February 25, 2017

An Analogy From The Housing Bubble

A report from Hoosier Ag Today. “Indiana farmland value decreased by an average of 7.1 percent in 2016 according to the newest report from Farm Credit Mid-America. The report also shows a slight drop in Kentucky but increases in average value for Ohio and Tennessee. Dennis Badger, Vice President Collateral Risk Management explains the fall in values comes just a few years after hitting all-time highs. ‘Actually in 2010 is when we’ve seen one of our largest spikes where Indiana showed a 27 percent increase,’ he said. ‘This past year, in 2016 the overall average for Indiana was 7.1 percent decline. The prior year, 2015 it was a 2.7 percent decline, so the rate of decline has increased for Indiana.’”

“Does the drop suggest a coming crisis? Badger says no. ‘Real estate like everything is cyclical, so when you had the highs of 2010 and the 27 percent increases, you’re also going to see a retraction where it comes back again, almost like a pendulum. So, the pendulum is heading back the other direction. It’s certainly not like a balloon that is popping I’ve heard as an analogy from the housing crisis, the housing bubble. We don’t think it’s anything near that magnitude. Certainly, some of the other factors such as commodity prices right now, the net farm income is certainly another concern. So, there are some variables that people want to be mindful of.’”

The Bakersfield Californian. “Agricultural land values in the Central Valley, and Kern County, have slipped a bit but most analysts aren’t worried about a major drop. Though water will become a larger question mark in coming years. For now, analysts are looking at the recent dip in values as more of a ‘breather’ from the meteoric rates at which ag land values shot up between 2010 and 2015. Does that mean high values are a bubble? No, said Roland Fumasi, an analyst with Rabobank’s Fresno-based RaboResearch Food & Agribusiness division. ‘Because prices are supported by economic reasons,’ he said.”

“The biggest drop in Kern will be for land planted in pistachios, Fumasi said. He’s projecting a 13 percent drop from a high of about $38,000 per acre in 2015 to about $33,000 an acre by the end of 2017. For almond lands, Fumasi is projecting a 9 percent drop in valuation from a high of $35,000 per acre in 2015 to $32,000 by the end of 2017. Almond acreage, unlike pistachio and other acreage, enjoys some beneficial factors that help buoy its value. Though the price per pound has dropped from about $5 to around $2.60, Associate Rabobank Analyst James Williamson said that is still profitable for farmers.”

The National Hog Farmer. “Don’t cut the farm bill is the message that over 500 national, state and local agricultural, conservation and nutrition groups are telling the Senate and House Budget Committees as it prepares the Fiscal Year ’18 budget. The groups say, ‘With the agriculture and rural economy struggling, households across the country struggling to meet their basic needs for nutrition, and farm income down 46% from only three years ago, it would be perilous to hinder development and passage of the 2018 farm bill with further cuts.’”

The Seymour Tribune. “Farmers should start seeing improvement in grain prices this year — a trend expected to continue through at least 2019.Chris Hurt, editor of Purdue Agricultural Economic Report delivered that message to the group of farmers and agribusiness men and women in Brownstown. ‘We’re now producing more than we can consume,’ he said. ‘There’s lots of wheat in the U.S. — the highest since 1986. The corn inventory is the highest in 11 years, and the soybean inventory is the highest in a decade. When you have inventories at decade highs, prices are probably going to be down there at decade lows.’”

From Agri-News. “Net incomes for Illinois grain farms are projected lower in 2017 than for 2016. If these projections hold, weakening of financial position will continue in 2017. Net incomes on grain farms likely will remain at low levels as long as corn prices remain below $4 per bushel. After being at higher levels from 2010 to 2012, net incomes decreased each year from 2012 to 2015. In 2015, net incomes averaged $500 per farm, the lowest level of any year between 1995 and 2015, and well below an income level needed to result in stable financial positions on grain farms.”

“As usual, farm incomes will range considerably across farms. Those farms that had average yields or below will face considerably lower incomes, as appears to be the case in southern Illinois.”

The Ag Watch Network. “Farm income continued to drop across the areas of the Midwest and the Midsouth during the fourth quarter of 2015 compared with the previous year, according to latest Agricultural Finance Monitor published by the Federal Reserve Bank of St. Louis. Meanwhile, the average value of quality farmland, as well as ranchland and pastureland, also declined.”

“During the fourth quarter, bankers reported a continued drop in farm income compared with the same period a year ago. Based on a diffusion index methodology with a base of 100 (results above 100 indicate proportionately higher income compared with the same quarter a year earlier; results lower than 100 indicate lower income), the farm income index value was 28. This was the sixth consecutive quarter that this value fell below 100, and the lowest level recorded since the survey began in 2012. Looking ahead at the first quarter of 2016, an even greater percentage of bankers indicated they expect income to continue to decline.”

“‘Crop and cattle prices are down, but input costs are rising at a slower pace, a Kentucky lender said. ‘I expect capital expenditures to decrease along with devaluation in farm real estate.’”

The Tri-State Livestock News. “Farmland values have declined, according to reports issued by the Federal Reserve banks in Chicago, Kansas City, St. Louis and Dallas. ‘Bankers across the 10th District noted that persistent weakness in farm income continued to weigh on farmland values,’ they wrote. ‘Although most farmland purchases in the quarter were financed with new debt, the portion of new loans with a cash down payment decreased. The persistent and widespread deterioration in farm income has occurred alongside increasing loan demand and lower repayment rates. These trends are expected to continue in the first quarter of 2017.’”

The Ag Professional. “The Fed reports, which contained concerning news for farmers, came on the heels of USDA’s forecast that U.S. farm incomes will drop 8.7% in 2017, and on the same day that The Wall Street Journal ran a front page story titled, ‘The Next Farm Bust is Coming.’ David Oppedahl, Senior Business Economist at the Chicago Fed pointed out that, ‘Since their 2013 peaks, Illinois, Indiana, and Michigan farmland values have experienced real declines of 11 percent, 7 percent, and 12 percent, respectively. Additionally, since their 2012 peak, Iowa farmland values have experienced a real decline of 15 percent.’”

“The volume of the farm loan portfolio deemed to have ‘major’ or ‘severe’ repayment problems grew to 5.9 percent in the fourth quarter of 2016, matching the share in 2002 and the highest such proportion in 15 years. ‘[S]urvey respondents forecasted the downward trends for farmland values and agricultural credit conditions to continue into 2017,’ the report added.”

“The Kansas City Fed added that, ‘Farm income also weakened in the fourth quarter. In fact, farm income fell for the fifteenth consecutive quarter, the longest such streak in survey history. Moreover, 70 percent of bankers expected the downward trend to continue in the first quarter of 2017.’”

A Preponderance Of New Supply

A report from Multi-Housing News. “Jeffery Hayward, head of Fannie Mae’s multifamily mortgage business, shared a few highlights from 2016, as well as initiatives that Fannie Mae is embarking on in 2017. MHN: Where are you seeing a concentration of new supply? Hayward: Dallas will have a lot of new units coming online. So will Austin and Denver. Seattle has been that way for a while, along with San Francisco, San Diego and L.A. Typically the new construction is aimed toward higher rent and income levels.”

“MHN: How will market forces impact loan quality this year? Hayward: There are some challenges in the market around new supply, meaning there are some markets with lots of new supply coming in. There will be a little bit of stress on the market because there is so much new production coming on. Particularly, there are about 12 or 13 markets in which there is a preponderance of new supply. All of that doesn’t necessarily fit what we do because some of it is very high-end product.”

From Construction Dive. “Builder and developer sentiment on the outlook for apartment and condominium construction maintained its strength in the fourth quarter of 2016, edging up two points from the prior quarter to a mark of 55 on the National Association of Home Builders’ Multifamily Production Index. Multifamily developers are bullish on the segment’s fundamentals, but a flurry of units coming online in the country’s largest metros suggest saturation ahead for some, forcing rents down.”

“Chicago, for example, is expected to see rents begin to decline by the second half of 2017 as the apartment rental market there reaches capacity. Inventory in that city is expected to be up 150% from mid-2005 by 2018, according to data from Appraisal Research Counselors. Supply in that category is also beginning to outpace demand in Washington, DC. A recent analysis of Census Bureau data by Greater Greater Washington found the District added 4,682 new units in 2016, the second-most since the government agency began tracking the figure in 1980. The growth has occurred primarily in multifamily construction, and is concentrated in three emerging neighborhoods.”

“A report by Axiometrics cited in The Wall Street Journal earlier this week noted that the number of new multifamily units is expected to hit its highest level in 30 years in 2017.”

The Business Observer in Florida. “Real estate firm Quadrum Global, which has bought and turned around hotels from Chicago to New York to Miami Beach, might be new to senior living, but its executives certainly aren’t timid. Quadrum director of U.S. investments Seth Schumer got interested in the senior-living sector in 2015 when Quadrum looked into buying a distressed senior living facility in Fort Myers. The company ultimately passed on the deal, but in the process Quadrum executives met and clicked with Colin Marshall, a 20-year executive in senior living management.”

“Marshall says the amenities at Avida will also be something special. Plans for the 488,265-square-foot campus include a bar bistro, private theater, dining hall and four open-air courtyards. Multiple other projects in the region also promise resort-living and high-quality amenities. Schumer acknowledges the word ‘overbuilt’ came up in the firm’s research for Avida, especially anecdotally. But the data he looked at doesn’t necessarily prove the specific market Avida targets is at saturation level, he adds. ‘We are really excited about this,’ Schumer says. ‘We think we can build a better mousetrap.’”

The Memphis Daily News in Tennessee. “The Memphis area is seeing a boon of mixed-use developments underway or in the works, from repurposed and renovated properties. As a second-tier metropolitan market, most of Memphis’ mixed-use projects have been spearheaded by local investors. However, more out-of-town investment is likely to follow, as many first-tier markets are saturated and more expensive from a developer or investor standpoint.”

“‘Many of Memphis’ peer markets are becoming oversaturated, and out-of-town investors have noted the dearth of new housing in many parts of the core city,’ said Josh Whitehead, planning director for the Memphis and Shelby County Office of Planning & Development.”

From Biznow on Virginia. “As it prepares its $8.4B merger with Vornado, The JBG Cos is abandoning one of the biggest placemaking projects it had planned in the region. The Chevy Chase-based developer is looking to sell its six-property, 2,664-unit apartment portfolio in Alexandria’s West End. This comes as Vornado is also halting some of the NoVa projects it had planned. The developer shelved the 933-unit addition it had planned for its RiverHouse apartments in Pentagon City. It also put on hold two of its Crystal City projects.”

From Mansion Global on New York. “In its weekly snapshot of Manhattan’s luxury housing market, real estate brokerage Olshan Realty found that 29 contracts were signed last week at $4 million and above, five more than the previous week. However, Olshan stressed that the headline-grabbing number masked underlying problems—particularly the average time a property spent on the market. ‘One is tempted to paint a rosy forecast for the spring, but let’s not overlook a cloud or two on the horizon,’ said Donna Olshan, president of Olshan. ‘Year-to-date, the average days on market is 415, a 32% increase over the same period in 2016.’”

“The moral, said Ms. Olshan, is that sellers who lower their prices to a realistic level ‘are more often than not rewarded with a sale.’”

The Houston Chronicle in Texas. “Houston-based Weingarten Realty Investors, which owns neighborhood shopping centers throughout the city, will add a 30-story residential tower to its flagship retail property next to River Oaks. Weingarten senior vice president Gerald Crump reiterated the company’s commitment to owning the property for the long term. Despite a current glut of new apartments in the urban core, Houston is a resilient market, he said. ‘We’re not merchant developers and we’re not really as concerned about timing the market as the merchant developer would be,’ Crump said.”

The Morning Call in Pennsylvania. “The Plaza at PPL Center, home to Talen Energy, could soon be headed for the commercial mortgage bond equivalent of foreclosure, a move that would open the door to new owners who could offer lower, more competitive rents. The current owner, a group called The Plaza at 835 W. Hamilton St., which purchased the property for $83.5 million in 2007, missed a $67 million balloon payment on Dec. 1, sending the loan into default.”

“The company that oversees its overdue loan reported this month that if the owner is unable to renegotiate loan terms, it plans to transfer the building’s title to a special servicer, according to Trepp LLC, a company that tracks loans included in commercial mortgage bonds. If The Plaza goes to a special servicer — a company that specializes in liquidating commercial mortgage bond real estate — it will eventually end up in the hands of a new owner whose hands won’t be tied by the need to make payments on a pricey mortgage.”

“Experts have said the building is likely worth far less than the loan’s $67.4 million balance. Located at Ninth and Hamilton streets next to PPL Tower, it cost $43.5 million to construct. It is one of downtown’s Allentown’s showcase properties, which — if Talen leaves — would be rendered mostly vacant and in search of tenants. Talen’s rent is at least 30 percent higher than what is charged for comparable downtown offices.”