The Housing Bubble

A paper written by Danielle DiMartino Booth
titled, ‘Commercial Real Estate: From Towers of Gold to Pillars of Salt.’ “Today’s investors in commercial real estate (CRE) can be forgiven if they’ve got the urge of late to go soft on the sector. Fine, so the current CRE cycle is long in the tooth. The same could be said for the length of the rally in just about every other asset class and for that matter the current economic expansion. What differentiates CRE from other asset classes is that it’s been hyper-driven by monetary policy gone wild. Flows into both U.S. commercial and high end residential real estate reflect the currency tug of war that started over three years ago.”

“Though few real estate consultancies are foolish enough to bite the hand that feeds them, there is a nascent acknowledgement that supply is becoming conspicuous in its abundance. Take a drive through anywhere in suburbia and you’ll conclude quickly enough that retail is the next major source of loans behaving badly. Retail is a subject in and of itself. Rather than take a deep dive, take it on faith that there’s no way all of the excess supply can be absorbed and repurposed.”

“Less visible to the naked eye is the trouble brewing in office space. Be that as it may, the numbers don’t lie. Commercial mortgage-backed securities (CMBS) comprise a mere tenth of CRE debt. Still, they provide an ideal prism into the health of the overall market given they are publicly traded; performance metrics are readily available. With that said, the most recent batch of data reveal that office delinquencies have been ticking up since midyear. Moreover, at $5.1 billion, the balance of delinquent office CMBS is second in size only to retail, which is saddled with a $5.9 billion pool of debt gone bad.”

“Private equity is sitting on a $230 billion mountain of dry powder, as in funds earmarked to buy up real estate. That’s up from $210 billion at the end of 2015 and a mere $156 billion four years ago due in large part to pensions chasing returns. Meanwhile, it looks like CMBS issuance will rise to $65 billion next year pushing up the sector’s market share to 15 percent. And don’t count out insurance companies. Some analysts predict their market share could double or more from 2016’s 13-percent base.”

“Not every tower, you see, maintains its golden allure forever. Real estate developers are the first to say they must be optimists to succeed in their chosen line of work. That said, many developers have gone down in flames, denying that the party has ended. Like Lot’s wife, they refuse to relinquish the past. They too look back, destroying what riches they had built, turning them into pillars of salt.”

From Bloomberg. “Manhattan apartment landlords are offering potential tenants more perks to avoid cutting rents further in a softening market. Incentives, such as a month’s free rent or payment of broker fees, were given on 25 percent of new leases last month, up from 14 percent a year earlier, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. It was the biggest share for any month since the firms began tracking the data six years ago, topping the record of 24 percent set in October. Landlords also gave discounts averaging 3.8 percent off their asking rents, compared with 3.2 percent in November 2015.”

“‘The effort to keep the appearance of rents being at a higher level than they actually are is taking more and more work,’ Jonathan Miller, president of Miller Samuel, said in an interview. ‘The public face of the rental market is different than what’s under the hood.’”

“At the end of November, there were 7,283 rental apartments on the market in Manhattan, a 25 percent jump from a year earlier, according to the firms. The annual growth in listings has topped 20 percent every month this year since March.”

From Bisnow. “If the country’s premier real estate market slumps, it makes everyone nervous. And there’s no getting around it, NYC is hugely in the red for office absorption in 2016. The data in CBRE and Colliers Internationals’ recent Manhattan office market snapshots is accurate, of course (the firms are some of the best in the biz), but some of the figures are pretty eye-popping. CBRE’s reporting that a negative 693k SF absorption in November brought year-to-date net absorption to negative 4.3M SF.”

“But what about the substantial drops in leasing activity? Year-to-date leasing activity, CBRE’s report reads, dropped 15% in Midtown, 25% in Midtown South and 23% in Downtown. CBRE analyst team lead Michael Slattery says the decline may seem steep, but only when compared to 2015, which had an unprecedented amount of activity.”

“What about reports of increased concessions from office landlords? ‘I take exception with people acting like concessions [are] rising all of a sudden,’ says Colliers International executive director Craig Caggiano. ‘They’ve been steadily increasing since 2008, when average rental abatements were four months. Today, on average, tenants can expect 8.7 months.’”

“He also points to New York’s unemployment rate, which was 5.6% in October, 30 bps below the 5.9% recorded in August 2008, just before the Lehman Brothers’ collapse.”

From Crain’s New York. “A year and a half after the owner of a Sutton Place development site allegedly turned down a sale offer that would have made him $45 million, Joseph Beninati now stands to lose the $4.3 million his firm invested in the project at a bankruptcy auction next Tuesday, federal court filings show.”

“Bauhouse Group began buying up a series of buildings along East 58th Street in the tony Manhattan enclave in early 2015, with plans to build a luxury condo tower. To do so, Beninati took out a series of high-interest loans from hard-money lender N. Richard Kalikow. But nearly a year later, a limited-liability company controlled by Bauhouse Group went into default and then filed for bankruptcy protection. And last month, an auction was scheduled to sell the site in an effort to pay back Kalikow’s firm, Gamma Real Estate, and a list of creditors that includes brokerages and law firms that worked on the project but were never compensated.”

“But selling the site for enough money to repay everyone—including Beninati and his firm, who are last in line—will be difficult. A real estate broker who will run the auction recently told The Wall Street Journal that he hoped the site will trade for north of $700 per square foot, which comes out to roughly $187 million. That is almost equal to what Gamma is owed in debt and interest for the main acquisition and building loan it floated for the project, meaning if a third party purchases the site next Tuesday, most of the proceeds would go to Gamma. Alternatively, Gamma could take control of the site by using some or all of the money it is owed to bid on the site itself.”

“Even if the assemblage goes for more than $700 per square foot, claims from creditors amount to millions more. And Gamma also lent the project $32 million in mezzanine financing, giving Beninati and Bauhouse only an outside chance to recoup their nearly $4.3 million investment—a striking fate because, according to testimony from Kalikow’s son, Beninati turned down an offer that would have made his firm tens of millions of dollars in the summer of 2015.”

It’s Friday desk clearing time for this blogger. “Miami condo sales continue to stagnate, new sales figures show. In a sober tone, ISG principal Craig Studnicky spoke to a crowd of about 500 real estate agents and industry insiders about the state of the preconstruction condo market in South Florida, referencing the challenges agents and developers have faced and the ‘lack of urgency’ among buyers in 2016. ‘It’s really, really tough to sell real estate when you can’t find a sense a urgency,’ Studnicky said. Studnicky called out various news reports about the flood of tens of thousands of condos coming to market in Miami, and the claim that buyers are ‘better off waiting.’ ‘How the hell do you close a condo with that kind of press?’ he asked the crowd.”

“Cipriani in Midtown was abuzz Tuesday night as hundreds of the city’s most powerful brokers, developers and lenders descended on law firm Fried Frank’s annual holiday extravaganza. But while the mood was undoubtedly festive, even the brokers had to admit the market outlook seemed a little grimmer than it did this time last year. Toll Brothers’ David Von Spreckelsen complained about how excess condo inventory was hurting sales velocity in Manhattan. ‘There’s just so many apartments out there,’ he said.”

“During Donald Trump’s campaign, he promised a mass deportation of all illegal immigrants, which could have an impact on housing markets across the country, especially Arizona. According to a Pew Hispanic report, in 2014 there were an estimated 300,000 unauthorized immigrants living in Arizona. Mark Stapp, executive director of the masters of real estate development program at the W.P. Carrey School of Business at Arizona State University, said that sending so many people out of the state could create a large over-supply of housing. ‘You’re probably going to see some playback in capital rushing to apartments,’ Stapp said.”

“Job growth in the East Bay is also expected to slow to between 1 percent and 1.5 percent over the next year, down from 2.7 percent growth between October 2015 and October 2016. Beacon’s economists blame the slowing job growth on a familiar culprit — higher housing costs. ‘Net migration is expected to dramatically decline over the next few years,’ Beacon Economics said. That spells bad news for residential real estate. Beacon said the San Francisco area rental market ‘appears to be approaching the end of frenzied growth.’ The firm expects multifamily permitting activity will fall by 18 to 24 percent in 2017, as compared to 2016, as ‘demand for apartments in the region’s pricier submarkets continues to cool.’”

“Consultancy JLL noted there have been 214 mortgagee listings so far this year - including 156 residential properties. ‘We foresee a 10 to 20 per cent increase in mortgagee sales for 2017 compared to this year,’ said Ms Mok Sze Sze, head of auction and sales for Singapore at JLL. Private residential rents weakened by 3 per cent in the first nine months of the year, and ERA Realty Network foresees a further 3 to 4 per cent drop next year owing to the increased supply of new homes and weaker leasing demand.”

“Property agents said landlords have been dropping rents and throwing in sweeteners such as new furniture and fittings to attract or retain tenants. ‘Many landlords who have bought their properties three to four years ago are settling for rents that don’t cover their mortgage payment because they went in at a high price and the market has weakened since,’ PropNex Realty senior associate director Anthea Yeo told The Straits Times.”

“Analysts said some properties were sold at significant losses this year, including a unit at Sentosa Cove condo Turquoise that went for $3.8 million. The seller had bought it at $7.16 million in 2007. Another apartment on the eighth floor at Seascape - also in Sentosa Cove - was resold at $6.35 million in October, down from its $11 million purchase price in 2011.”

“An economist has advised local property developers to unload themselves of unsold units by offering discounts as they face competition from their counterparts from China. Speaking to FMT, Hoo Ke Ping noted that the Chinese developers were typically catering to their rich compatriots and had to price their properties at above RM1 million a unit. Only a few Malaysians could afford to buy those homes, he pointed out.”

“‘The problem Malaysian developers will face is that many of them have built expensive homes that they have not been able to sell,’ he said. ‘So not only is there an oversupply, but the local developers are now facing competition from the Chinese in the high-end property sector.’”

“Amid the prolonged slowdown in residential real estate and the demonetisation’s economic fallout, several companies have been unable to attract buyers for their surplus land. Over the last year, demand in Mumbai’s real estate market has been flat. Moreover, prices are expected to fall by at least 15-20% as demand may drop further due to demonetisation. Analysts say the current market environment is not conducive because there is too much uncertainty on the sale of finished products.”

“‘There will be uncertainty for the next six months. Land is valued on the basis of backward calculation. So people will be wary of buying land,’ said Gulam Zia, executive director at realty consultancy Knight Frank.”

“As sparkling white snow settles on Stettler and area streets, homes and parks, the real estate market slows down as it does every year. Despite the winter slow down, and despite the tepid economy, it’s been a pretty good year for Fran Snowden at Century 21 Candor Realty. ‘Lower price homes sell well,’ Snowden said. ‘The higher priced ones are at a bit of a standstill.’”

“The picture Snowden paints with her observations is very similar to those of realtor James Dadensky, who has worked for more than 20 years in the industry. ‘Of course, the recession isn’t helping,’ Dadensky said. ‘But it’s not as bad as people think.’”

“Business is relatively steady, though like Snowden, Dadensky is now in the midst of the winter slump. During the summer, though, houses on the market didn’t stay there long, he said. ‘As long as people price their homes at market value, they will sell,’ he said. ‘It’s when they price high, they don’t. The glory days of house selling is over.’”