveraged finance market. "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be”.

Michiyo Nakamoto & David Wighton. “Bullish Citigroup is 'still dancing' to the beat of the buy-out boom.” The Financial Times.  10 July 2007, in


“Genius is knowing when to stop”.

Johann Wolfgang von Goethe.


For those of us who lived through the Financial Crisis of 2008-2009, there are disturbing signs in the Manhattan, multi-family residential market of the build-up of a considerable price ‘bubble’. How so? Well the classical instances of price bubbles are when prices for whatever asset class one is referencing outpaces, or should one say considerably outpaces the normative  valuation habitually employed in said asset class. From Tulips in 17th century Holland to modern day.  In the case of multi-family residential, the habitual markers to evaluate this particular asset class, are something referred to in the trade as ‘cap rates’ (id. est., capitalization rates, which being net operating income divided by sales price), pricing per unit and pricing per square foot. With the latter category being perhaps the most rigorous measurement as ‘cap rates’ are unfortunately quite a subjective measurement. Particularly in the hands of a less than scrupulous real estate broker. A rather large breed of individuals in the Manhattan market unfortunately.  Using price per square foot, it is easy to see when one looks at a select number of properties currently on the market, how much prices have run up in the past two to three years. A run-up, which has not nearly been matched by increases for rentals in the same locations.

In the case of the first example: 150 West 84th Street, a five-story, walk-up building on Manhattan’s Upper West Side. The building is located in a somewhat sub-par section of the UWS, with one side facing a public school and the other side facing low-income housing. The building was marketed and sold back in late 2012, for $7,125,000.00. Which works out to $548.00 per square foot. It is currently on the market for the sum of $13,000,000.00. Which works out to a prospective increase in price of 82%. A somewhat extraordinary increase given the short amount of time involved from the prior sale.  However, there is (uniquely) in this instance a caveat: the new owners have managed to increase the gross income of the building by about fifty-percent (50%), which mitigates, if not necessarily rationalizes the asking price of this piece. I can also state from my own recollection of the building in years gone by, that it was suffering from a good deal of deferred maintenance and the new owners have considerably reduced this problem.

In the case of the second example: 340 East 90th Street, a six-story, doorman, elevator building on Manhattan’s Upper East Side. The building is located of course in an area which brokers have recently played-up as on the cusp of a boom in both values and rentals due to the near completion of the Second Avenue Metro line in 2016 (allegedly).  Leaving this aspect aside for a moment, the history is rather clear: back in December 2011, the building was sold for the sum of $9,825,000.00. Which works out to approximately $363.00 per square foot. Currently the building is on the market for the princely sum of $21,750.000.00. Which is worth $805.00 per square foot. A prospective increase in pricing by 121%. Admittedly there are two mitigating variables to this dramatic run-up in pricing: a) the near completion of the Second Avenue metro; b) the fact that the current owners have spend a considerable amount of monies (perhaps have a million dollars) in renovating a product which similarly to the first example above, had a good many preventative maintenance issues from my own memory of seeing the building x number of years ago.  Remember though that these two variables only mitigate they do not and cannot per se rationalize the prospective greatly increased sales price.

In the case of our third and final example: 136-148 West 111th Street, four, five-story walk-up buildings in the newly gentrifying Central Park North area.  In 2011, the buildings were sold for the sum of $13,000,000.00, which works out to $240.00, per square foot. Back in December of last year, the building were put back on the market by the new owners for the exorbitant sum of $25,000,000.00. Which works out to a 92% increase in sales price and almost five-hundred dollars per square foot.  I should say though that the buildings are located in an area, in which valuations per se, regardless of any other, Manhattan-wide factors have indeed seen increases in recent years. This to an extent mitigates the greatly increased pricing for this package. Once again, it does mitigate, but it cannot possibly rationalize such an extraordinary increase.  

With the above cases in mind, what can possibly explain dominant motor for these huge increases in asking prices for these class ‘c’, multi-family residential properties?  There are I would surmise several variables, but the key one is the continuance of historically low interest rates for precisely these types of transactions by local lenders.  Notwithstanding the increases that one saw last year in the five and ten year Treasury bills, rates from most lenders on purchases are still historically speaking near lows (ranging from 2.75% to 3.35%). In some cases, with interest only for two, three or even five years. In addition to lenders being willing to lend at higher loan to values than was the case even two years ago. AKA increased ‘leverage’ and ‘liquidity’. This all being of course the fruit of the Federal Reserve ‘Quantitative Easing’ policy. Albeit now being reduced monthly (the so-called ‘Tapering’ policy).  It would be a reasonably guess that the over-pricing in the multi-family residential Manhattan market will continue while rates remain low. Which in turn raises the issue: how will the market react once rates go up?  For some commentators, the run-up in rates will not strongly affect the pricing of the market since unlike in the past, ‘this time it is different’ (to quote from the very apt title of the Rogoff & Reinhart book). Which they mean that due to the historically low inventory available on the market for sale, the current pricing is a ‘rational’ reaction by the market to this state of affairs.  And indeed very intelligent and experienced individuals like Massey Knakal’s Robert Knakal have posited precisely that.  And notwithstanding his own self-interested, motivation, I do believe that in the case of Mr. Knakal he is quite sincere in so stating such. However, the fact is that in other asset classes in recent years (particularly minerals and precious metals), commentators were also saying the very same thing about the uniqueness of the contemporary situation. Low and behold of course, with the beginning of tapering and the concomitant slow-down in the Chinese demand for the self-same raw materials and precious metals, we have seen a marked reduction in prices in said assets classes. To my mind, based upon a good reading of recent history, it is foolish to not believe that in the famous mots of Mr. Prince ‘when the music stops’, those who engaged in over-leveraged / hopelessly optimistic projections on their recent purchases  will come out of the forthcoming down-turn in the same fashion that Mr. Prince and Citi-bank did, when things became ‘complicated’. Accordingly, my word to the wise is: remember Goethe’s dictum and take care to know when to get off this current multi-family merry-go-round. Once things do indeed become ‘complicated’ it will be very difficult to keep one’s shirt on.