November 13, 2016

The Fantasy That The Good Times Will Keep Rolling

A report from the Post & Courier in South Carolina. “Nearly three-dozen apartment developments with 6,251 units are either planned or under construction in the city of Charleston. More than half of those units are already being built, while others are grinding their way through the city’s approvals process. Some developers may abandon their projects before breaking ground, but in general, the apartment wave appears to be an all-time high for the city. ‘It makes us ask the question: are we growing in a way that is sustainable for the community, or are we growing in a way that works for developers to come in and title properties, then flip those properties and move on with a profit?’ Kristopher King, executive director of the Preservation Society of Charleston, said.”

“There is an opt-in zone already on the books that requires apartment developers in the Upper Peninsula to dedicate 15 percent of their total units to workforce housing. Of the roughly 2,000 units in that zone, about 300 will be for workforce housing. King added that many of those units are only suitable for single-person households. ‘You look at these workforce housing units, they average about 600 square feet and they’re basically studios,’ he said. ‘Are we building housing for everybody, or are we just creating a lot of inventory for college students and very young professionals?’”

From Crosscut in Washington. “Each morning on his way to work at City Hall, Seattle’s budget director Ben Noble bikes past two under-construction office towers. Both are slated for completion next year, Noble says, and both ‘are going to deliver a lot of product to the market.’ But he adds, neither building is ‘fully leased, by any means.’ The city isn’t anticipating a repeat of 2008, when the financial crisis caused construction to grind to a halt. The new forecast, issued by Noble’s office in late September (and echoed by King County and several private forecasters) predicts a soft landing: a nine percent decline in construction through 2019, coupled with an even more modest cooling in the city’s broader economy.”

“While economists start to get nervous when booms stretch past the historic average (around eight years), the opposite is true for most people. The longer the good times keep rolling, the easier it is to buy into the fantasy that they’ll keep rolling, that our tech-fueled economy is, somehow, becoming untethered from national trends and historic cycles. Or as the recent Delta Airlines ad insists, ‘You can’t stop Seattle.’”

“Arguably, agglomeration is even a stronger force today. It also helps explain why developers have been pumping out new office space — and why they’re so confident that housing demand will remain high. According to real-estate market analyst Dupree Scott, developers expect to bring another 25,000 rental units online by 2019. While wages have been soaring (3.6 percent annually in the Seattle metro area) they’re not rising nearly as fast as rents (9.7 percent) or home prices (11.8 percent). ‘You see rents growing at 15 to 20 percent over the last two years, but show me where incomes have gone up to match,’ says Mathew Gardner, chief economist at Windermere. ‘They haven’t.’”

The Tennessean. “Between Broadstone Germantown, Carillon, Peyton Stakes and 909 Flats, more than 1,000 apartment units are coming online in a Germantown area market that’s considered ground zero of Nashville’s apartment construction boom. Beyond perks, developers are dangling amenities such as a rooftop entertainment venue and art studios to differentiate their properties in the increasingly crowded market.”

“Last week, Nick Ingram and Loren McBride and their two dogs settled into a unit at Broadstone Germantown, drawn in part by a pitch of a month’s free rent and a $1,000 gift card. ‘Basically, by the time you add that over the course of the year-long lease, it ended up being almost as cheap as what we were paying in Murfreesboro,’ Ingram said, estimating that with the value of the incentives, the couple is paying $1,250 a month instead of $1,470.”

The Star Tribune in Minnesota. “Demand for rental apartments in the Twin Cities metro continues to defy expectations. Marquette’s Apartment Trends report said the average market rent was $1,091, a 5.4 percent increase compared with last year. Because so many of the new units that have come online are luxury units, much of that increase was a change from the typical mix of properties.”

“Valerie Doleman, vice president for marketing and communications for Twin Cities-based Sherman Associates, said that occupancy throughout the company’s entire portfolio in the Twin Cities has remained high — about 96 percent. She said that leasing activity has remained strong, but with several high-end projects currently in lease-up, renters have been pondering their decision. The company is putting the finishing touches on the Encore, a luxury 12-story rental building overlooking Gold Medal Park and the Mississippi River in the Mill District. The building has the kinds of finishes that are typically found in upscale for-sale condos.”

“Rents range from $1,780 for a studio to $8,600 for a penthouse unit. Though move-ins won’t start until December, the building is 12 percent pre-leased. ‘People are requiring more time to make a decision,’ she said. ‘We have adjusted our marketing strategy to better help them in their decision process.’”

The Wichita Eagle in Kansas. “Renters, rejoice! Wichita is going through an apartment construction boom, which will mean more choices and, increasingly, a break on rent increases. Developers built 800 units this year and more than 2,300 units since 2013, according to a recent report from Martens Commercial. 2017 may come close to matching 2016, with two apartment projects on the west side and two downtown under construction. And after 2017, the number of potential projects on drawing boards goes on and on.”

“Martens agent Jeff Englert said there are signs Wichita is reaching the peak in this apartment construction cycle. New construction is expensive to pay for, and developers count on the buildings to fill up fast. That’s why construction in a boom cycle can be like musical chairs. The first ones into the market stood out and likely are doing well. Those who wait to enter the market risk waiting too long and not having their projects fill up without some money-losing incentives. ‘You just don’t want to be that last guy,’ Englert said.”

“Craig Hanson, president of Weigand-Omega, one of the city’s largest property managers, said he expects a lot of pressure to fall on older apartment complexes, from the nicest properties in the good locations, called Class A, to the next level down, Class B. Their owners will have to reinvest to stay even or will have to accept a lower rent to compete. ‘They’ll feel more pressure for incentives and free rents across the entire market,’ Hanson said.”

The Houston Chronicle in Texas. “Some coveted neighborhoods of Houston, where top-end luxury apartments rose en masse, are now seeing some of the sharpest drops, as the apartment glut in the weakened economy continues to take hold. Economists and the latest monthly reports on Houston’s apartment market reveal the signs of a depressed market, particularly in Montrose, River Oaks, the Museum District, the Galleria and The Woodlands. These markets are also among the most expensive and were targeted for new projects during Houston’s boom years.”

“Commenting on the multifamily market this week, University of Houston economist Bill Gilmer said after oil prices started to fall, Houston developers continued to build, expanding the local multifamily market by 30 percent. ‘We just could not quit building these apartments,’ the director of the Bauer College’s Institute of Regional Forecasting said during his semiannual economic update. ‘Sure enough, there are some problems arising.’”

“Landlords are offering so many move-in specials that Gilmer noted a thread on the Houston Reddit website that lists all the buildings with deals of up to three months free rent. Average rents have peaked and vacancy rates in some Inner Loop neighborhoods could be above 10 and 20 percent by year’s end. Multifamily construction will also peak this year, falling from more than 27,000 units to nearly 8,000 units next year, according to Gilmer’s projections. In 2018, fewer than 2,000 units are expected to be built.”

“Bruce McClenny of Houston-based Apartment Data Services said rents and occupancy among top-end luxury apartments continue to slip. But he said recent months have shown that this has trickled down to the lower-end older products. ‘The economy is so slow that we are starting to see the move-outs overtake the move-ins,’ McClenny said. ‘It’s kind of a slow, agonizing thing that is going on. … For renters, it is a good thing because there are a lot of good deals out there.’”

“As construction jobs finish, fewer people will need to live on the blue-collar east side and drops in occupancy and rents will be seen, McClenny said. ‘That will be a concern for 2017,’ he said. ‘That’s also going to be a drag on the overall numbers.’”