January 9, 2017

Questions About How Long The Current Boom Can Last

A report from National Mortgage News. “Houston’s once-red-hot economy has cooled considerably since the days when oil was selling for more than $100 a barrel and that has forced commercial real estate lender Jody Proler to be far more selective when pursuing new business. ‘Houston was clearly oversupplied in Class A office space. There were energy companies that leased out space and literally never put a single person in the building,’ said Proler.”

“Slowing economies in energy hotbeds like Houston and North Dakota help explain why delinquency rates on loans tied to office and hotel properties are on the rise. According to Trepp, a New York-based provider of securities and investment data, the total value of delinquent commercial mortgage-backed securities that were secured by loans on office buildings climbed nearly 6% in 2016 when compared with a year earlier, to $8.7 billion. The total value of delinquent CMBS secured by hotels rose 12.1% to $2.3 billion in the same period.”

“But weakness in the energy sector explains only part of the increase in problem commercial real estate loans. A surge in new construction has led to an oversupply of office space in several urban markets, including Washington, D.C. Also, many CMBS issuances that are currently delinquent are backed by loans in which banks overvalued the properties in the first place, said Matthew Anderson, managing director at Trepp. Many of those loans were originated before the financial crisis, he said.”

“‘You may have thought we were done with the excesses of the past, but we still have loans from the previous peak still causing reverberations in the market today,’ Anderson said.”

“Look no further than North Dakota to understand how CMBS delinquencies can mirror trouble spots, Anderson said. The state’s economy started to boom in 2006 when hydraulic fracturing, or fracking, in the Bakken shale region took off. Developers scrambled to build hotels and apartment buildings to deal with the influx of workers. But vacancy rates at all those hotels and apartment buildings have soared, depressing their value. About two-dozen CMBS issuances based on North Dakota projects were in delinquency status in December 2016, according to Trepp. They include a $27 million loan for the States Addition Apartment project in Dickinson, N.D.”

“The Houston-area economy has also struggled because of the energy sector’s downturn, and scores of nearly empty office buildings now dot the landscape, Proler said. There were 19 CMBS issuances on Houston-area properties in delinquency status in December.”

The Los Angeles Times in California. “Downtown Los Angeles is undergoing its largest construction boom in modern times — an explosion juiced by foreign investment that’s adding thousands of residences, construction jobs and a multitude of shops and restaurants. To find a time of greater construction one would have to go back to the Roaring ’20s, when many of downtown’s most famous historic buildings were erected.”

“But the epicenter, arguably, is the South Park neighborhood. And like the 1980s — when Japanese investment flooded downtown — foreign dollars are playing a major role. From 2014 until this summer, Chinese developers were involved in at least seven of 18 land deals downtown valued in excess of $19 million, according to real estate firm Transwestern. However, the upcoming flood of apartments — in addition to other developments — is increasingly raising questions about how long the current boom can last.”

“Landlords of new apartment buildings are now offering incentives to sign a lease. That includes Carmel Partners, which is offering up to eight weeks free rent to lure new tenants at Eighth & Grand. As a result, lenders and investors are growing more cautious on projects they will fund — a pullback underway in other marquee markets across the nation, including New York City and San Francisco. ‘I think everyone is more selective,’ said Chris Casey, managing director of capital markets for JLL, noting that investors are waiting to see how well the new projects lease up.”

The Boston Globe in Massachusetts. “South Boston rarely takes kindly to change, no matter how well-intentioned. But City Hall recently adopted a major change that even hidebound residents might embrace: new zoning regulations that will impact virtually the entire neighborhood. The rules are an attempt to restore order to a booming neighborhood that can feel like a giant construction site.”

“The new parking requirements will also increase building costs, making some projects prohibitively expensive. That could slow the pace of construction in what has been the hottest neighborhood in Boston’s building boom. ‘I’ve been told by developers that it will slow down the development in South Boston, which is probably a good thing because we are getting oversaturated,’ said Joanne McDevitt, president of the City Point Neighborhood Association.”

The Wall Street Journal on New York. “A sharp slowdown in co-op sales has hit the rarefied upper end of the market especially hard. Sales of all co-ops were down 12% in 2016 compared with 2015, while sales of co-ops that sold for $4 million or more were down about 26%, a Wall Street Journal analysis found. The decline in activity has been so steep that many real-estate brokers are wondering whether luxury co-ops, with their rigid rules and complex financial reviews for buyers, are permanently losing ground to towering new condominium buildings offering cushy amenities and less-rigorous rules.”

“‘Clearly the very high-end co-op market is pretty dead,’ said Kirk Henckels, director of private brokerage at Stribling & Associates.”

From Loudoun Now in Virginia. “A draft report on Loudoun County’s future housing needs projects a major shortage of residential units by 2040—but other reports may show just the opposite. The Loudoun Department of Planning and Zoning has counted 131,440 housing units in the county already, with at least 51,787 more permitted under current zoning and in developments already underway. Allowing for some upzoning, county planners estimate up to 185,749 may be built in the county under current conditions—before even considering the Board of Supervisors ambitious plans around future Silver Line Metro stops.”

“‘These forecasts assume no substantial changes to local or other policies to target particular household types,’ notes the GMU housing needs assessment. But substantial changes are coming down the pike, to say the least: The county is planning for up to 15,109 additional housing units, mostly townhouses and apartments, around the Silver Line through 2040.”

“Measuring those Silver Line and current buildout numbers against the GMU study, the county is planning to be seriously overbuilt, with up to 198,336 housing units available by 2040 but demand for only 167,600—leaving nearly 31,000 houses, townhomes, and apartments standing empty or unbuilt.”