November 7, 2016

Why The Fed Is Worried About A Bubble

A report from the Post and Courier in South Carolina. “Baseball season came to a thrilling end in Cleveland early Thursday morning, but the game lives on as an analogy for the smoking-hot commercial real estate business. Shellacked in the last recession, the industry has been in rally mode for the better part of seven years. That kind of a hitting streak draws the inevitable sports comparison among real estate economists like Bob Bach. Bach, director of research for the Americas at the commercial real estate firm Newmark Grubb Frank Knight, was in Charleston last week to help kick off a panel discussion about the state of the industry, both nationally and locally. The title of his opening talk summed up the big question that most everyone in the room and in the business is asking right now: ‘Past the Freshness Date?’”

“It’s arguably best of times. Vacancy rates at income-producing properties such as office buildings and apartment complexes are sinking in most markets, nudging up rents and spurring new construction. ‘I call it the golden age of commercial real estate,’ Bach said.”

“Charleston is a golden child of this gilded era. Apartments continue to go up at a rapid clip across the region, and hotel developers can’t seem to add rooms quickly enough. As in the pre-recession era, all of the frothiness is raising concerns as prices continue to climb and spread development of all kinds farther inland. At the national level, and at the Federal Reserve, much of the hand-wringing stems from whether the industry is in a bubble pumped up by years of low interest rates and the pursuit of higher returns. ‘We’re still seeing a lot of capital coming into commercial real estate - and lot of capital from overseas,’ Bach said. ‘That’s why the Fed is worried about a bubble.’”

“‘I don’t see anything on the horizon that will tip us into a recession,’ Bach said. But he also cautioned that downturns are difficult to predict. And they’re more likely to start after a presidential election, Bach added. The takeaway for anyone with skin in the real estate game - from brokers to bankers to builders - is to be prepared for the inevitable slump. For when the bats go quiet. For when vacancies and values go the other way. A game of baseball, in theory, can go on forever. An already long-in-the-tooth real estate rally most certainly won’t. ‘There will be another recession,’ Bach said. ‘We have to be practical about that.’”

From Forbes. “U.S. housing supply is down and prices are up, but there is at least one sign of softening. Landlords and sellers are increasingly cutting prices in order to find takers. According to a new Trulia analysis, in the 12-months through September, advertised prices were reduced on 9.32% of rental listings around the country, up from 7.97% in the prior year. The share of rentals with price reductions increased in 80 of the 100 largest metropolitan areas. Of the 100 largest metro areas, 70 experienced an increase in price reductions on for-sale listings year-over-year.”

“Every month this year the share of listings taking prices cuts was higher than that same month a year earlier and the year-over-year difference have expanded as 2016 has progressed. In a separate analysis Trulia found that price cuts are more common in the luxury market (which Trulia defines as the top third of the market).”

“Geographically the cuts were highly concentrated. Four of the ten cities with the biggest pickup in rental reductions are in Texas and most of the rest are West Coast tech hubs that have seen a surge in popularity in recent years. San Francisco offers a striking case study. Sale prices in the city are up more than 70% over the past five years. Nevertheless, a whopping 21.31% of rental listings in the city experienced a price reduction this year, that’s more than any other metro area.”

The Real Deal on Florida. “West Palm Beach Mayor Jeri Muoio’s rejection last week of a plan to allow 30-story office towers on the city’s waterfront made billionaire real estate investor Jeff Greene very happy. If the city had adopted the plan, Greene said he would have questioned going forward with all his various projects in West Palm Beach, where he estimates that he owns about $300 million of real estate. But now it’s full-steam ahead. ‘I’m ready to go now’ on several projects, Greene said.”

“The decrease in office space came after Greene spoke to real estate agents who said that 400,000 square feet is too much for the city to absorb. ‘It’s not like companies are lined up for this one,’ Greene said. ‘It’s been publicized in the national media, but no one has called me for space.’ Still, he’s confident he’ll be able to fill the Class A space with 30-40 quality tenants.”

“As for increasing the residential component, ‘downtown West Palm Beach keeps getting better,’ Greene said. ‘If you have apartments in a viable city, there will be people to rent them.’ Given the raft of residential building downtown now, rents may fall. But ultimately, they will rebound, he said.”

From Click 2 Houston in Texas. “These days, it might seem like there’s a new apartment building going up on every street corner in the Inner Loop, and although the local economy might have taken a hit with the downturn of oil and gas, many new rental projects have persisted. ‘When you’re driving around Houston now, especially inside the Loop, everything looks completely different than it did even three years ago,’ said Realtor Brittany Taggart, of Urban Leasing and Real Estate. ‘Places that were just a small lot (are) now a huge, mid-rise apartment complex.’”

“In September, occupancy rates dipped to 89.4 percent — a sharp decline from 91.2 percent occupied in September of the previous year, according to Apartment Data Services. The same report shows more than 17,000 new units ready for move-in as of September 2016 — only about 18 percent of which were occupied at the time the report was published.”

“A glut in the apartment rental market means complexes are competing with one another, and offering a variety of enticing specials to lure renters. ‘(Luxury apartment complexes) are offering insane specials right now,’ Taggart noted. ‘Anywhere from one month to even three months free. They’re offering iPads, they’re throwing iWatches at you, TVs (and) Visa gift cards.’”

“One such project is Market Square Tower in downtown Houston, a luxury high-rise apartment that boasts the tallest swimming pool in Texas — suspended 42 stories above the ground, off the side of the building. Like other new properties, Market Square Tower is offering big incentives, too: half-off rent for the first six months with a 13-month lease agreement.”

“So, what does this mean if you’re renewing a lease? One woman, Lacy, knows doing some research can make a big difference when it comes to negotiating a renewal. When the lease at her Upper Kirby apartment was up this summer, management wanted to increase her rent, even though she noticed a lot of empty units in her building. ‘I was not happy,’ Lacy said. ‘So I called around other complexes to see what specials they offered.’”

“Lacy also checked her apartment complex’s website and saw much lower rates advertised than what they were offering her for the same size and style as her apartment. So she asked for a discount. And she got one. Lacy said she negotiated a rate that was about $200 lower, and she was able to secure a storage unit at her property for a discounted rate. She still agreed to a longer lease. ‘Before you renew, do your homework,’ Lacy said. ‘Know the occupancy rate of your apartment. Know if you want to switch to a two-bedroom versus a one-bedroom.’”