January 2, 2017

Investments Have Created Too Much Inventory

A report from the Wall Street Journal. “America’s luxury-apartment craze is coming to an end. Landlords of upscale properties in cities across the U.S. are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions, including as many as three months of free rent, to attract tenants. The turnaround comes after a seven-year boom during which apartment rents have risen more than 26%, far outstripping inflation and income growth. The slowdown, said Jay Parsons, vice president for MPF Research, is being driven not by a pullback in demand but rather a flood of new supply. More than 50,000 new units were rented by tenants in the fourth quarter, six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.”

“Nationally, more than 378,000 new apartments are expected to be completed in 2017, almost 35% more than the 20-year average, according to real estate tracker Axiometrics Inc. Most of the new construction in recent years has been on the high-end. Of 189,100 multifamily rental units completed between the fourth quarter of 2015 and the third quarter of 2016 in 54 U.S. metropolitan areas, 84% were in the luxury category, according to CoStar Group Inc., a real-estate research firm. For apartment units currently under construction, renters would need to make at least $75,000 a year to afford 88% of those units.”

“Benjamin Gable, a 31-year-old advertising copywriter, recently scored a $200-a-month discount on 1.5-bedroom apartment in Brooklyn’s trendy Greenpoint neighborhood. The apartment was originally listed for $2,700 and had sat on the market for six weeks, according to Rich Cassell, Mr. Gable’s real-estate agent. The landlord had already dropped the price to $2,500 and Mr. Cassell negotiated it down again to $2,300. ‘There’s just so much that has hit the market, it is oversaturated with high-end luxury,’ Mr. Cassell said.”

The Real Deal on Florida. “Miami’s real estate market experienced the first wave of a slowdown in condo sales at the start of 2016, with some experts warning it could lead to a recession by the end of the year. Twelve months later, South Florida real estate didn’t implode, but the industry is beginning to feel the pinch of a bear market. In downtown Miami, a saturation of projects marketed to buyers looking for units as investments has created too much inventory, said Dan Kodsi, developer of Paramount Miami Worldcenter and Paramount Bay.”

“Ezra Katz, founder and CEO of Aztec Group, said he foresees construction financing slowing down dramatically next year. ‘Underwriting standards are changing and lenders are becoming more conservative,’ he said. ‘Lenders have a lot of loans on their books. I think projects that are contemplated as new construction and have not been financed will find it very challenging, particularly the Johnnies-come-lately or new kids in town.’”

From The Thrillist. “As soon as he walked through the door, Matt Semmelhack knew it was over. He’d been away from his San Francisco restaurant AQ for less than a week, but when he got back, it just felt different. It went beyond the usual concerns of the modern restaurateur. ‘I wasn’t worried the lights were properly dim, or the regulars were in the right booths,’ he says. Instead, Semmelhack was just looking at his staff — and all he could see was the money each one of them was costing him, flashing in front of him like a video-game score. ‘I knew right then,’ he says, ‘we had to shut it all down.’”

“Semmelhack is not the only restaurateur looking to duck and cover. The American restaurant business is a bubble, and that bubble is bursting. I’ve arrived at this conclusion after spending a year traveling around the country and talking to chefs, restaurant owners, and other industry folk for this series.”

“In the restaurant world, rent always sucks. In Miami, Michelle Bernstein’s Cena by Michy helped rebirth the MiMo historic district but was forced to close this year, after the landlord attempted to triple the rent. And even Danny Meyer had to close and move Union Square Cafe in New York, which, since 1985, had served as one of America’s culinary landmarks, when he couldn’t rationalize paying the huge rent hike the landlord proposed.”

“Thanks to its dubious location, AQ didn’t really have a rent issue. And in 2013, it actually increased its revenue, pulling in $3.1 million. But despite making $200K more than it had the previous year, its net profit was $50K lower, as costs continued to creep up and up. What started as $250K profit and an 8.5% margin in 2012 was down to $40K and 1.5% by 2015. Because it had to pay off $42K in Small Business Association loans each year, this meant negative net cash flow for 2015.”

“Then came 2016. In 2016, AQ’s projected revenue was $1.6 million, down a million dollars from the year before. They went from doing 240 covers (dinners served) per night at their peak to around 100 this past year. Naturally, there were a lot of factors at play. Maybe it’s because there were 3,600 restaurants in SF when it opened, and now the SF Environmental Health Department puts that number at 7,600. Maybe the physical and mental toll of running an aspirational sit-down restaurant for five years was just too much.”

“Whatever it was, with losses of around $250K and a 40% drop in revenue, AQ will serve its last meal sometime in January, 2017.”