April 6, 2017

Everything Is Overpriced, And Returns Are Falling

A report from Multi-Housing News. “More than 11,000 new apartment units are under construction in Northern New Jersey, including 4,800 in Hudson County municipalities Jersey City and Hoboken alone, Yardi Matrix data shows. But the biggest impediment to rent growth in the area is the abundant amount of new supply in New York City, which has led a slowdown or reduction of rents in New York apartment properties and the growing use of concessions. ‘We’re now seeing real pressure on rents,’ said Abe Naparstek, the senior vice president of East Coast development at Forest City Realty Trust. ‘It’s hard to see pressure on rents in New York not affect (Gold Coast) markets in the near term … The next two to three years, it’s hard to imagine there will be a lot of rent growth.’”

The Houston Chronicle. “Houston was called out as an underperforming market for apartment landlords along with some other big cities, a report by John Burns Real Estate Consulting showed. The region’s oversupply of apartments in energy-dependent, higher-end submarkets contributed to a 3.6 percent annual drop in rents in the fourth quarter. Concessions such as free rent with a new lease remain, but landlords are optimistic the worst is behind them, according to the report.”

“Rents in the tech cities of San Francisco and San Jose fell by 2.3 percent and 2.5 percent respectively in the fourth quarter. They’re projected to continue declining over the next several years as a large amount of new apartments are completed this year.”

From Value Walk. “For the last several days I’ve been speaking at an investment conference organized by my friends Robert Helms and Russell Gray. One of the key themes so far in the event is that there are likely problems ahead for the US real estate market. On the first day I had a great conversation with the Chief Economist of Fannie Mae, who was also speaking at the conference. I asked him point blank– what do you think of US housing right now? He answered succinctly: ‘It’s overpriced.’ His presentation went DEEP into the data, showing that US housing is ‘late in the cycle,’ meaning that prices may soon reach their peaks and then suffer a substantial correction.”

“A number of prominent real estate investors and developers have also spoken anecdotally that they’re no longer buying. One gentleman who owns and operates more than 10,000 apartment units told us that he can no longer find any properties that meet his investment criteria. Everything is overpriced, and investment returns are falling. Even more amazing, he told us that banks financed his most recent deals at unbelievable terms– they loaned him hundreds of millions of dollars to fund his real estate projects at just 3%, on an interest-only basis.”

“Think about it– he pays 3% interest, but the money loses nearly 3% of its value each year due to inflation… so essentially the money is zero cost. As I remarked to the audience, the banks are once again putting their customers’ funds at risk and receiving zero return in exchange. This is another sign of a major bubble, similar to what happened ten years ago in the last crash.”

From Lewrockwell.com. “Fannie Mae and Freddie Mac still have housing blood on their hands from the 2008 financial crash. However, the giant GSEs, placed in government conservatorship in September 2008, have now, virtually all by themselves, created another bubble, this time in the multifamily rental market. Fannie and Freddie made 53% of all apartment loans in 2016, that’s down from their combined 68% market share in 2012. So, their conservator, The Federal Housing Finance Agency (FHFA), recently eased the GSE’s lending caps so they can crank out, even more, loans.”

“In a recent press release, Fannie Mae crowed, ‘Fannie Mae (FNMA/OTC) provided $55.3 billion in financing and supported 724,000 units of multifamily housing in 2016 – the highest volume in the history of its Delegated Underwriting and Servicing (DUS®) program.’”

“Cheap interest rates make for low Cap (capitalization) rates and nationwide, ‘Mid-/high-rise cap rates declined to 4.8%, and garden apartment cap rates to 5.6%, both historic lows,’ writes Salmonsen. So, developers can build, lease up and flip projects at sky-high valuations.”

“Real estate profits are irresistible to developers and according to real estate firm Marcus & Millichap, Apartment builders ‘will bring 371,000 units to the market in 2017,’ with project rents expected to rise 3.8% and vacancy by year-end to be 4%.”

“With Clark County Nevada being number three in the nation for in-migration, apartment builders are frantically putting up units and apartment buyers are bidding out-of-this-world prices for units. ‘Overall in Southern Nevada, investors paid an average of $110,111 per unit for apartment complexes this year by the third quarter, up 53 percent from 2015, according to brokerage firm Colliers International,’ the R-J’s Eli Segall wrote late last year. ‘Landlords are betting they can push rents higher in Las Vegas, whose rates trail that of other cities.’”

“But for now, here in Las Vegas, guys like Scott McClave, senior principal of acquisitions and finance at The Bascom Group, see nothing but clear sailing. When asked if the market was overheated, he replied: ‘If you look at the job and population growth, Las Vegas is still not quite building enough to meet that demand.’”

“Are rents getting too high? ‘Today, the average income-to-rent ratio is about 4:1, so it’s pretty easy overall for people to afford rents here. You look at an extreme market like New York or L.A., that ratio is more like 2:1,’ McClave said.”

“When asked if apartment construction will continue, the truth came out. After saying everyone, remembers the crash, and new development is ‘measured,’ McClave admitted, ‘But a builder will never pass on a construction loan. I understand the mentality. The mindset is always, ‘My building will be better, my building will out-lease everyone else’s.’ I don’t fault people for that.’”

“McClave’s company, Bascom, combined with Los Angeles-based Oaktree to pay $38.17 million for the 110-unit luxury complex, or $347,000 per unit, reportedly the most expensive apartment building sale ever in the Las Vegas area, as measured by price per unit.”