The Millennial Balance Sheet: Education, Indebtedness and Rent Checks

2016 will be the first year that Baby Boomers account for the same share of the electorate as their Millennial children. As Millennials are the most educated and indebted generation, it is important to consider how Millennials’ spending decisions differ from our parents’ generation and what this means for the real estate market.

With property prices soaring faster than our wages are growing, Millennials are not homeowners with mortgages: we are renters with student debt. Unlike our Baby Boomer parents, we cannot afford to buy office space to start a business: startups rent and share office space, rather than invest in the commercial real estate asset. Indeed, Millennials have even developed real estate apps to facilitate the leasing process, rather than investing in the properties themselves.

For the NYC real estate market, the good news for prospective buyers is that prices are falling. Homeownership rates amongst Millennials, however, have not improved, which is interesting because past economic recoveries have been fueled by homeownership. It is unclear whether Millennials simply cannot afford to buy or if we have learned that in today’s market, it is more economical to rent than to buy, especially in NYC. Whatever the reasons, Millennials, unlike our parents, do not have as significant tangible real estate assets to show for our over-schooling and indebtedness.

Rather, it seems that many Millennials’ most valuable assets are in the form of academic degrees and the relationships that we have fostered along the way. Unlike our parents’ property that can be encumbered, Millennials’ most valuable assets cannot be restricted or physically taken away.  Individuals’ reputations and credibility, however, can be destroyed within seconds, thanks to the Internet. For Millennial lawyers, this means that how ever they engage on social media–through professional and personal networks–they must protect their core asset (i.e. themselves) by cultivating their personal brands, communicating wisely in the blogosphere and remembering that perception is reality.

In the meantime, until NYC real estate prices fall even further, I will do as Millennials do: focus on my career, stay connected, renew my lease and wait to buy.

A Statement about the Abatement: The Effects of the 421-a Expiration

For over forty years, the 421-a tax exemption program incentivized developers to build multifamily residential rental units in New York City. The program provided tax benefits to developers who built properties with affordable housing in Geographic Exclusion Areas (GEA), which includes all of Manhattan and parts of the Bronx, Brooklyn, Queens and Staten Island.

The program expired in June 2015. It was set to renew in January 2016 if the Real Estate Board of New York (REBNY) and the Building and Construction Trades Council of Greater New York (BCTCGNY) reached a wage agreement for workers employed at development sites benefiting from 421-a. While labor unions lobbied to pay workers prevailing wages, developers argued that increasing their labor costs would render their projects economically unviable.

If renewed, the 421-a program would have extended the tax exemption period for developers to 35 years, mandated the inclusion of affordable housing in all rental projects and provided developers with various ways to comply with the affordability requirements. The program would have also continued to prevent the use of “poor door” entrances, which effectively segregate the affordable portions of buildings from the other tenants.

With no deal in place between the REBNY and BCTCGNY as of January 15, 2016, however, the abatement program expired, making headline news. This left many New Yorkers wondering . . . how the 421-a expiration will affect them.

For developers, who did not have shovels in the ground by December 31, 2015, rental development could become cost prohibitive, because the tax benefits for building affordable housing are no longer available. If developers are less willing to pay current prices for land in GEAs, this fall in demand could push down land prices.

For potential buyers, such as myself, this means that I’m (still) waiting to buy.

For Delegation Challenge junkies, who are wondering how the renewal of the 421-a legislation was contingent upon an agreement between two private parties . . . stay tuned!

Why I’m Waiting to Buy

I’ve lived in the same condominium building, renting from an owner, for the past five years.  Although I’d like to buy, I’m going to wait.  Here’s why.

Since the financial crisis, there has been an influx of foreign cash investment in Manhattan luxury real estate.  While this has fueled the development of luxury condominiums, the supply of these units may soon exceed demand.

In 2015, more than half of trophy ($10M+) and super-luxury ($5M+) condominium sales were to shell companies, structured as LLCs.  In Manhattan’s most expensive condominium buildings, approximately 70% of such sales were to LLCs, which were typically used to protect buyers’ privacy.

In March 2016, title insurance companies will be required to disclose to the government the identities of buyers who use LLCs to purchase condominiums over $3M.  This rule was promulgated in an effort to uncover illicit funds laundered through Manhattan real estate.  Although the LLC rule will expire in August, it may ultimately affect—or even deter—cash investors, who strategically used LLC ownership vehicles to purchase Manhattan’s most expensive residential property.

Thousands of new luxury condominiums will be offered for sale this year and next.  Demand for these luxury units, however, has been declining.  This could lead to an excess supply of condominiums with $5M+ sales tags.  As price is a function of supply and demand, luxury condominium prices may continue to decline through 2016.

It is unclear how the LLC requirements will ultimately impact the real estate market.  What is clear, however, is that investors and developers will face new legal challenges in the upcoming year.  Two regulatory changes—the impending LLC disclosure requirements (discussed in this post) and the recent expiration of the 421-a abatement (which I will address in my next post)—may alter incentives for developers and investors.

Overall, it is important for attorneys to know how these regulations will affect their clients and liquidity.  While attorneys can creatively structure deals to limit their client investors’ liability in compliance with the new rules, at this point, the price is still high, so I’ll wait to buy.