RAFAEL PI ROMAN: I'm joined now by Chris Bonanos, Real Estate Editor of New York Magazine on the balcony of New York Magazine. Chris, you often hear people talking in this city about the area that's going to be the next Soho or the next Tribeca. What does it take for a neighborhood to be transformed into a Soho or a Tribeca? CHRIS BONANOS: Well, to some extent, it depends on what people are looking for at that time. But in general, especially in New York it takes a couple of things. You have to have transportation ... And then a decent stock of buildings that could become housing. And that doesn't mean they have to be houses or apartment buildings. When Soho became Soho those loft spaces were old industrial spaces. So they turned out to have big windows and lots of light and they turned out to be good places to live, so that's key. You have to have some kind of buildings that will make good housing. RAFAEL PI ROMAN: So old buildings are a good thing to have. CHRIS BONANOS: It helps. RAFAEL PI ROMAN: Now what's the process? Sometimes people identify the transformation to a trendy neighborhood as the gentrification of a neighborhood? It's not just that is it? CHRIS BONANOS: No, it's a process that happens in a lot of cities and many times over. What tends to be the first wave is artists without money who need a lot of space to work. And if you need a lot of space and you don't have money you go to a neighborhood that's often empty or abandoned, or just poor and that has spaces that are not being used in one way or another. [Such as] in the case of Soho or Tribeca, which was the center of a manufacturing base in New York City [that] largely left town in the '40s and '60s ... A lot of garment factories and small jobbers downtown stopped using these big industrial spaces. And artists found these empty buildings and they were almost empty. It's hard to imagine now, but in 1960 what is now Soho they were talking about knocking... down for a highway. There was a study done that said there was nothing there of architectural merit. Nobody thinks that anymore. So anyway, the artists come in, and if they are successful obviously there will be galleries and things, and what then happens is people who want to be around the artists start to arrive. It's people who work in the creative industries; in New York it's publishing and art dealers and people like that. They move to the neighborhood because they like the creative atmosphere. They, however, are salaried workers... They are also people who are probably coming from neighborhoods that are not as poor, just because again they are middle class. And they start to bring the businesses in that would support a neighborhood like that, like cafes, restaurants, shops... And then when those services come into the neighborhood and you start to get people who have more money, like investment bankers and executives. And they move in and then suddenly the artists, unless they are very successful, can't afford to live there anymore, and they have to go stake out a new neighborhood. And that has happened to Soho now. The galleries have disappeared in Soho; they are going to Chelsea and Brooklyn. The residents of Soho now are mostly upper middle class people and there are plenty of support services, but the galleries are turning into Old Navy Stores, Armanis, or expensive restaurants, and it's a fully gentrified neighborhood. RAFAEL PI ROMAN: We just saw a piece about Red Hook and some of the transformations going on there. Is Red Hook a good candidate for a trendy neighborhood or a future Soho? CHRIS BONANOS: Well, it could be. It has some of the earmarks in that there's a lot of opened up space, the waterfront, old factories. On the other hand it doesn't have subway access, which is a problem. There is talk on and off of building a trolley service there, and of course there's the bus line going to Red Hook. So there's some support there. And it is -- there is a certain amount of proximity to neighborhoods that have already been gentrified. So people will be close to people they know if it becomes gentrified. We'll have people who are priced out of Park Slope going into Red Hook. However, the buildings that are there now -- there's not a lot of buildings that have never been housing... That's not like Carol Gardens, for example, there were a lot of people living already. It doesn't have brownstones... There is some housing, but it's largely industrial space, so it will take a certain amount of renovation to make that into housing, and it's a little trickier in terms of access than Soho or Tribeca was, so it might be a little slower. RAFAEL PI ROMAN: You know, in Red Hook we saw there are individuals committed to transforming the area. Does it always take that? Have all the neighborhoods that have been transformed into trendy neighborhood -- have they always had key individuals, real estate people who engineer the change? CHRIS BONANOS: Yes, sometimes it's true. That can help because sometimes it takes grant money or seed money or somebody having to lure businesses there. It helps certainly, especially if a neighborhood like Red Hook is a candidate for gentrification, but it doesn't happen just overnight automatically because of extenuating circumstances. Like I said, people would be a little more reluctant to invest if they can't get there. RAFAEL PI ROMAN: What about residents who don't want a transformation? Historically have people who haven't wanted a neighborhood change, have succeeded, or do they ultimately lose out if the trend is in that direction? CHRIS BONANOS: Well, that's a problem because gentrification definitely has a downside. When a neighborhood gets -- the problem with gentrification is that it happens too fast, faster than neighborhoods traditionally change, and faster than one or two generations. It happens within a decade very often. Soho, in 1970, was largely abandoned because there were a few scattered artists' lofts. By 1990 it was an established fairly wealthy neighborhood. That happened pretty fast and I think faster than one generation. So what happens is older people who have been in the neighborhood for their entire lives, they don't have time to retire and gradually move on. It comes in right next to them and suddenly their rent can say, in five years triple, or something like that. And [sometimes] these are older people with fixed incomes. Obviously they are stuck there. They don't want to move. They have lived in their neighborhood for 70 years. Who wants to move out of a neighborhood you've lived in for 70 years? And then they are surrounded by people who are paying much more than they are and they end up... leaving the neighborhood or becoming very frustrated. RAFAEL PI ROMAN: Is there an upside to gentrification for people who aren't wealthy? CHRIS BONANOS: Yeah, there is. I mean it does bring life into a neighborhood that was often poor or just sort of quiet, where there wasn't much going on. That means there's money coming in -- that means cafes and restaurants, which do mean more money in the neighborhood. Therefore the services get better. You know garbage pickup and stuff become more regular, and most important the crime rate usually goes down. You couldn't really walk on Avenue D because there was somebody dealing in your neighborhood and for a long time you are really in trouble. RAFAEL PI ROMAN: Or unless you pretended to be crazy at 2 in the morning, as I often do when I walk down Avenue C. CHRIS BONANOS: Yeah right. Go around and wave your hand, talk to your hand or something like that. Or run. And obviously having [services] is more expensive, but on the other hand you won't get mugged. And that's the key difference for a lot of people. And again especially for elderly people living there for a long time. I know somebody whose grandmother lived on Avenue A for many, many years and she just used to not go out after dark. She just stopped going out. She wouldn't go to the supermarket or the bank, and now she can. And that's a big change. RAFAEL PI ROMAN: Now what are your candidates for the neighborhoods that may become the next trendy neighborhoods in the city? CHRIS BONANOS: It's hard to say, because a lot of the neighborhoods that would be gentrified in New York have been gentrified. We are sort of running out of undiscovered territories. But people have been talking for a long time about Bedford Stuyvesant because there's a great stock of brownstones and it is sort of, I mean, it's not the [run-down] neighborhood that it was, say 20 years ago. I mean it's still poor. And there's still a lot of blocks that are pretty rough, but it's also a neighborhood that has great housing stock and it's a tight-knit community. You know people who live there are really committed to it, and it's a candidate; it also has good subway access, and that's important. And it happens to have great architecture. The brownstones are terrific and that will attract people. RAFAEL PI ROMAN: What about Queens or the Bronx, nobody ever mentions Queens or the Bronx as a possible future trendy place. CHRIS BONANOS: That's true. The South Bronx hasn't been gentrified in a way that Soho or Cobble Hill has. It's sort of been different. What it has is come back to a certain sense from being, you know, the slum that everybody described. Again, that's a catch phrase for slum -- the South Bronx was sort of the word people used for a really, really tough neighborhood. Fort Apache, I mean. And what's happened to a lot of those blocks is because of Federal money coming in and other things, and again, people were committed -- it's sort of become rebuilt as a middle class neighborhood. It's sort of a place where gentrification has been a little slower and not quite as artist driven. It's neighborhoody now... And I now Queens -- Astroria is starting to shape up too. It's traditionally a Greek neighborhood, over the past 30 or 40 years. And now other immigrant groups are coming in. You are seeing sort of like Dominican restaurants in between the Greek restaurants, but it's also a mix. There are some middle class people in Astoria, and it sort of -- it's a nice mix right now. And the housing stock is gorgeous so I think it does attract... people... But again, it's sort of coming along as the neighborhood -- people, middle class people, are moving in. RAFAEL PI ROMAN: So in future Bohemia we should still look to Manhattan and Brooklyn. CHRIS BONANOS: Well, with the unquestionable lure of Manhattan -- RAFAEL PI ROMAN: Chris, we want to talk about the New York Housing market in a second. But first here's a look at a few apartments that we found in a market recently. [VIDEO INTERLUDE] RAFAEL PI ROMAN: You know, Chris, after 9/11 there were dire predictions about the housing market in New York City, both commercial and residential. Talk to me about the residential market. What's happened? CHRIS BONANOS: Well the dire predictions did not come true mostly. You have to talk separately about rents, a rental apartment is different than apartments that are for sale, but the buying markets just -- it didn't crash. There were a couple of months where it got real quiet because everything in New York got real quiet. You couldn't close on an apartment because if your lawyer's office was on Wall Street, he couldn't get into his office. So there were a couple of months where nothing happened. But after that the market really picked up where it left off. RAFAEL PI ROMAN: Why? CHRIS BONANOS: It's hard to say. The most basic reason seems to be that the mass exodus from New York didn't happen. Everybody had friends who said that first day, that's it, I'm leaving town. And I don't know about your friends, but none of mine moved. Nobody I know left. You hear occasionally about somebody who bought a country house and went up there -- goes up there more often, but that's about it. Nobody really left. And so the basic number of people who want apartments didn't change and there are also fewer apartments than there are people. RAFAEL PI ROMAN: And people are still coming in. CHRIS BONANOS: Yeah, people are still moving in. This is, I always called this the FRIENDS effect. RAFAEL PI ROMAN: What's that? CHRIS BONANOS: Well, for 10 years, on NBC in primetime there has been a sitcom that effectively was an infomercial for New York. What it tells people is if you want to be hip and in your 20s or early 30s, a young, hip person who has a good time living, you should probably do it in New York. And of course it's not exactly a realistic portrayal; nobody seems to have a job on the show, or if they do it's about three hours a week, and in a coffee shop the rest of the time hanging around making wise cracks. It does sort of tell a kid in the Midwest who had been watching that show -- it's been on for 10 years... that's half their life if you're in college now -- that you gotta come to New York, look how much fun it is. And so you'll have an apartment that's a quarter the size of theirs, but it's a powerful image. And before that people watched SEINFELD. Now it might be SEX IN THE CITY. You know, they all add up to a powerful draw to the city, for young people to come. RAFAEL PI ROMAN: And that hasn't changed since 9/11? CHRIS BONANOS: I don't think so. I understand that applications at NYU are still up. RAFAEL PI ROMAN: We just saw a $15 million apartment. Who buys a $15 million apartment in New York City? CHRIS BONANOS: Anybody with $15 million. I mean, it used to be old money and it's not anymore. It's all sorts of different people now, largely because of the stock boom over the past 10 years. There are people who made a killing on stocks and things like that, and there's a lot more money flying around the city than there used to be. RAFAEL PI ROMAN: Even though the market's down? CHRIS BONANOS: Well, if you played it right, you got out a year ago and then you have this wad of cash that you gotta do something with right? The average income in New York, if I'm not mistaken since 1980, in Manhattan anyway, it has quadrupled. RAFAEL PI ROMAN: Really? CHRIS BONANOS: Yeah, it's much higher than it used to be. RAFAEL PI ROMAN: I need a raise. CHRIS BONANOS: There's a lot more money around and therefore the salability of an apartment that's $5 or $10 or $15 million is a lot. There's a lot more potential buyers than there used to be. RAFAEL PI ROMAN: Now we also saw an apartment going for $675 in Woodside, Queens, right next to the 7 train. As if the 7 train were running right through the house. Now who rents an apartment like that? CHRIS BONANOS: Again, largely speaking, somebody who doesn't have $800... Also it depends what sets you off. I have a friend in Chicago who bought a house right next to the railroad tracks because she likes the sound of trains. There's something for everyone out there, I think. I have friends who can't stand my apartment because it looks over a major avenue and the noise level is substantial. I don't hear it at all, and when I go to their apartment the fact that there isn't a deli within 75 feet drives me nuts. It's a matter of what you love. RAFAEL PI ROMAN: Speaking of Chicago, how does the housing market in New York compare to cities like Chicago or San Francisco? CHRIS BONANOS: It's worse. Sure it was always worse and I think it's going to be worse for a long time. Other cities are not an island and therefore they can expand more readily... I mean, of course that happens in New York too when you go to the other boroughs, but Manhattan's prices which are particularly the ones that are the craziest, and are driven by the fact that you can't build anymore. It's certainly the most expensive county and the only one that compares is San Francisco during the boom. In fact, San Francisco now has been much harder hit by the internet bust than New York because... a lot of the city's fortunes were tied up in the high-tech industry. And in fact there's a lot of empty housing and rents are actually going down more substantially than in New York. Also San Francisco was proceeding -- well I think it was 1995 when the average rent in San Francisco went up 40 percent, and you can't sustain that, especially in a city where all of that money is coming from one business. RAFAEL PI ROMAN: Is there a greater demand now in New York City for apartments, for family apartments? CHRIS BONANOS: Definitely. The changes over the past 10 years, most specifically about crime, but other things too -- there's more money, and people are just more willing to stay in the city when they have families. Therefore, it is much more [unbalanced] especially because a lot of what went up in the 50s and 60s, a lot of the post war buildings were studios and one bedroom, there's definitely a shortage. So bigger apartments, say three bedroom apartments, something where you can raise a child or two. There's a much higher demand for those, especially in neighborhoods that were largely built in the 50s and 60s. There's also a trend of people buying two apartments and knocking down a wall. It's happening a lot more than it used to. Again, mostly in post-war buildings that are all one bedroom studios. As a matter of fact, people will buy three apartments next to each other -- the real estate gods have to line up with like a planetary alignment, you need three on sale at the same time. I read about one person who bought two and one underneath and cut a stairway. You do whatever you can. RAFAEL PI ROMAN: Now what's your prediction for the future housing market in New York City? CHRIS BONANOS: It's hard to say, of course. But as long as the stock market continues to be in real trouble, there are always questions. But I don't see anything changing... There are still a lot of young people who want to come to New York. There are still a lot of professionals who want to be in New York. There are people who want to raise families here. If they have babies or toddlers they clearly have made that decision and are probably going to stick with it as long as their kids are in school. So that's a good 20 years. And the market's not going to fall very much. It's fairly bright unless something radical happens, you know, like what drove the last [bear market]. The problems say of crime and drugs in the '70s and '80s was that the city lost a lot of money and economic force because the manufacturing base was leaving. Now the city has to a certain extent been redefined as an information capital or a financial -- well it's always been a financial capital, but as a place for creativity and culture, and that's not going away. That's just, to a large extent, how a lot of cities can redefine themselves. People want to live there, not because they have to work there, but because they want to be there to go to concerts, museums, and art galleries and things like that. That's not changing. RAFAEL PI ROMAN: Chris, what's the difference between rent control and rent stabilization? CHRIS BONANOS: Rent control is the one that gets people the most excited. Rent control sends apartments that were rented, for which a lease was written between I think it's 1947 and 1971 when the law changed. If you have a lease that was written during that period, they are laws that were put in place during the second World War when people were away at war and they couldn't pay their rent or were working in unusual situations, and so they said, okay, we'll freeze the rents for people coming back... So from 1947 to 1971, if you wrote a lease it could only be increased a set amount every year. And if you still have one of those leases which I believe the number is about 50,000 people still do, your rent can only go up about 2 or 3 percent a year. There's a commission that decides every year how much the rent can legally go up. So if you have a lease that was written in 1960 for a giant apartment for $400 a month, it's probably gone up to about $600 to $700 now. And you have hit the lotto. Rent stabilization is a lot gentler. It simply governs about, I think it's a couple of million, between 2 and 3 million apartments. And it just essentially regulates the amount that the rents can go up every year. It can start sort of anywhere; it has started at a much higher rate. So it's a lot easier on both landlords and tenants. RAFAEL PI ROMAN: Well that used to be, rent regulation, particularly rent stabilization which affects more people used to be almost like the third rail of New York City politics. Maybe the first or the second rail -- no politician could be against it. Is that changing? CHRIS BONANOS: A little bit. There is a school of thought now, particularly outside the city and I would say most of the opposition is going to go up in Albany, but there is a school of thought that says it's actually not good for the housing situation in New York. The anti-rent control position is that by taking a number of apartments out of the pool that is set by the free market that it is simply setting the rates for everybody. You are making the number of available apartments smaller. Because nobody who has a rent controlled lease ever leaves. And in fact, people will try to roll it over from generation to generation, but there are leases from the late 40s that are in grand kids' hands now. So it makes much smaller the pool of available apartments in the free market therefore driving up their costs. And the theory if we were to get rid of rent control, the free market will go down and rent control will go up and we'll see some sort of equilibrium and it's better for all concerned. It also has taken out of circulation some really big, fabulous apartments and therefore it leaves the lousy housing stock for the free market... It only benefits a few and they are not a select few who are say, people who are most desperate, or they are not chosen by any -- it's just the luck of the draw. So it can be wealthy people or poor people or anybody and so the idea is that it's... RAFAEL PI ROMAN: Like the tenant could be wealthier than the owner of the apartment that he or she lives in. CHRIS BONANOS: It happens. Sure. There are people in giant apartments who would not have a problem paying free market rent. RAFAEL PI ROMAN: But you say the popularity of it may be waning to some degree? CHRIS BONANOS: Yes. For one thing it's been chipped away at. The law changed in 1997... If your landlord keeps improving the apartment, he can apply a percentage of the money he spent on improving the apartment to the rent. And so if he does a huge amount of renovations on an empty apartment, he can get it decontrolled. You can only do this after someone has moved out. But he can get it decontrolled; take it out of the rent control market. The other thing is if you have what's called luxury decontrol. If you've made more than $175,000 in the past two years, and you have a rent control lease you lose the lease. You've gotta pay free market the next year. So that was an effort to keep the very wealthiest people who are hanging onto these leases from -- RAFAEL PI ROMAN: So a number of these apartments were deregulated. CHRIS BONANOS: Right. RAFAEL PI ROMAN: But that law expires next year, does it not? And there's talk about rolling back some of these laws. CHRIS BONANOS: Yes, there's talk about a bunch of ways of changing it... lowering that total, which has already been lowered. It used to be $250,000 a year, and now it's $155,000. There's talk of rolling some of it back, there's talk of -- RAFAEL PI ROMAN: Extending it. CHRIS BONANOS: Yes. RAFAEL PI ROMAN: What do you think is going to happen? CHRIS BONANOS: It's a very politicized thing. As you said, it's a really touchy subject. People get very hot headed and it's hard to get what's going on in Albany too. It really, I don't think it's true about a lot of political issues, that there's a lot of wheeling and dealing about this one -- RAFAEL PI ROMAN: Chris, one of the reasons that people believe that rent regulation is becoming less popular is because more and more people are buying co-ops and buildings where others have stabilized apartments and they don't like it. CHRIS BONANOS: That's certainly true. We did a cover story about this not too long ago in the magazine in which people talked about their neighbors. It's in buildings mostly that are mixed, that are in co-ops, but still have some old rent stabilized or rent controlled tenants. And you know, they pay a quarter of what their neighbors pay, which is bound to create a little bit of hostility, or a lot of hostility and then also the people who pay much more in the building will sometimes get fewer services than the people who are paying -- RAFAEL PI ROMAN: How is that? CHRIS BONANOS: Well the thing is if you are under the rent control and rent stabilization laws, you're entitled to what you've been getting. So for example, if you live in a rent controlled apartment that has a terrace, they have to work on the roof and they set up scaffolding on your terrace. You can say you have lost your terrace for that year and it will reduce your rent for the next lease, which would be two years. So naturally the building will be making less money on your apartment, which is already much below market rate and is presumably being subsidized by people who are paying full fares. And that is bound to create more -- RAFAEL PI ROMAN: And if there are new rules that apply to co-op owners about the use of the elevators, for example, that can't apply -- CHRIS BONANOS: Right, because again it's a reduction in services -- RAFAEL PI ROMAN: So I could see where a bit of hostility would kick in. CHRIS BONANOS: You got it. RAFAEL PI ROMAN: What about the arguments in favor of rent regulation? CHRIS BONANOS: Well, the arguments have been made 1,000 times over, that it keeps -- in a city that's getting wealthier and getting more and more expensive, it keeps some apartments available for people who have less money. And therefore it often sustains either older people who haven't been swept up in this sort of income boost that has happened in recent years, or people who have quirkier jobs, musicians and artists. People who inherently are unlikely to make a lot of money -- you'll still have them in the building. It's generally agreed that a mix of people in a neighborhood and even in an apartment building is good for that neighborhood to get more -- it's more vibrant, people would rather live there. A building that is all, I don't know, all bankers or lawyers -- even bankers or lawyers would agree it's more fun to have somebody around the corner who does something different. RAFAEL PI ROMAN: It is true that New York City has a particular feel to it because middle class people, working people, and rich people could live within a few blocks from each other. CHRIS BONANOS: That's right, of course. And New York City has a concentration like no other in America of what you could call the creative industries, people who work as writers or in TV or things that demand more creativity than every day businesses. RAFAEL PI ROMAN: Ten years from now, what's your prediction about the buyers' market in residential housing and the rental market in residential housing? CHRIS BONANOS: Unless there's some radical change that we can't foresee, I don't see anything changing... an even more horrifying terrorist attack than we've already experienced, or something just again completely out of the blue, that really, really clobbers our economic base. The city has the same draw as it had. As I said, young people still want to come here and people are starting to want to raise families here, and that locks them in for the length of an education. So you have a kid entering school now, there's a likelihood that you're going to stay for 12 years. That's not going to change, and again, barring something horrible, people are going to want to stay. That will keep prices up, for good or bad it will keep people here. RAFAEL PI ROMAN: Chris, thanks a lot.