April 16, 2017

Overbuilt And Overpriced

A report from the Columbus Dispatch in Ohio. “Homebuyers aren’t the only ones combing central Ohio for real-estate deals. In the past three years, investment firms searching for bargains outside the nation’s largest cities have paid more than $1.2 billion for 145 central Ohio complexes containing 30,000 apartments, according to Yardi Matrix. ‘Interest from investors is incredibly strong,’ said D.J. Effler, senior vice president of Bellwether Enterprise’s Columbus office. ‘There’s no limit to the amount of capital in search of good multifamily properties in Columbus.’”

“Investor interest has pushed prices for apartments to record highs in recent years: Last year, investors paid an average of $53,422 per Columbus-area apartment, up from $29,373 just five years earlier, according to Yardi. Complexes built in the 1970s and 1980s account for most of the recent sales, but a growing number of newer complexes also have sold. Investors paid more than $100,000 last year for each apartment in the comparably sized boom markets of Austin, Texas; Nashville, Tennessee; and Charlotte, North Carolina — more than twice what they paid for a Columbus apartment, Marcus & Millichap found. On the extreme high end, apartment buildings in New York, San Francisco and San Jose cost more than $300,000 per unit.”

“‘I see two distinct markets,’ said Matthew Sharp, co-founder of Hamilton Point Investments, a Connecticut company that bought four central Ohio apartment complexes in recent years. ‘One is what I would call tier-one luxury apartment markets, the trendy ones, the Charlottes, Denvers and Buckheads (Atlanta) — truly Class A. That stuff has been overbuilt and is overpriced. But middle-income to upper-income units in secondary growth markets like Columbus are a phenomenal deal.’”

The Dallas Morning News in Texas. “Dallas-Fort Worth was already the top apartment building market in the country before starts increased by more than 95 percent in the first two months of 2017. Almost 30,000 new apartments will open their doors here in 2017. ‘That’s a lot of new product coming on line at once,’ said Greg Willett, economist with Richardson-based apartment analyst RealPage. ‘Right now we have 50,000 units under construction - that is a lot even by historical standards.’”

“Encore CEO Bradley Miller said he’s being more cautious about development. ‘At this stage of the cycle, the one thing you don’t want to be is stupid,’ he said. ‘We’ve had the mentality of ‘build it and they will come,’ and they have come. But what happens when they don’t?’”

“With rents in North Texas rising on average more than a third in the last 10 years, apartment developers and operators worry that incomes aren’t keeping up. ‘How do everyday people - even those making pretty good money - continue to elevate the percentage of their income going to rent?’ said Rick Graf, president of Pinnacle Living. ‘At the end of the day you have to have people who can afford and are willing to pay that much rent.’”

The Arizona Republic. “Renters in metro Phoenix are getting a bit of a break these days. The Valley is in a midst of an apartment building boom. So many projects are popping up so fast, it’s getting tough to keep track. In central Phoenix, about 4,000 apartments are in progress or planned in the area. Demand was so high for apartments in downtown Phoenix at the end of 2015, the area had the highest average rent in the Valley.”

“But that’s already shifting a bit. Many apartment developers are already building in some rent deals because of the number of new complexes going up, according to real estate analysts. In Scottsdale, another popular spot for new apartment development, the average rent fell almost 1 percent last month, according to ApartmentList.”

From MarketWatch. “Rental costs continued to be one of the priciest things Americans pay for in March, but there are signs some relief may be in sight. The annual growth in rental costs has outpaced annual inflation by more than a full percentage point for 34 months in a row, the longest such streak since the early 1950s. But that may soon ease. ‘We think the recent slowdown is more than just noise,’ Goldman Sachs economists wrote. ‘We believe the lagged impact of elevated multifamily construction activity in the last two years is exerting upward pressures on vacancy rates and downward pressure on prices.’”

“In the five years since the recession ended, multi-family housing starts have run at a pace nearly 30% higher than they did throughout the 1990s. Now that’s starting to bear fruit, particularly in the higher-end areas of the market. According to Zillow data from February, rents were down 9% in Chicago, 5% in San Francisco, and 3% in Miami.”

“Another, less-discussed reason for national rents to be nudging down: massive declines in the oil patch.”