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NY real estate pros fear interest spike in debt ceiling fight

July 28, 2011 12:00PM By David Jones

From left: Steven Spinola, president of the REBNY; Eric Anton, executive managing director at Eastern Consolidated; Debra Shultz, managing director at Manhattan Mortgage; David Heiden, a principal at W Financial and Barry Sternlicht, chairman and CEO of Starwood Capital Group

As the debt ceiling debate nears a critical juncture in Washington D.C., real estate executives in New York are concerned that absent a final resolution, the fragile recovery will be short-circuited by a sudden spike in interest rates.

Steven Spinola, president of the Real Estate Board of New York, the 12,000-member trade organization, said the industry’s main concern is the impact a debt ceiling default could have on projects financed with tax exempt bonds.

“If there is no agreement and our credit rating goes down, what will that do to interest rates?” Spinola said.

He said many landlords have multi-family apartment buildings financed with 30-year loans that would face a potential interest rate spike with a credit downgrade. He noted if that happened, lenders might force those landlords to put more equity into a deal to keep the loan in balance because there is a limit to how much additional income they could derive from existing rents.

Spinola said he did speak with Sen. Charles Schumer’s office about the debt ceiling debate, but REBNY has not sent any official policy positions on the debt ceiling fight. Spinola fears that both sides are locked into such a fierce ideological battle that an organization like REBNY will have limited impact this late in the game.

“I hope there will be a compromise,” Spinola said.

Schumer’s office did not return calls seeking comment.

Robert Knakal, chairman of commercial real estate brokerage Massey Knakal Realty Services, said he has reached out to two of out-of-state U.S. senators.

“They are really exasperated with the breakdown in communications,” Knakal said. The two senators, whom he declined to name, “have said the partisanship is the most significant it has been during the course of their careers.”

Knakal agreed that the biggest concern is about the impact of higher interest rates, which would put downward pressure on property values. He said at the end of the day, such a decrease could threaten the viability of certain projects, as lenders would have to change their assumptions about the ability of borrowers to pay off existing loans.

Eric Anton, executive managing director at Manhattan-based commercial real estate brokerage Eastern Consolidated, said the bottom line is that the country spends too much money, and the resulting downgrade could hurt interest rates over the long-term.

“It’s not about where we are now, it’s where we’re headed,” he said. “There may not be enough money on the planet to pay interest on this debt.”

On the residential side, there has been little change thus far due to the debt debate, but a downgrade that affects interest rates could change all that.

“If rates climb, mortgages would be more expensive for buyers, which could slow down sales,” said Debra Shultz, managing director at Manhattan Mortgage, the largest residential mortgage brokerage in New York, “and higher rates would also slow down refis.”

Fixed-rate mortgages averaged 4.55 percent nationwide on a 30-year loan, according to data released today by Freddie Mac.

David Heiden, a principal at W Financial, a Manhattan-based lender that specializes in bridge loans and mezzanine financing, said that he currently has a half-dozen deals on the table, and nobody has mentioned the debt ceiling to him as having any impact on their transactions.

Kathy Braddock, co-founder of Manhattan-based residential brokerage Rutenberg Realty, said the assumption remains that once the screaming stops, there will be a resolution.

“Most people are just passively assuming this will work itself out,” Braddock said. “Interest rates could tick up. But they are so historically low, borrowing money is still the buy of the century.”

Barry Sternlicht, chairman and CEO of Starwood Capital Group, a Greenwich, Conn.-based real estate fund, said it it’s unclear what immediate impact that a default would have, but he’s stunned nevertheless that Washington has allowed the debate to sink to the level it has.

“It’s inconceivable to me that this couldn’t be worked out over time,” he said. “Maybe they shouldn’t pay the politicians, and that would balance the budget.” Tags: REBNY Robert Knakal barry sternlicht charles schumer david heiden debra shultz
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Anonymous

Knakal has influence with out of state senators ? W

Comment #1 Posted By: Anonymous 07/28/11

Anonymous

The situation is simple, the GOP is going to fold and Obama is going to be president again and then we can all continue paying higher taxes and have our money mismanaged so we could have homeless shelters in the middle of Chelsea.

Comment #2 Posted By: Anonymous 07/28/11

Anonymous

The fact that Knakal has out of town juice is a testament to his stature as a thought leader of national repute

Comment #3 Posted By: Anonymous 07/28/11

Anonymous

I agreewith Barry Sterlicht,they shouldn’t pay the Politicans,that would balance the budget for a few years…

Comment #4 Posted By: Anonymous 07/28/11

Anonymous

organization like REBNY ?? What a JOKE

Comment #5 Posted By: Anonymous 07/28/11

Anonymous

Nice these chaps finally woke-up. Whether default or downgrade, you’re going to see mortgages freeze (again), prices go down and people who want to buy won’t be qualified at higher interest rates. All of this could have been avoided by Congress. Raise the debt ceiling to at least 2012 and take the “several months” the credit agencies have given to go in and get a real deal and reduction of deficit. They’d probably have til mid-October to devise and to Nov. 15th to pass both chambers. The world markets would quiet down PLUS American citizens might get a plan that’s well written. They have this option and they’re not taking it. Just amazing!

Comment #6 Posted By: Anonymous 07/28/11

Anonymous

#2 are you serious “continue paying higher taxes” ? You realize taxes are at the lowest levels in something like 30 years and that the United States has the lowest tax rates of all western industrialized countries. Look at the tax levels from the mid 1990’s compared to today, today’s tax rates on the Federal level are anywhere from 20 to 25% LOWER than what they were in 1996, 96, 97 etc. Know your facts.

Comment #7 Posted By: Anonymous 07/28/11

Anonymous

Knakal spoke with Senator Blutarsky

Comment #8 Posted By: Anonymous 07/28/11

UrbanDigs

Here’s how it endgame will go down. The perception of US debt as a AAA investment will degrade. Who knows about the actual rating, its all about the markets perception, and trust in the asset class. More often than not the markets will force the hand. As treasury sells bonds, the markets will determine the right yield that justifies the perceived risks – whether a default actually occurs or not is another story. If rates do surge, we will see QE3 talks heat up and the fed will think, thats the key, think that they must buy treasury securities to stimulate the economy and lower rates. if equities and HY and other risk assets do selloff, the usual safe haven of treasuries may not be perceived as safe anymore. Thats when gold flies.

Comment #9 Posted By: UrbanDigs 07/28/11

Anonymous

In defense of Robt. Knackal,- An increase in interest rates would hurt all of us in R. E., so if Mr. Knackal is catching the ear of some Senator you can trust it should help ALL of us in Real Estate.

Comment #10 Posted By: Anonymous 07/28/11

Anonymous

Knakal for congress !

Comment #11 Posted By: Anonymous 07/28/11

Anonymous

REBNY is a worthless entity that will have no bearing on any choices.

Comment #12 Posted By: Anonymous 07/29/11

Anonymous

Anton’s right – there is absolutely NO ROOM for any increase in interest rates because just a 100 bp increase in treasury rates will cost us $145B extra in debt service. Any serious debt reduction in a rising interest rate environment is virtually impossible. While I’m rooting for a compromise in DC over this mess, the fiscal conservatives are absolutely right in trying to fix this mess NOW.

Comment #13 Posted By: Anonymous 07/29/11

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