April 12, 2016

Distorting The Allocation Of Capital Toward Risky Endeavors

A report from MarketWatch. “The commercial real estate market is a potential asset bubble that ‘bears watching,’ said Kansas City Fed President Esther George on Thursday, pressing her case for the U.S. central bank to ’stay the course’ and gradually raise interest rates. ‘In the long run, a failure to keep interest-rate policy in line with improving fundamentals can distort the allocation of capital toward less fruitful — or perhaps excessively risky — endeavors,’ George said in a speech to an economic forum.”

“She cited prior bubbles in the stock market, housing ‘and most recently, commodity prices.’ ‘My concern for some time has been that extending monetary policy too far beyond its scope of capability risks undesirable financial, economic and political distortions,’ she said.”

The Wall Street Journal. “The apartment-rental market cooled in the first quarter, according to reports from three research companies, suggesting a six-year boom that has pushed the cost of housing to unaffordable heights in many U.S. cities might be coming to an end. Potentially most alarming to housing economists: Demand for new apartments in the first quarter was about half its typical level. The number of occupied new apartments across the country climbed by just over 20,000 units in the first quarter, compared with the five-year average of about 40,000 for the quarter, according to apartment tracker MPF Research.”

“The data suggest the bull market for apartments, which began in 2010, is on its last legs. ‘The past few years everything you touched was gold in the apartment industry, and that’s not going to be the case’ this year, said Jay Parsons, vice president for MPF Research. That’s partly because, over the next three years, developers are expected to build almost one million apartments in the U.S., more than the nearly 900,000 constructed during the previous three, according to Axiometrics.”

“‘We can’t keep building and building and building and not see weakness enter the market,’ said Ryan Severino, senior economist at REIS.”

The Pioneer Press in Minnesota. “Downtown St. Paul is undergoing a transformation. The number of housing units downtown has spiked more than 20 percent in just five years — a vast majority of it market rate. The building craze isn’t even limited to the downtown core. Many developers are expressing concern that residential properties — specifically apartments — are being overbuilt. And that the focus should be on bringing jobs downtown. ‘Someone needs to be thinking about where do we put the next office tower in downtown St. Paul, and I don’t think anybody is thinking about that,’ said Mary Bujold, president of Maxfield Research and Consulting.”

The Houston Business Journal in Texas. “Houston apartment vacancies are rising during the oil slump, according to a new report. Houston’s apartment vacancy rate in 2015 climbed to 6.2 percent, an increase of 0.4 percentage points year over year, according to Marcus and Millichap. Vacancy rates varied from submarket to submarket, ranging from a low of 4.2 percent in Brazoria County south of Houston to a high of 9.7 percent in Spring/Tomball. The brokerage attributed the city’s rising vacancy rates to the weakened job market during the oil slump and competition from new apartment projects that have flooded the market during the boom years.”

“Apartment operators have noticed more move-out notices as energy job cuts take their toll on Houston’s economy. Neal Verma, the president of Houston-based multifamily company Nova Asset Management Inc., told the Houston Business Journal several months ago that he is seeing more move-outs from his 6,000 apartment units in Houston, pushing his overall vacancy rate from 5 percent closer to 8 percent.”

The Minot Daily News in North Dakota. “The market for housing and apartments reflects the transitional time taking place in Minot. With the oil boom gradually fading into the past, and the flood recovery slogging on, the current market for housing and apartments is experiencing an increase in selection and a wider range of prices.”

“Matt Watne, president of IPM Incorporated shared that renters stand to benefit from a normalized market, too. ‘It is a renter’s market,’ Watne said. ‘Many new apartments have been built over the past several years. This, combined with a declining demand due to the drop in oil prices has created significant vacancies in Minot. Because of this, rent prices have been coming down and rental incentives are now commonplace.’”

From Biznow on Colorado. “The Denver apartment market is hot, but is it fireproof from the risk of overheating—too many apartments, not enough demand? Momentum Development principal Jeff Temple tells us there’s certainly a risk of overbuilding—at least in certain areas in the Front Range. ‘Almost all the product coming online is Class-A, and much of it’s Downtown Denver. The fourth quarter of 2015 saw a slowdown in absorption, and the beginning of concessions in many markets.’”

Bloomberg on New York. “Manhattan builder Extell Development Co. is retreating from a plan to list 38 units at its One57 tower for lease, choosing to sell them instead as demand for luxury rentals slips amid an abundance of supply. Luxury rentals are proliferating in Manhattan as buyers of pricey condos, in many cases out-of-town investors, take possession of their apartments then quickly list them for lease. The added supply is pushing down rents for the most-expensive units. The median monthly rent for a Manhattan luxury apartment — the top 10 percent of the market — fell 3.5 percent in March from a year earlier to $8,228, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said in a report.”

“‘I would be under the assumption that they had no traction on the luxury-rental tack,’ Jonathan Miller, president of Miller Samuel said of Extell’s plan. ‘The weakest segment of the rental market is luxury rentals.’”