December 13, 2016

Prices Have Taken A Hit Due To A So-Called ‘Glut’

A report from the Australian. “The direction of interest rates next year is in question, as house prices grow at the slowest rate in more than three years and business conditions remain uncertain. During the past year, Darwin property values slumped by 7.2 per cent while Perth fell by 4 per cent after the mining boom. There are now 9.755 million residential dwellings in Australia that house an average of 2.5 people per property. The data showed the average median house price in the capital cities was now $631,000, a record high and an $8000 increase on the previous quarter.”

“‘We are becoming increasingly concerned about the underlying momentum in the economy as ­evidence mounts that the non-mining economy is losing steam,’ said National Australia Bank chief economist Alan Oster. ‘Soft outcomes for employment conditions are a concern, and suggest that the labour market is only barely generating enough jobs to keep the unemployment rate steady.’”

The Daily Mercury. “From the great heights of building 72 homes worth a combined $22.33 million in one year, Mackay builder Paul Steven Zammit has confirmed he failed to steer his company clear of a ‘cash crisis.’ In a statement emailed to the Daily Mercury, Mr Zammit revealed River City Homes had run out of funds, despite ‘pouring every cent I have and every cent I could’ into it. ‘I have no excuses for what has occurred beyond my genuine belief that we could have traded through this,’ he wrote.”

“In his statement, Mr Zammit apologised to those creditors to whom the company still owed money and wrote ‘it (was) with deep regret that creditors have been hurt in the process.’ He wrote that he faced ‘the worse economic climate (he had) seen, with the crashing of the mining industry leaving an oversupply of housing in the region, increased unemployment, the tightening of the lending policies from bank(s), devaluations of properties and the length of the downturn has made it extremely difficult to trade through it.’”

From The Age. “No government ever asked the people of Melbourne if they wanted their city to become a high rise metropolis. No plan set such a goal. Governments decided for us. Halfway through its term, Victorian Labor has joined the big-city development camp. Labor’s strategy is to side with vested interests while pretending to listen to rising resident concerns about rampant development. One explanation for Labor’s approach is its addiction to land-related tax revenue – currently at about $7.6 billion annually – and its desperation to maintain the construction industry share of 7 per cent of state production.”

“The construction industry wields enormous influence through its multi-layered development, business and service elements. Peak development groups lobby effectively. Unions are a powerful lobby group with Labor. There is no lack of infill land and other development sites. In the central city, apartment supply equals projected residential demand until 2031. By early 2016, about 100 high rise apartment buildings were under construction, planned or had gained recent permits, potentially doubling the number of high rise buildings in the central city. Some densities are over four times those of Hong Kong and Tokyo.”

From SBS News/AAP. “Brisbane home prices have taken a hit as a slide in demand and a flood of new units impact the city’s property market, according to the latest data from Real Estate Institute Queensland. Property analysts have been warning of price falls in unit and apartments for months due to a so-called ‘glut’ of new buildings coming onto the market.”

From Domain News. “A Sydney buyer looking for a holiday home has snagged a bargain on the Gold Coast, settling on one of the most exclusive addresses in Queensland for $4.8 million — $1.9 million cheaper than what the vendors paid almost 10 years ago. Selling agent Tolemy Stevens said the situation could have been much worse. ‘If we had sold this property two years ago it would have only been half of what the seller paid for it in 2007,’ he said. ‘We’ve made significant ground in the past few years.’”

“The global financial crisis was to blame for the cheap sale price, Mr Stevens said. The market was at its peak in 2007 when the penthouse was bought and property owners on the Gold Coast suffered greatly during the crash, he said. ‘We genuinely believe that it’s a great result for the area,’ he said. ‘The property is only 29 per cent away from the peak from the market in 2007. No one has a crystal ball, I don’t know if we’ll be able to recreate the boom time that we had at the moment; a lot of things have changed.’”

In The Midst Of A Boom, Concern About A Bust

A report from Bloomberg. “Real estate developers who can’t get funding from JPMorgan Chase & Co.’s commercial bank may have another option: a JPMorgan trading desk. A group of traders in JPMorgan’s investment bank has expanded from selling commercial mortgage-backed securities to underwriting loans that are unsuitable for bonds, such as those for big construction projects, according to people with knowledge of the matter. In recent months, the desk has helped fund developments including Manhattan condominiums, a Times Square hotel and New Jersey’s troubled American Dream mega-mall.”

“The biggest U.S. bank by assets is making the deals as traditional lenders pull back from construction loans, which carry bigger risks and juicier yields than mortgages for occupied buildings. Traders in JPMorgan’s investment bank are harnessing demand from investors and developers to take part in potentially lucrative projects, even as the company’s commercial bank — which holds most of its real estate debt — signals caution about riskier property financing after a six-year surge in prices.”

“‘They’re lending into a higher-risk area when we’re clearly at an inflection point in the cycle,’ said Mark Williams, a former Federal Reserve examiner who lectures on financial risk management at Boston University, and didn’t have specific knowledge of the loans.”

The Houston Chronicle in Texas. “Several large real estate loans backed by Houston office buildings with vacant space and exposure to the volatile energy industry have the potential to default, according to a recent report from a ratings agency Morningstar Credit Ratings. Morningstar’s November ‘Watchlist’ report includes loans held in commercial-backed mortgage securities with an elevated risk of default based on a number of factors, including building occupancy, upcoming lease expirations and the amount of debt the owner has on the property. The ratings agency added seven loans totaling $263.5 million backed by Houston collateral to its list.”

“On a list of markets with the most ‘Watchlist exposure,’ Houston moved up 10 spots in the past year to No. 5, according to the Morningstar report. The top four markets on the list are New York City, Los Angeles, Washington, D.C., and San Diego.”

From Costar. “Over the past 12 months, the balance of Houston loans on the Watchlist has grown by more than 50% to $748.1 million, moving Houston up to have the fifth-largest Watchlist exposure from 15th largest one year ago. Much of the increase can be attributed to 2007 loans, whose Watchlist exposure more than tripled, and 2013 loans, which saw a 188.2% increase over the past 12 months. Six of the seven loans added to its Watchlist have Morningstar loan-to-value ratios greater than 90%, including five with LTVs above 100%.”

“Office vacancy in Houston increased nearly four percentage points to 14.6% in the third quarter of 2016 from 10.8% in 2014, according to CoStar Group. Sublease space pushes the total availability to roughly 20.0%. While office buildings made up the largest property type added to Morningstar’s Watchlist in November, it also was seeing weakness in other property types as job losses from energy-related sectors weigh on demand. It added two multifamily loans, the $13 million Champions Centre Apartments loan in CSMC 2007-C4 with a $100,000 value deficiency; and the $5.7 million Colonial Oaks at Westchase loan in FREMF 2011-K14 with a $1.8 million value deficiency.”

The Arizona Republic. “If you see a big construction crane in metro Phoenix now, chances are it’s the site of a new apartment complex. The Valley is in the midst of an apartment building boom. Developers are almost racing to get the complexes up. Enticed by rising rents, they are turning parking lots on prime vacant corners, old restaurants, half-empty shopping centers and older, run-down complexes into shiny, new upscale complexes.”

“These complexes are being quickly built, pretty rapidly filled up with renters and then sold. Investors have spent a record $4.5 billion on Valley apartment complexes through November of this year, according to research from ABI Multifamily. And both big-time investors, including pension funds and life insurance companies, and even individual investors aren’t done buying, ABI’s Thomas Brophy said.”

“But when the Valley goes through a building boom, there’s always concern about a bust. Last month, the Elevation on Central complex in midtown Phoenix, which was completed just a few months ago, sold for $60 million. During the same week the Alta Tempe apartments, near the city’s lake, sold for almost $68 million. ‘Alta Tempe is a premier core community with a tremendous downtown Tempe location,’ said CBRE broker Asher Gunter, who negotiated those two big deals with Tyler Anderson, Sean Cunningham and Matt Pesch.”

“That apartment brokerage team is pretty busy now. And their investor clients definitely have a lot of new developments to choose from with more than 10,000 apartments recently built, under construction or planned in metro Phoenix. The heady number of new apartments in the Valley gives some folks pause, though. After two years or steady increases, the average Phoenix-area apartment rent did dip a bit last month, according to research firm Yardi Matrix.”

The Columbia Daily Tribune in Missouri. “Despite a downturn in enrollment at the University of Missouri, a West Coast investment management firm is enthusiastic about its $21.6 million purchase of the Gateway apartments at 3904 Buttonwood Drive. ‘We understood there would be a drop in enrollment’ at MU as a result of campus turmoil last fall, said Alexander Philips, CEO and CIO of TwinRock Partners. Philips said that the company’s experience with The Row and Columbia’s national recognition as a college community — along with MU’s participation in the Southeastern Conference — ‘made us feel comfortable there would be a rebound’ in enrollment ‘at some point and time.’”

“He said Gateway, a 450-bed complex built in 2006, had an 85 percent occupancy this year. ‘We’re not happy with that,’ Philips said. ‘With student housing, you want to be around 95, 97′ percent. He said the complex averaged around 95 percent occupancy since opening in 2006. Occupancy at The Row is in ‘the low 90s,’ he added.”

“The topic of student housing vacancies was the focus of a report presented last month to the Columbia City Council. The student housing report noted that Columbia’s 25 apartment complexes had 4,414 rental units with an average vacancy rate of just under 20 percent. Excluding complexes with 50 percent or greater vacancy, which were considered outliers in the report, the average was 9.8 percent.”

“Mayor Brian Treece has bemoaned the growing bevy of ‘luxury student high-rises,’ particularly downtown. He noted that the rooms often rent for $1,000 a month and higher, a factor that challenges the city’s initiatives to advocate for more affordable housing. ‘It actually inflates the rent on that secondary housing market,’ he said. ‘Unfortunately, that is driving out the opportunity for young families’ to rent or own a home ‘at a reasonable level.’”

“Columbia-based Catalyst Design Works, previously known as Trittenbach Development, is known for its projects at Discovery Park and Brookside student apartments. The company provided an analysis several months ago that concluded ‘there’s likely an oversaturation of student housing’ in the Columbia market. Catalyst spokesman Jack Cardetti has said the company ‘takes a much longer view of the market’ for student housing unlike ‘most out-of-state developers who are looking to build something and then flip it rather quickly.’”