February 19, 2016

Lower Demand, Oversupply And A Business Downturn

It’s Friday desk clearing time for this blogger. “Faced with both an uncertain global economy and signs of softening in the city’s ultra-luxury condominium market, should JDS Development Group and Property Markets Group really be soldiering on with plans to build 111 West 57th Street? That’s the question an analyst asked of top executives at Apollo Commercial Real Estate Finance, which provided the mezzanine debt for the supertall project on Billionaires’ Row. ‘Is it your understanding that, despite all the volatility in CMBS and market disruptions, that the developers there are – is it their plan to continue to march forward and at this point?,’ Steven Delaney, an analyst at JMP Securities, asked. ‘Nobody’s pulling back and saying, ‘Okay, I am putting my project on mothballs till the market settles down?’”

“The question, a signal of the market’s broader worries about a correction at the top of the Manhattan residential market, comes as lenders begin to retreat from financing uber-luxe projects. Stuart Rothstein, COO of Apollo Global’s real estate business, looked to dispel worries about the viability of the project during the call. ‘Is what’s going on a risk-off mentality and a lack of liquidity, or it is a fundamental shift in the underlying economy and are we heading towards a recession?’ I’d say I’m not smart enough to know the answer to that,’ he said.”

“There’s an adage that says, ‘the rich are always rich’. There is also an expectation that expensive homes will keep appreciating, regardless of how the overall housing market is performing, But in reality, high-end housing has been showing some signs of weakness. Right here in Anne Arundel County, we are also seeing continued softness for the million-dollar market.”

“When you look at homes priced between $1 and $2.5 million, the months of supply (MOS) is nearly 12, meaning it would take a year to sell all the houses in that price range currently on the market. In May and June of 2015, the situation was even worse, with the MOS for high-priced homes climbing to over 18 months! All this adds up to a glut of expensive homes on the market. If your place is worth $1 million plus, don’t shoot for the moon on price. All you’ll do is shoot yourself in the foot.”

“Good news for those looking to rent in Chicago: Rental rates in the city are falling according to a new report from Abodo. Chicago had the third biggest monthly drop in rental rates among the national markets the company tracks, 9 percent. Only San Jose, California; and Las Vegas, Nevada, both with 11 percent drops, had larger falloffs. Several factors may be contributing to the downward trend, including dropping demand for units and a glut of available housing options in Chicago, the Abodo spokesman said. There has been a huge boom in housing constructing in recent years, according to Michael Taus, Abodo’s vice president of growth. ‘We believe a steady decline in rent prices in Chicago might be on the way,’ he added.”

“Despite a continued production of more than 11-million barrels of oil a month, the effects of the slowdown are moving into Watford City. Economic Development Director Gene Veeder says in many cases, salaries have been trimmed and company housing subsidies have fallen by the wayside, and housing prices are falling to keep units full. ‘They’ve dropped by 50 percent.’”

“More than a third of the housing units in Abu Dhabi are unrented because of a drop in demand and landlord behavior, according to the municipality. ‘Nearly 37 per cent of the available housing units in Abu Dhabi are now vacant…our target is to reduce that level to 8 per cent in 2020,’ said Abdullah Al Baloushi, director of the land and property division in Abu Dhabi municipality. ‘As for the new real estate law, we hope that it will ensure a more accurate property database, control the market and push unqualified and unauthorized brokers out,’ he told local reporters in the capital.”

“Abu Dhabi, with a population of more than two million, has one of the highest rent rates in the world but rents have eased over the past few months due to lower demand, oversupply and a business downturn because of low oil prices.”

“A massive number of Melbourne homes are lying vacant, research from a tax reform organisation shows. More than 82,700 residential properties — or 4.8 per cent of Melbourne’s housing stock — sit empty, while many people struggle to afford to buy or even rent accommodation. Prosper Australia project director Karl Fitzgerald said the report showed land was being hoarded for profit. ‘The incentives for property speculators to hold prime locations empty is an affront to anyone locked out of housing,’ Mr Fitzgerald said.”

“When it comes to putting the frozen city of Yingkou, near the border with North Korea, on the style map, the developers are not short of ambition. But one thing is missing. There aren’t any prospective buyers. In fact, there are no people here at all. No cars on the eight-lane roads; no one in the Olympic-themed sports centre. As dark descends, light shines only from ‘The Happy Pizza Hut,’ Yingkou’s brush with western cuisine. Whole apartment blocks are black. ‘No one wants to live on this side of the river,’ explains a resident of the nearby old town. ‘It’s too far from everything. There are no jobs. It’s a complete waste of money.’”

“Among Yingkou’s developers, ambition has given way to desperation. They admit privately they’ve only sold a fraction of their stock. None would risk talking publicly, but I get a rare opportunity to sit down with Wang Shi, founder and chairman of Vanke, the world’s largest home builder by sales. ‘It’s a real problem,’ he concedes. ‘Many cities have an oversupply of housing.’”

“The wealth and sophistication of Fort McMurray is hard to compare with smaller boom towns, but one common feature is that the decline is often gradual, as enormous reservoirs of wealth seep out of the community. After many years of prosperity, residents cannot accept that the party is over. As houses go up for sale and municipal projects grind to a halt, everyone knows that something important has changed in Fort Mac as the global price of oil has fallen further and stayed low longer than almost anyone expected.”

“‘There was a lot of hope,’ Hark Savinsky says of Atikokan, which saw its population shrink from about 7,000 to just over 2,000. ‘And this is part of the denial, I suppose.’”

“He compares the community’s reaction to the stages of grief, where acceptance only comes after denial, anger, bargaining and depression. It’s hard to say what stage Fort McMurray is at just now. The talk that everything will be back to normal ‘after we get the pipeline’ may indeed be part of the denial stage. In December 2014, I quoted one of Canada’s top commodity economists who said oil had oversold and would bounce back to $70 US a barrel in 2015. But these days even optimists are losing their smiles.”

Bits Bucket for February 19, 2016

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