I have received many phone calls and emails over the past two weeks regarding the proposed Monarch tax abatement. Justifiably, many people are alarmed to think that we might lose potential tax money at a time when residents are suffering from job losses and a depressed market. I was not on the Council in 2005 when the Monarch development was put into motion. Was this development the best option at the time that it was created and approved? My father did not think so. Councilman Mapp clearly did not think so (read his blog for details). Given the outcome, it seems that they were right. Unfortunately I can’t go back in time and sell the land at fair market value or approve a project that would serve a better purpose. That time has come and gone. What I can do, however, is understand what choices need to be made now, given the circumstances.
My thought process so far has been:
1) What is our reality given the real estate market?
2) Let’s say the tax abatement is approved. What is the best that can happen? What is the worst that can happen?
3) Let’s say the tax abatement is not approved. What is the best that can happen? What is the worst that can happen?
It is important to examine Plainfield’s real estate reality. I’ve analyzed information on the average absorption rate over the past 3 months (May-July) for Plainfield and 17 nearby municipalities.
The absorption rate is a key measurement of the real estate market in a given community. It measures how much time, in months, it would take for all of the current inventory (multi-family, single family, condos, coops, etc) to sell. The rate is based on the supply of units available for purchase and the demand for those units.
- 0-4 months is considered a “seller’s market” which means that the demand for homes is greater than the supply
- 5-6 months absorption is considered a “normal, balanced market”. In a normal market the supply of and demand for homes is balanced
- 7+ months is a “buyer’s market” which means that the supply of homes is greater that the demand
Take a look at Plainfield’s absorption rate as compared to other markets. It is debatable to say that anyone is experiencing a true seller’s market with no one below 4 months. Agents who work the municipalities with the lowest absorption rate have told me that those units are being sold far below asking price. According to these figures, some communities are in a normal market. Like Plainfield, however, many communities are still in a buyer’s market.
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Plainfield’s absorption rate is 12 months. This means that at the current rate that units are selling, it would take 12 months (1 full year) to sell everything - and that’s if no other units are put on the market. Since the real estate bubble burst no municipality has been safe from unbalanced markets. At one point it was not unheard of that the absorption rate was peaking at 20+ months in municipalities including Watchung and Warren. Rates as high as 50+ months have not been unheard of across the state. Historically, when the market drops Plainfield is one of the first communities affected and one of the last to recover. This trend has improved somewhat over the last decade.
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Although Plainfield’s current absorption rate is still fairly high, the good news is that the rate has been trending down in recent months. This is consistent with what some real estate experts have been predicting. Jeff Otteau, a trusted real estate analyst and head of the Otteau Valuation Group, believes that the market will bottom out in the 2nd half of 2009 (May 27, Star Ledger). As noted in other blogs the many incentives that have been put in place at the state and national level have contributed to this balancing of the supply and demand for real estate.
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So, what does this mean for the Monarch? Well these numbers show that Plainfield’s market is still not a balanced market. There is too much supply and too little demand. Ideally all 63 units at the Monarch would be sold quickly, be 100% owner-occupied and be fully-taxed (no abatement). Based on the above figures, I have to question if this is realistic.
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I’d prefer to leave gut-feelings out of the decision-making process and focus only on the numbers from both a short-term and long-term standpoint. In a later post I will share my thoughts on how the City will be affected should the abatement be approved or rejected.
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12 comments:
Thanks for a smart, reasoned look at the Monarch abatement in the context of the broader real estate market. All we can ask of our representatives is that they use their brains and skills to make sense of issues before the community. You seem to be doing that. I look forward to your next post.
Annie, You are thinking too much. Just because the admin are for it, some people are against it. The bloggers all did a knee jerk anti-action without looking at any data.
They would rather see this project fail. Plainfield got here with that kind of thinking.
We need better thinking. We need reasoned thinking. I do no care who said it, but if it makes sense, then where ever it comes from I for one am OK with it.
Mark
Annie, you are really great. I admire your thoughfulness on everything that you do. Here are some additional thoughts:
1- The data you looked at is for this year and for 3 months. What does this data look like in a more normal time in real estate. Let's take 1998 or 2000 for an example
2- This does not take into account any changes within the city itself. Do we think that Plainfield will have no downtown or other assets worth touting - ever? Our school system is looking better, so perhaps we should take into account the future.
3- Why Monarch? If our absorption rate is so high, why are we offering this only to one building - why not all the homes that are on the market and foreclosed if our goal is to sell homes?
4- Why do we think the tax abatement means people will keep their homes? How do we know the Monarch won't become rentals or if the abatement is passed, that the owners won't foreclose anyway?
I think we need to stay a steady course. Before abatements, why don't we look for a vision? Why don't we stop building residents and look at economic development? And, why don't we do a study on what will happen 10 years from now with the train going straight into NYC and how it will affect us?
Thanks for this analysis. However, even with what you have said, there is a lot of conjecture. These units, given their low price and the newness and the amenities, will sell at least as quickly, if not more quickly, than other units at the other condo developments. They do not need an unfair abatement that will sit on the backs of the rest of us taxpayers, Annie. That's why your father was against it. Commercial development can be helped with an abatement. I hope your next post includes the true figures that developers and realtors look at. This developer stands to make a lot of moolah off these units. Look at what he's doing in Rahway and look at his track record around the state. He will make his money. he will just make it a little more slowly. It's always a slow market for developers when every unit doesn't sell the first day of the open house. I know it and you know and every real estate agent and broker in town knows it. Resist giving more breaks to this guy. The federal tax credits are more than enough to make the units desirable to a first time home buyer. This abatement is only for the developer. Don't ruin the town further. That is not an emotional assessment. It is a reasoned approach.
Unfortunately you are looking at this from a very limited view. Just putting up one set of data is not going to convinne a lot of people. It does not convince me.
We know the market is bad. So what else is new? Why not give every home that is for sale a tax abatement to make it move?
Annie,
Sophistry! Justification sounds good but does not pass the "blink" test. Tax abatement gets Monarch and the pay-to-play politicans off the hook. How can you justify giving tax abatement to sub-prime buyers but ask others to pick up the difference? $200,000 is a steal- even for apartment quality condos. Worse case scenario: the bank forcloses. It is doubtful, if valued as apartmnets, the debt will be satisfied; there is certainly no return on equity - if there ever was any. With the market improving and if Plainfield politicans will put the city's future first, this development will ultimately make a contribution to the tax role. Intuition often is the best test.
Annie, One more individual has earned my gratitude for openly informing the public on her thought process regarding a controversial issue. I am eager to read your analysis on the pros and cons. I am sure that your final decision will not be based on political expediency.
I assure you that my objections and I am sure those of the other blogers are based on our concern for Plainfield and its citizens not emotions.
Annie,
If I had to sell my house now, would I be able to offer a buyer a tax abatement? No. I would have to lower and lower my price, and the city would get their piece. I, and many other Plainfielders who have been here a long time and have been good citizens and active in the community, are having a beast of a time paying mortgage and taxes. Most of us have been scraping to stay current. It is a major burden. I don't complain about taxes (much) because I believe it is the price for a civilized society. However, if people come in and buy these units, using Plainfield as a stop on the train, and contribute nothing AND get a break on their taxes, you will see a LOT of people getting really pissed off. Times are very tough right now. It is blatantly and cruelly unfair to stick your loyal Plainfielders with further tax burden to make it easier for the developer to unload his condos. He can suck it up.
Thanks for weighing in on this, unfortunately your post is very limited. You haven't said anything that we don't already know: The housing market is bad and in Plainfield it's a little worse, and it's a buyer's market. How can you make a reasoned analysis by looking at such short-term data? I would suggest you look at 5 or 10 years of the market. I would suggest you look at what happened in the housing market in the early 1980s as well. The tone of your post seems to be equivocating on this issue. What makes giving this developer a tax abatement more important than giving me an abatement to the buyer of my house? What's the best that could happen? All the condos sell quickly. The worst? They sell just as slowly as everything else. You are a licensed agent, so you know that to get a sale you have to lower the price. The developer can do this. Even if he were to lose money, which is not likely at all, given what he put into it (construction costs, marketing, etc.) that is the price of doing business. There are scores of homeowners who lose money when selling their homes. I am sure you have dealt with some of them on both sides of a real estate transaction. It happens. It is not likely to happen if this developer's greed were put in check and he were to lower the price to something reasonable. The bottom line: they are not selling because they are overpriced.
Per The Monarch Annie... In a nutshell.. Zone for NO APARTMENT RENTALS -- You and the rest of the City Council can do this.. Yes, yes you can. Then... let it fail if need be. That's it. What development are we going to hinder by letting this fail? The new Target going in on West Front Street? The 6 story office tower by the train station? The 6 restaurants by the Netherwood Train Station ? The condo and retail development complex off Park ?? The new Wegmans next to the Monach ? The new movie theatre downtown ?? Which of these is not going to come here ? I'll answer that for you. They are not coming anyways. The Monarch has nothing to do with our future -- NOTHING. What does have something to do with our future is downtown, The Connelley properties, the massive vacant uncared for parking lots, the buildings by the train station downtown with the roofs falling in, the main boulevards packed with $1 stores and nothing else, the public drinking, the garbage and general lack of care for the city as a whole --- on the city and property owners part. Solve that and we have solved the present and future development problems. The Monarch is not the key. Repeat, The Monarch is NOT the key. Let The market dictate what will be with The Monarch not the City Council. Zone it for NO RENTALS...and let whatever happens, happen.
To 8/4 8:22am
AMEN!
a second amen!
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