October 9, 2016

Once It Starts Going Downhill, It Starts Going Fast

A report from Real Estate Weekly. “Lifestyle changes from Millennials, Baby Boomers and a favorable financing environment contributed to resilient multifamily capitalization rates in the U.S. over the first half of 2016, according to the latest research from CBRE Group, Inc. ‘Given investor caution after long periods of sustained price appreciation, we had expected to see more increases in cap rates; however, the decline in government bond yields has kept the spread of cap rates above the risk-free rate favorable, which has helped to support current price levels,’ said Spencer Levy, Americas Head of Research, CBRE.”

“‘There are significant demographic and lifestyle changes from Millennials and Baby Boomers that have a long-way to run relative to increasing demand for apartments,’ said Chris Akins, Senior Managing Director, Multifamily, Capital Markets, CBRE. ‘This, combined with favorable and plentiful financing available from Fannie Mae and Freddie Mac is making multifamily an attractive long-term prospect as reflected in the cap rates. Foreign capital is also becoming more comfortable with the asset class. We have not seen significant over-supply, although we are starting to see moderated rent growth as a result of new supply in some markets.’”

From Reuters Media. “Even with a good salary as a data scientist at a San Francisco technology firm, Yang Guo, 30, knew he couldn’t afford a home in the Bay Area, among the priciest U.S. markets. He still wanted to own property in addition to stocks, however, and soon found a way to buy cheap rental houses in faraway cities - and to outsource the associated hassles to HomeUnion, a three-year-old startup in Irvine, California.”

“The companies are pulling in money from clients in costly coastal markets that is boosting demand and home prices in the lower-cost cities they target. ‘In the last 12 months, I’ve seen more cash buyers from California than I’ve ever seen in my career, and I’ve been doing this for 25 years,’ said Anne Callahan, a real estate agent in Cleveland, Ohio, where the average rent for a single-family home is up 4.2 percent over the last year, according to Zillow Research.”

“Guo, the San Francisco investor, had no experience as a landlord and is already realizing that it is not as simple as he imagined. His property near Birmingham — in a metro area whose 14.4 percent vacancy doubles the 6.9 percent average nationwide - sat empty for a few months before he landed a tenant. The high cost of property insurance, meanwhile, is making him wary of buying in areas susceptible to hurricanes and other natural disasters.”

“There are signs, too, that the rental industry is cooling off. After the housing crash, hedge funds raced into beaten down markets including Las Vegas and Los Angeles, buying up large blocs of single family homes to rent out. But some institutional investors are now eyeing an exit strategy. Blackstone Group’s Invitation Homes announced in July that it expects to sell about 5 percent of its about 50,000 homes to current renters.”

From Marketplace. “The median price for an existing home in the United States right now is around $240,000 and rising. But there are some markets, like Detroit, where it’s still far below that — in the city of Detroit the median value is below $40,000. The prospect of buying low and selling it at a decent profit or renting it to tenants has drawn a lot of international investors to Detroit. But that can create problems.”

“‘There are a lot of people competing for these houses,’ said Rob Funk, a realtor who says his business is hot right now. On a way to a house on Detroit’s east side, which he’d shown earlier in the day to a German investor, he said he sees more and more people from overseas: the U.K., China, Indonesia. The one he showed to the German guy is two stories, solid brick, with a lot of detail work inside. But like a lot of homes that have sat vacant for years in the city, it’s missing a furnace, and needs a new roof — the repairs could add up to tens of thousands of dollars. On the other hand, he’s marketing the house at for just $9,900.”

“A buyer might fix it up and flip it, but local investors also buy up homes in foreclosure auctions and resell them to overseas investors as rental properties. Websites advertise a return on investment of up to 20 percent. ‘That seems like a very attractive return when government bonds give you 1.5 percent,’ said Stijn Van Nieuwerburgh, a professor of real estate finance at New York University’s Stern School.”

“Still, it’s no secret that this is all speculation on the likelihood that home prices will continue to rise in the city. Also, cash buyers from out of town who are speculating can push up prices somewhat arbitrarily, making otherwise very low-value homes out of reach for locals. ‘People are essentially gambling for the resurrection of Detroit,’ Van Nieuwerburgh said.”

“It also means growing numbers of landlords in Detroit are the very definition of absentee. Taneka Sanford is on the other side of that situation— she rents a three-bedroom in the city for $750 a month for her two kids and herself. During a walk through of the house, she pointed to a back hall and basement with visibly waterlogged ceilings and walls. Parts of the house smelled like mold even though she’d cleaned after a long rain. There was a hole in the roof of the garage, and a dangerous pit several feet wide and deep in the backyard that makes it unsafe for kids to play.”

“‘When it rains it pours,’ she said — meaning literally, it pours inside the house. She said she’s been asking the managers to fix these and several other problems since she moved in last November. The owners are in Taiwan. After she withheld rent and demanded the repairs, the local management company took her to court — but a judge dismissed the case in September when the management company failed to appear in court with full documentation showing it has the authority to represent the Taiwanese owners.”

“Last year the owners agreed to cut $50 from her monthly rent, but doing more might cut too deep into their returns. It’s also not clear that the Taiwanese owners know about all the problems, or what their cut is of the rent payments. In some cases in Detroit, local intermediaries have been caught scamming overseas buyers, who saw pictures that didn’t represent the homes accurately.”

The New Orleans Advocate in Louisiana. “A year ago, the three-bedroom condo in the Cotton Mill building might not have been empty for even a day in between tenants — likely movie industry professionals who wouldn’t have blanched at renting it out for $5,500 or more a month. The Warehouse District complex was in high demand. But with film work drying up after the Legislature trimmed back the state’s tax credit program; with the oil and gas industry, another major employer, laying off workers; and with a surge in new Central Business District apartments, the Cotton Mill condo languished on the market for two months this summer before it finally found a tenant for $1,000 less than normal.”

“Although the unit still went for several times what a typical renter would pay in New Orleans, the difficulty in filling it may be a sign that the city’s scorching-hot rental market is beginning to soften, according to analysts and landlords. ‘If the higher-end market can’t stay afloat, the lower-end market can’t either,’ said Karen Sepko, who manages several Cotton Mill condos and other units in the Warehouse District. ‘If the higher-end market is discounting, the lower-end market is too.’”

“At the same time, rental rates appear to be continuing to climb at the lower end of the market, leaving many tenants paying more than they can afford in rent even as many landlords are having trouble making a profit. But there does appear to be a glut of apartments, many brand-new, on the market.”

“‘There are high-end properties that are sitting vacant that people can’t get into because they simply can’t afford it. There are middle-of-the-road properties that people can’t get into because of things like insurance and property taxes,’ said Andreanecia Morris, executive director of HousingNOLA. ‘Then there are people who are living in their houses or renting and are cost-burdened. The boom we’ve seen, given the economics, is not sustainable. Given the wages of most of our citizens, housing prices continually going up is not something that New Orleans could sustain.’”

“Sepko, the Cotton Mill condos manager, has a more dire view of the situation than some of the others watching the market. While the properties she manages go for hefty sums, she said that when all the costs are added up — including the mortgage, insurance, property taxes and condo fees — many of the condo owners she represents are barely breaking even or are taking a loss on their properties. If prices continue to decline, she said, that could mean foreclosures will ripple through the market.”

“‘It takes a little while to get the snowball going, but once it starts going downhill, it starts going fast,’ Sepko said.”