The Housing Bubble

A report from the Union Tribune in California. “In the first quarter of this year, local residential building permits were at their lowest since the Great Recession — largely because of a drop-off in apartment construction, said data from the Construction Industry Research Board. Builders and analysts point to about 3,000 new apartments in San Diego County this year already in the pipeline, dissuading builders — at least for now — from starting projects.”

“Builder Wermers Companies said the market has slowed following a surge in new-apartment construction over the past several years and as lenders have tightened credit for real estate loans. Tom Wermers said lenders are skittish about all the new apartments being built and may be concerned rent growth will not be as high as originally thought. Borre Winckel, CEO of the San Diego Building Industry Association, said builders have chased high-end buyers and renters, but there are only so many wealthy people.”

“‘That demographic that can can afford the top tier is thinning out,’ he said. ‘We don’t have the middle market happening anymore.’”

From Bisnow on North Carolina. “There will not be a slump in Charlotte multifamily any time soon, even in new development or investment sales, speakers at Bisnow’s Charlotte Multifamily Growth & Expansion event said. But a slowdown is possible, even likely, for Class-A product — which now includes some amenities hardly dreamed of before this cycle. Top-end development that manages to break ground in the near future is going to have to compete very hard on amenities.”

“More than one speaker predicted a softening of the market, for a variety of reasons. For developers, it will be land and construction prices, and an increasing reluctance on the part of lenders to finance Class-A in particular. For owners, higher rents will be harder to sustain. There are a lot of new jobs in the market, but that will not sustain massive rent growth as it has in recent years because wage growth still lags.”

“Even so, renters now expect much more in the way of amenities than ever before. As more supply comes online, owners need to offer those kinds of amenities to be competitive, such as rooftop pools or massage rooms or workout space with high-end equipment in common areas, and foyers and laundry rooms (as opposed to closets) in the units.”

From Multi-Housing News on Colorado. “The Mile-High City has gone through something of a Renaissance as of late. However, with rents rising at a more pedestrian rate and development still in high gear, is Denver’s multifamily market about to suffer from its years of accelerated improvement?”

“Feeding on a firing-on-all-cylinders economy and rising demand due to its growing population, developers started adding apartment inventory at a frantic rate. Since 2014, roughly 28,000 new units have been added to the market, cementing a housing boom only matched by more established markets like San Francisco and Seattle.”

“Words like ‘bubble’ get thrown around often in similar situations, but the large volume of construction has yielded so much job growth in that sector alone that it has produced demand for market-rate units. Last year saw the creation of 12,400 construction jobs.”

“On the other hand, overbuilding is manifesting itself in the upscale segment, as developers, spurred by high returns, have continued to add projects to the pipeline. As of May 2017, roughly 53,000 units were in some stage of development, despite recent completions having already compressed occupancy to 94.4 percent, 140 basis points below what it was a year ago.”

The Real Deal on New York. “The Bronx has become a destination for investors seeking high returns – not only in new development, which is, by any measure booming, but also in the borough’s existing apartment building stock. From 2010 to 2016, city property records show that investors spent $9.2 billion snatching up Bronx apartment buildings. Deal flow has continued into this year. But even though some sellers have made a killing on their properties, the buildings aren’t generating nearly enough income to keep pace with the sales prices, according to an analysis conducted by The Real Deal.”

“In over half of apartment building transactions between 2009 and 2016, market prices grew at least three times faster than building net income – a disconnect pointing to investor speculation that the fundamental value of buildings will catch up to their sticker price as rent rolls in the borough increase. The assumption, though, may not pan out, and depending on the terms of investors’ debt, overpriced acquisitions may put investors in a difficult position.”

“Jonathan Miller, CEO of appraisal firm Miller Samuel, sees rising prices in the Bronx as being part of a larger trend. ‘There’s a flood of capital worldwide seeking a home,’ he said. ‘Sometimes the financials don’t always make sense.’”

“The increase between 2011 and 2015 is clear. The sale price per unit in multifamily apartment buildings has roughly doubled in this time, closing at nearly $150,000 per unit by the second half of 2015. ‘I think the prices are much too high,’ said Steve Finkelstein, whose firm invested roughly $180 million in Bronx apartment buildings from 2009 through 2014. ‘There are people out there still buying,’ he said. ‘I don’t agree with their valuation, so I’m kind of out of the market right now.’”