The Housing Bubble

A report from Philadelphia Magazine in Pennsylvania. “The real estate sections in local and regional media of late, most definitely including this one, have been awash with stories about new luxury rental developments. Hardly a day passes without an announcement of a new high-end project on the drawing boards or a ribbon-cutting at a newly completed one. This boom in high-end apartment construction in Philadelphia comes as a similar one nationwide enters its eighth year. That’s about the point where market cycles come to an end as supply begins to outstrip demand, and when that happens, those developers who find themselves standing instead of sitting when the music stops usually have to resort to price cuts to fill vacant units.”

“Lauren Gilchrist, vice president and director of research at JLL, sees signs that it’s getting awfully close if it hasn’t peaked yet. Gilchrist noted that about 8,300 new rental housing units have been delivered or are on their way since 2012, and another 3,200 are in the planning stages. ‘I’m beginning to hear from developers about significant concessions being offered to new tenants,’ she said. ‘Absorption has slowly begun not to keep pace with the delivery of new units.’”

“Gilchrist doesn’t see the bursting of a bubble on the horizon here, but she does see the high-end market softening in the near term: ‘Projects not yet in the development pipeline may be riskier than they were a year ago.’”

The IndyStar in Indiana. “I’ve written about real estate in three cities since 2011 — Milwaukee, Baltimore and Indianapolis — and have spent much of my time asking the same question: When will developers stop building luxury apartment buildings? The answer remains unchanged — for now. The nation’s inexplicable apartment boom will persist for at least another year. But there is evidence that it’s waning.”

“Developers are expected to complete 3,700 new apartments in metropolitan Indianapolis this year, including 1,023 Downtown, according to apartment brokerage firm Tikijian Associates. The firm also projects that 1,528 apartments will open Downtown in 2018. Apartment construction has surged in almost every large U.S. city, turning vacant lots into mid-rises and fulfilling the millennial dream of granite countertops. Most experts have predicted the bubble will burst — some day — while marveling at just how many people are willing to pay more than $1,000 a month to live in buildings with theater rooms and pools.”

“Much of last year’s eye-popping rent growth can be attributed to new luxury buildings that opened, said George Tikijian, senior managing director of Tikijian Associates. But, for existing buildings, Indianapolis rent growth is following a national trend that suggests the apartment boom as we know it is almost over. ‘I do think we’ve probably seen peak rent growth and peak occupancy growth for the next few years,’ Tikijian said.”

From Crain’s New York. “The market for land in Manhattan fell precipitously in 2016 according to data from the real estate services firm Cushman & Wakefield. The dollar volume of land sales dropped to just under $3 billion in Manhattan, a 74% decrease from the year prior, as the number of transactions fell by nearly 40%.”

“The data is further evidence that the land market has taken a drubbing amid concerns about an oversupply of residential units in the city, especially high-end condos. Sales have also become difficult to finance as banks have pulled back on lending to land deals. Construction financing has also become more difficult to source, discouraging buyers.”

“According to Bob Knakal, Cushman’s chairman of investment sales, the drop in land prices was not reflected in the company’s report because prospective sellers have not yet adjusted to the slow down and have still insisted on top-dollar sums reflective of the frothy land values from over a year ago. Knakal said that parcels that might have commanded $800 per square foot over a year ago were now roughly 25% cheaper to buy, or around $600 per square foot, a discount that will become clearer in the coming months as more deals take place.”

“‘It takes awhile, a year to 18 months, before sellers get used to the new reality and begin selling at the new market prices,’ Knakal said.”

From Reason Magazine on Texas. “The retirement fund for firefighters and police officers in Dallas is more than $5 billion in the red, and Mayor Mike Rawlings thinks someone should have to go to jail for messing things up so badly. The big problem for the Dallas pension fund is that benefits promised by city officials were too generous relative to what the city was contributing, and the investment returns failed to make up the difference. It overinvested in real estate (at one point, the Dallas police and fire pension plan had the highest percentage of real estate holdings of any major pension fund in the country, according to one report), leaving it vulnerable to downturns in the housing market.”

A letter to the editor in The Citizen in Georgia. “If you lived in Fayette County over the past 20 years, you might remember the enthusiastic multi-family apartment debate in Peachtree City. Developers were saying hundreds more apartment units were needed in the city and many residents were questioning the logic of bringing in more multi-family rental housing. Development interests wanted the apartments because it was profitable and investment money was plentiful. Eventually, we end up with over-supply of rental housing. With the glut comes slashing rents and offering concessions to attract renters, which crashes the entire market.”

“Chasing single millennials with apartments when the market in downtown Atlanta is heading into a rent-reducing glut is foolishness, especially when millennial families are opting for single-family housing. As with housing preference, another fallacy is millennials will not drive cars. J.D. Power’s Power Information Network reported that the share of the millennials in the new car market increased 28 percent. Millennials are estimated to be 40 percent of the nation’s cars sales by 2020.”

“We do not need to be fooled and we must remind ourselves that suburbs are continuing to outstrip downtowns in overall population growth, diversity and even younger residents. Three-quarters of people age 25 to 34 live in metro suburbs. Building apartments and other high-density housing is not the answer to any of our problems and could cause further problems, especially when the units are built with materials denoting a short useful lifespan.”