July 30, 2016

A Cascading Effect Down

A topic on apartments, starting with the Real Deal on Florida. “For the third time in six years, Fort Lauderdale’s Harbour Pointe apartment building has traded hands between investors for a growing price tag. The luxury waterfront apartments were just sold to a joint venture from New York and California for $11 million. With 34 units, this latest sale breaks down to about $323,529 per apartment. The apartments were built in 1976 and were renovated in 2010 when a company led by Richard Walters, the previous owner, modernized the building’s pool, common areas, units and elevators.”

“After finishing up its facelift in 2010, according to county records, Walters sold the apartments for $7.65 million — a cool $2.13 million more than what he paid four years earlier. The most recent owners came into the picture three years ago when they paid $9.2 million for the property. And now, the trio have sold the Harbour Pointe apartments again for a tidy $1.8 million profit over what they paid in 2013.”

“The sale was announced by Marcus & Millichap’s Joseph Thomas, Adam Duncan and Derek Soven, who represented the sellers. ‘In addition to continued stable cash flow and predictable future rent growth, the property offers a significant value-add opportunity through stabilizing rents, implementing utility reimbursements and adding additional income sources like tenant storage lockers,’ Duncan said.”

The Charlotte Observer in North Carolina. “It’s the question about Charlotte’s apartment boom that I get most often from readers: ‘When will the bubble burst?’ That was the title of a forum hosted by the Greater Charlotte Apartment Association. Jay Parsons, a Dallas-based specialist who tracks apartment data for MPF Research, said that question is being asked in other booming markets throughout the U.S. as well. ‘We’re building a lot of apartments across the country, but they remain full,’ said Parsons.”

“Charlotte ranks fifth nationally in the percentage of new apartment units added to the market (behind Austin, San Antonio, Salt Lake City and Nashville), with 3.3 percent annual growth through the second quarter this year, Parsons said. ‘That’s not a crazy number,’ he said. ‘But where it’s going to get crazier is what’s coming.’”

“Based on upcoming projects, Parsons said that growth rate will increase to 7.6 percent – a supply increase he politely called ‘aggressive.’ ‘The next wave is about to hit,’ said Parsons. A quick drive around certain Charlotte neighborhoods makes it apparent that the apartment boom isn’t evenly spread. The most dramatic increase has been in the uptown/South End submarket, which has seen a 108 percent increase in the number of apartments since 2012. That translates to nearly 9,000 new units, and means that uptown and South End are the fastest-growing submarket in the entire U.S. – yup, the whole nation – out of 1,000 tracked by MPF Research.”

“Traditionally, Parsons explained, landlords who needed to fill high-end apartments during a slowdown could offer a month or two free rent and entice people to move up from a Class B to a Class A building. But that was when rents at Class A buildings were 25 to 30 percent higher than Class B buildings. That premium has now widened to about 50 percent. ‘If there is an issue, that’s going to be a real challenge across the country, including here in the uptown/South End area,’ Parsons said. One market where that’s already being felt is Houston, caught in an energy sector crash. There, Parsons said, high-end apartments are having to offer three months free rent to draw tenants, a costly proposition for developers.”

“‘That’s a lot of concessions,’ he said.”

From CNBC. “Rents are soaring and demand for apartments is historically high, but some developers and landlords are overestimating the strength of the U.S. apartment market — and paying for it in quarterly earnings. Others are warning that the second half of this year will be even tougher. Most of the product is in pricey markets and pricier neighborhoods, not in areas where demand is highest. That is because the costs of land and construction rose.”

“‘Any time the numbers will work, developers will build. That’s what happened in San Francisco and New York. Land prices and construction costs went up so much, the only thing you could build was high-end apartments,’ said Alexander Goldfarb, senior REIT analyst with Sandler O’Neill, which currently has a hold rating on all the apartment REITs it covers.”

“That is precisely why Equity Residential missed expectations so badly in its second-quarter earnings and revised its outlook lower yet again. ‘Clearly 2016 will not turn out to be the year we had originally expected due to deteriorating market conditions in San Francisco and New York City, which combined made up 50 percent of our initial growth forecast for the year,’ Equity Residential CEO David Neithercut said on a quarterly earnings call this week. ‘These markets have turned to become quite volatile.’”

“Oversupply is part of the problem, but jobs, especially high-paying jobs, are weighing on all the apartment developers. Concessions are now the rule more than the exception. AvalonBay gave renters four times the monetary concessions in the second quarter of this year compared with those of a year ago. If you start offering two months free, a $3,500 a month apartment is now $2,900, Goldfarb said. ‘There is a cascading effect down,’ he said.”

The Denver Post in Colorado. “Three out of five apartments built in metro Denver since 2014 came with rents at the top one-third of the market, while only one in 15 came with rents in the bottom third of the market, according to an analysis from Zillow. In metro Denver, 60 percent of new apartments fell in the top rent tier, where rents averaged $2,060 a month. Only 6.6 percent had rents that would fit in the bottom third, where the average was a much more affordable $1,164 a month.”

“Denver wasn’t the most extreme city when it came to a concentration on new luxury apartments. Tampa, for example, had 93.1 percent of new apartments with rents in the top tier, while in Chicago it was 79.2 percent. But Denver was among the metros, along with Charlotte, N.C. and Seattle, that did the worst job of supplying new units in the bottom tier of rents.”

“The lopsided nature of apartment construction is creating some anomalies. Zillow estimates apartment rents in metro Denver on the whole are rising at an 6.5 percent annual rate, but the bottom third of the market at 8.6 percent rate as tenants battle it out for a limited supply. Where things get really distorted is in the top tier, which is measuring a 13.9 percent annual increase in rents. Zillow chief economist Svenja Gudell said that isn’t demand driven, as on the bottom end, but rather because the new units are pushing the market higher.”

“The rent increases, however, don’t include the concessions that developers are offering, such as a month or two rent, to win tenants to new projects. As more units hit the market targeting a limited segment of the population that doesn’t have to rent, developers could be leaving themselves exposed, Gudell warned.”

The Stranger in Washington. “According to information gathered by Zillow, the Seattle-based online real-estate data company, and recounted in a Seattle Times post, the ‘typical monthly rent in the Seattle metro area surpassed $2,000′ and is up an astonishing ‘9.7 percent in the past year.’ As a consequence, Seattle is number one in rent growth in the US.”

“But what is causing this sharp increase? Seattle Times gets this answer from Zillow’s chief economist, Svenja Gudell, who sounds just like someone who has received a solid education in the nonsense of neoclassical economics: supply and demand. (Gudell also mentions that the market is building a lot, but only for those with a lot of money.) There is, however, no mention of the financial sector or speculation. None. The fiction turns out to be the absence of fictitious capital.”

“What is missing from the picture is, of course, reality, which is always defined or shaped by historical developments. What is absent from much neoclassical thinking is precisely history, and so its frame of reality tends to be empty, contentless. This is why when the housing crash of 2008 occurred, the neoclassical school of economics, which is still the dominate mode of economic thinking, called it a ‘black swan.’ It was not supposed to happen. It was not in their mathematical models. It came from nowhere.”

“This nowhere only existed in the absence of a history that contained events like the 1998 collapse of Long-Term Capital Management, the savings and loan crisis of the 1980s, and much, much more. These instructive events were not at all dissimilar to the crash of 2008, which was caused by financial markets that are pressed, as always, to find high-grade investments with high yields and burdened by private debt.”

“Property is also what the British call a placement, meaning, to use the words of Joan Robinson (the greatest heterodox economist of the 20th century), a ’store of purchasing power for its owner.’ This means, if a property market is open (or weakly regulated), its value as use becomes subordinate to its value as storage and value as exchange.”

“And it is here the politics of absence makes its appearance. We are still talking about the housing supply in the terms of use value, when in fact the housing supply has become, democratically speaking, about useless values. To exclude finance from the economics of Seattle’s red-hot real estate market is pure madness. We are in the process of making yet another one of those black swans.”