June 2, 2016

Signs Of Impending Fallout

A report from Bloomberg. “Apartment owners with properties in San Francisco and New York tumbled after landlord Equity Residential said new leases in those cities — two of the most expensive U.S. rental markets — are falling short of revenue expectations. Equity Residential, the largest apartment REIT by market value, on Wednesday lowered its revenue forecast for the second time this year, citing continued weakness in New York and a recent slowdown in San Francisco. The company said rates on newly signed leases aren’t meeting its projections because of an increase in supply.”

“In the West Coast city, where rents climbed 11 percent last year, about 5,100 new units — the most in 26 years — are expected to be listed for rent in 2016, data from Reis Inc. show. In Manhattan, 5,675 apartments will be added to the rental inventory, according to brokerage Citi Habitats. San Francisco effective rents in the first quarter were unchanged from a year earlier at an average of $2,492, according to Reis. A slowdown in the city’s technology industry has also been affecting the market, said Ryan Severino, director of research at the real estate data company.”

“‘Supply has been exceeding demand recently,’ Severino said. ‘Job growth in tech year-to-date is about half of what it was last year.’”

“The REIT in April cut its expectations for revenue growth because of New York weakness. The company’s forecast reduction halfway through that heightened rental period suggests its rates are missing the mark, said Jonathan Miller, president of appraiser Miller Samuel Inc., which tracks the New York rental market. ‘This is the peak leasing season,’ Miller said. ‘I would find it hard to believe that there’d be any meaningful improvement from the current conditions.’”

From Miami Today in Florida. “The Miami condominium market is relatively stable and holding its own compared to countywide statistics, experts say, despite a decrease in transactions from this time last year and a small drop in the year-to-date price per square foot. Data of waterfront condos showed that compared to the first quarter of 2015, the first quarter of 2016 saw a sizeable 36% drop in transactions and a 1% increase in average living area. The average price of a waterfront condo dropped 14%, with the average price per square foot dropping 15% from $834 to $711.”

“According to Integra Realty Resources, the 2016 year-to-date average price per square foot for downtown Miami condominiums is $441 – down 3% from 2015. Downtown, often considered the ‘face and brand of Miami,’ is a very important indicator for stability, said Anthony Graziano, senior managing director of Integra Realty Resources. ‘It’s the canary in the coal mine.’”

The Texas Tribune. “Thousands have been laid off. Tax collections are plummeting. Many are on the brink of homelessness. Rows of drilling rigs and white company trucks sit idle — there’s no telling for how long. And, yet, amid the worst oil bust in decades, the energy capital of West Texas hasn’t slowed down much.”

“If the signs of impending comeback are all around, though, so too are the ones of fallout. Pawn shops are bustling, and several fancy, new pickup trucks slapped with ‘for sale’ signs can be seen sitting on the side of the road. While housing costs have decreased significantly since then and availability is no longer an issue, officials say people who have been laid off, had their hours cut or taken lower-paying jobs are struggling to stay in their homes. Midland, which had the highest median home prices in the state in 2014, is still one of the most expensive places to live in Texas, said Jim Gaines, chief economist at the Texas A&M; Real Estate Center, while noting the entire state is considered affordable.”

“The median home price in the Midland, which topped $280,000 in mid-2014, had fallen to $205,000 last month, according to the Permian Basin Board of Realtors. Average rent has decreased from about $1,200 per month for a 1-bedroom in 2014 to $900 per month now, said Rhonda Lesley, the head of the Permian Basin Apartment Association. Still, she said she recalls a time before the boom when average rent was more like $500. Apartment occupancy, which reached almost 100 percent in 2014, has fallen to 80 percent, she said.”

“Juan Carlos Pacheco, a Child Protective Services worker in Odessa who struggled to find affordable housing during the boom, said he and his co-workers are worried about the state eliminating a $1,000 monthly housing stipend it put in place to offset housing costs during the boom and boost recruitment. If that happens, he said, ‘we’re going to be facing a different problem because people are not going to be able to afford to be here.’ Pacheco said he bought a house in December 2014 and paid more for it than he wanted to, but still considers himself ‘not a miracle, but … lucky.’”

From Globes on New York. “The worsening slowdown in the Manhattan luxury housing market is having a negative impact on the results of US developer Gary Barnett’s real estate company, Extell. Five months in to 2016, the company has not sold a single one of the 60 apartments in the One57 apartment high-rise, its flagship project.”

“Extell’s first quarter reports show a $30 million loss, compared with a $49 million net profit in the corresponding quarter last year. The company’s free cash flow was a negative $79 million, following a $429 million negative cash flow in all of 2015. Since the beginning of 2015, the company has been financing itself by taking on debt (including $148 million raised in Israel last year), giving it a $296 million positive cash flow from financing activities over the past 15 months.”

“In response to the reports, IBI Investment House real estate analyst Yaniv Saylan emphasized that Extell needs financing like we need air to breath. ‘Things will get worse before they get better,’ Saylan writes, ‘The cash is running out, and the company needs capital quickly. As of now, the controlling shareholder has not begun the process of selling properties, and is still investing capital in development of projects.’”