The Housing Bubble

A report from the Chico Enterprise-Record in California. “Dozens of apartment buildings will be popping up across the city the next few years, many geared toward student living. This year, at least 758 apartments and about 275 single-family homes will begin construction. Developer Kevin Kramer said there is a lot of apartment activity and it’s a ‘head scratcher’ as to whether all of it is going to get filled. Now all the builders are deciding to invest in apartments. At some point, the market for multi-family building, much like the brick-and-mortar retail market, could get saturated, he said, and vacancies could go up. ‘It’s a pendulum that swings back and forth,’ he said. ‘But I think right now we’re OK.’”

“Meriam Park developer and business owner Dan Gonzales said his primary focus is on jobs. Meriam Park is a live-work development designed to appeal to the millennial generation, which he believes is changing the look and function of multi-family housing. ‘That’s my biggest concern about the amount of housing,’ Gonzales said. ‘I don’t see the job growth happening to sustain it into the future.’”

The Loveland Reporter-Herald in Colorado. “Loveland’s average rent costs are among the highest in Colorado, according to a report released by the Colorado Division of Housing. However, Loveland’s vacancy rate has gone up to 8.7 percent from a vacancy rate of 8.4 percent in the third quarter. For perspective, Loveland’s vacancy rate in the fourth quarter of 2010 was 3.6 percent. City of Loveland Community Partnership Office administrator Alison Hade said she wasn’t expecting the results for Loveland, especially with rent costs at some of the highest in the state.”

“‘I am very interested in watching it over time,’ Hade said. ‘I’m thinking with a vacancy rate that is that high, I would hope to see some pressure relieved in our rents,’ she said.”

The Duncan Banner in Oklahoma. “College students want to live near campus, but the proliferation of large-scale student housing in core Norman has city leaders concerned. They recently enacted a six-month moratorium, and preliminary discussions to update the R-3 multi-family zoning ordinance began Thursday. Since November 2015, the city has known Norman’s student housing market is becoming oversaturated, based on a report by RKG Associates Inc.”

“Mike Buhl of Commercial Realty Resources Co. (CRRC) also sees a soft market ahead for Norman’s student housing as other factors continue to drive the building and the buying and selling of apartments. ‘Strong investor demand, low interest rates and falling capitalization rates were once again the trends that made 2016 so busy in the multi-family sector,’ Buhl said. Buhl, a Norman resident, and Tulsa associate Darla Knight recently released CRRC’s 2016 Apartment Report. Buhl believes the low interest rate ‘has been the single biggest factor in helping to fuel apartment acquisitions.’”

In addition to building new apartments, investors are buying older apartments with the intention of upgrading them. ‘This year was very active in terms of apartment sell,’ Buhl said. ‘We’re seeing a lot of new construction on the conventional and the student side. There’s about 4,000 bedrooms that are being added to the market.’”

“University enrollment numbers indicate the student population is not increasing at that same pace as investors are building new apartments. ‘In order for those new properties to fill up, they’re going to have to get more occupants from other places,’ Buhl said. The Monnett Garden apartment complex is in the Boyd corridor, where many R-3, super-sized duplexes have been built. ‘They’re going after the same market,’ Buhl said. ‘They’re going after a student who is going to rent the bedroom. Norman probably hasn’t quite felt the effects of all the new per-bedroom, multi-family housing that has come online. They’ve added a lot of those, in addition to the new apartments.’”

The Real Deal on New York. “Leaner times may be coming for doormen and pet groomers. New York’s rental market is in the doldrums and the luxury market has taken the worst of it, new research shows. Luxury rents have fallen or stagnated in most neighborhoods while non-luxury rents continued to rise, causing the price gap between them to shrink. In recent years, developers have been flooding the market with high-end rental buildings targeted towards yuppies and equipped with amenities like gyms, game rooms, and pet spas. But the supply surge means renters now have a wealth of options to choose from, and landlords can’t expect to command the same premiums they could just a year ago.”

“On a neighborhood level, some of the biggest decreases in the price gap between luxury and non-luxury were recorded in West Harlem and Astoria. Shane Leese, a data scientist at RentHop, said developers in these neighborhoods have been building luxury rentals in anticipation of a future spike in demand that has yet to materialize. ‘People are willing to to stay in their non-luxe apartments, and pay the 7 to 10 percent increase, for now,’ he said.”

The Houston Chronicle in Texas. “Houston’s apartment market is facing a sluggish year as demand struggles to keep up with a growing supply, panelists said Wednesday morning to members of the Houston Apartment Association. The markets most concerning to multifamily analyst Bruce McClenny include Montrose, the Galleria, the Texas Medical Center area, downtown and Tomball/Spring. Rents were down last year near the Galleria, the Medical Center and Montrose, an Inner Loop neighborhood where more renters moved out of apartments than moved in.”

“Rents for high-end apartments will continue to soften this year as the supply grows. Overall occupancy is expected to be at 88 percent by year-end, data shows. ‘2017 in Houston is going to be a lot of hand-to-hand combat,’ Camden Property Trust’s Keith Oden said Wednesday during the company’s fourth-quarter earnings call. He called Houston’s apartment market ‘vastly oversupplied.’”

“Merchant builders, who sell developments after constructing them rather than holding them for the long term, are offering as many as three months of free rent to lure tenants. As many as 12,000 new apartments are expected to open this year, while job growth is expected to be modest at best.”

A report from Bloomberg on New York. “Manhattan landlords, who for years pushed apartment rents to ever-higher levels, now keep setting records of a different kind: the giveaways they offer to tenants. The portion of new leases signed with concessions reached a new high for the fourth straight month. ‘They know they have to,’ Hal Gavzie, executive director of leasing for Douglas Elliman, said in an interview. ‘As landlords and owners, they would much rather not do it. But you have tenants and renters who are resisting the price increases, and this is now where things are.’”

“These days, it’s not uncommon for apartment seekers to tell Citi Habitats broker Adam Franklin that they don’t want to pay the fee for his services. Usually, that would be a deal-breaker for him, but now there are plenty of new buildings he can show clients where the landlords will cover his costs, and then some, Franklin said. That’s what happened in a deal he arranged last month for a Long Island couple, who signed a lease for a two-bedroom apartment at aalto57, a newly constructed tower at 1065 Second Ave. The landlord offered a month of free rent on a 13-month lease, but the couple, having toured many new buildings across Manhattan, asked for more, Franklin said.”

“The landlord threw in an extra free month — on condition they sign a two-year lease for the $8,150-a-month unit. And when they declined that longer commitment, the landlord came back with two months of free rent on a 14-month lease, effectively lowering their cost to $6,985. ‘The numbers have to make sense to them because many other buildings are offering incentives,’ Franklin said.”

From The Real Deal. “New York City residential landlords are continuing to rely on renters’ incentives to keep vacancies at bay, a trend that is expected to become more widespread throughout 2017. According to the monthly rental report from Douglas Elliman, in Manhattan, 31 percent of all new leases included some form of concession last month, nearly double what it was a year ago. In Brooklyn, 18 percent of leases had concessions, compared to just 5 percent last year.”

“‘Landlords are trying to strike a balance and that means fine tuning rents to fit market conditions,’ said Jonathan Miller, CEO of appraisal firm Miller Samuel and author of the report. He predicts landlords will use concessions even more aggressively in 2017. ‘I don’t think we’re at the end of this — nothing is changing and there’s a lot of product coming in,’ he said. ‘The rental market is going to get weaker before it gets stronger.’”

“The market in northwest Queens continues to be ‘choppy,’ according to Miller. The median rent fell 2.4 percent year-over-year to $2,700. Out of all the leases signed last month, 38 percent included concessions. The concessions are driven by the uptick in new development rentals, which had a market share of 34 percent last month, more than double what it was this time last year. ‘In the last six months in 2016, you started to see a run-up in Brooklyn in the use of concessions,’ said Miller. ‘Even though the concessions are still less than in Manhattan, the amount of concessions tripled over the year, whereas in Manhattan it doubled.’”

The New York Post. “Sky-high Big Apple rents have ­finally hit the ceiling. Some of the city’s hottest neighborhoods have seen the steepest rent drops — thanks in part to over­development and New Yorkers’ willingness to accept longer work commutes in exchange for more living space at less cost, according to a new study from RentHop. Falling rents were especially striking in Chelsea, where world-renowned ’star­chitects’ designed luxury condominiums that have risen around the High Line.”

“Comparing median prices from the fourth quarter of 2016 with the comparable 2015 period, the monthly rent for a one-bedroom, nondoorman apartment in Chelsea plunged an eye-popping 15.5 percent, to $3,125. ‘People are still leaving Manhattan in search of cheaper rents and larger apartments,’ said RentHop data scientist Shane Leese. ‘In Chelsea, the market is saturated. People are tired of paying $3,000 and $4,000 a month in rent and they’re moving to places like Bushwick, with longer commutes.’”

“Rents in Long Island City plunged 7.22 percent to $2,250 for a one-bedroom in a non-doorman building while luxury doorman units dropped 1.73 percent to $2,862. Williamsburg’s hot status may also be fading, the study notes, as nondoorman rents dropped 3.41 percent to $2,800 and were down 0.62 percent in luxury doorman buildings. Battery Park City also saw huge drops: 8.5 percent, to $3,570, in doorman buildings and 15.2 percent, to $3,300, for nondoorman units. In chi-chi Soho, one-bedrooms in doorman buildings fell 14 percent, to $7,095 while nondoorman units fell 10.5 percent, to $2,950.”

From Mansion Global. “In Brooklyn, where many Manhattanites used to flee to avoid soaring rents, landlord concessions also hit a new record of 18.1%, more than triple the 5.4% from a year ago. Like Manhattan, the issue is a flood of high-end rentals coming onto the market, with listing inventory increasing 24.9% to 2,459 in the year to January, while the average number of days a property spent on the market was almost a third higher at 68. ‘What we’re seeing is a lot more inventory growth in Brooklyn throughout the year and that’s accelerating the use of concessions to protect base rents,’ said Jonathan Miller, chief executive of Miller Samuel and author of the report.”

“Median rents in Brooklyn were 1.9% lower year-over-year at $2,750, the sixth drop in seven months. Including the impact of concessions, they were down 2.8% at $2,702. A separate report Thursday by brokerage Citi Habitats found that 37% of Manhattan rental transactions it was involved in offered a free month’s rent and/or payment of the broker fee to entice new tenants in January–up slightly from 35% in December.”

The Commercial Observer. “President Donald Trump’s travel ban issued late last month might have come at the worst possible moment for an industry that is already struggling to keep its head above water: New York’s hotel business. Long before Trump’s Jan. 27 executive order, the industry had been plagued by problems including an oversupply of rooms, the growing presence of Airbnb, looming foreclosures and a transformation of existing hotels into something entirely different—like, say, homeless shelters.”

“The travel ban is only part of the problem. Perhaps most critical is the 15,333 rooms under construction in New York City, according to data from STR, a source of hotel data benchmarking. That will be tacked onto the existing 115,369 hotel rooms in the city. ‘People have to be very, very aware of this,’ said Jan D. Freitag, the senior vice president of lodging insights at STR. ‘It will impact the performance of the market going forward. If room demand stays the same and we’re adding 15,000 rooms over the next two years or so, occupancy will decline.’”

“If all of the new rooms were to open tomorrow, that would represent a 13 percent increase in room supply. Divide that by two years, that’s a 6.5 percent increase in the number of rooms per year. The U.S. annual average, by comparison, is 2 percent, Freitag said. Robert Chan, a partner in the Flatiron Hotel at 9 West 26th Street at the corner of Broadway, noted that there are a lot of hotels being offered for sale as a result of the market cooling.”

“Those include St. James Hotel at 109 West 45th Street, W New York Union Square at 201 Park Avenue South and Gowanus Inn & Yard at 645 Union Street in Brooklyn. In addition there are those that are in financial peril. Gallivant Times Square at 234 West 48th Street, formerly known as TRYP New York Times Square by Wyndham, is in foreclosure, as are Mansfield Hotel at 12 West 44th Street and Shoreham Hotel at 33 West 55th Street.”