May 23, 2017

A Disconnect Between Economics And Reality

A report from the Seattle Times in Washington. “As Seattle summers keep getting hotter and hotter, a once-unthinkable perk for renters here has become more commonplace: air conditioning. Traditionally, there hasn’t been much of a point for local developers to spend the extra money to install A/C and new construction was rare enough that new buildings didn’t need extras — they stood out just for being new. But now the record apartment construction boom sweeping the city has created what some in the industry have called an ‘amenities arms race’ to attract tenants. Things like rooftop decks, gyms and dog play areas are a dime a dozen. Now A/C has become a way for landlords to stand out in a sea of apartment ads.”

“‘I don’t think it’s a fad, I think it’s probably going to be a new normal, because it is getting warmer,’ said Megan Murphy, a senior manager at one of the biggest developers in town, Paul Allen’s Vulcan Real Estate. ‘Now it’s becoming more competitive, as well — it’s not just about being the new kid on the block, it’s about being the new kid on the block with all the extras.’”

From the Denver Post in Colorado. “Metro Denver landlords are cutting their advertised rents at one of the highest rates in the country, according to Trulia. Nationally, rent increases have plateaued and more landlords are starting to realize that rent hikes year-after-year aren’t a given, noted Felipe Chacón, author of the report.”

“Compounding the problem, many of the apartments and homes built are on the more expensive end of the market, while the jobs created in metro Denver are mostly on the lower-end of the wage scale, said Mark Vitner, a senior economist with Wells Fargo Securities. ‘There is a real affordability issue in Denver,’ Vitner said, adding that could be contributing to a recent slow down in in-bound migration and job growth.”

From Construction Dive. “On a national basis, rental hikes are finally easing, with about one in 10 listings experiencing a rate cut year-over-year, and the national median rent dropping by 2.9%, Trulia reported. Of the 100 largest metro areas, 83 saw a growth in price cuts this year as compared with the previous year. The Texas cities of Dallas, Austin, Houston and Fort Worth had the highest proportion of increases in rent reductions. When it comes to price reductions of for-sale listings, Dallas and Austin topped the list in year-over-year increases, followed by San Antonio, TX, San Jose, CA, Camden, NJ, and San Francisco.”

The Norman Transcript in Oklahoma. “Rent charged on multi-family properties in Norman is on the decline, according to recent studies. City leaders approved a moratorium in January for a wide swath of central Norman in reaction to R-3 zoning, which allowed large, multi-family structures to be built alongside historic bungalows. That six-month moratorium on new construction is set to expire soon, but the multi-family rental market is already experiencing the effects of a soft market, according to some experts.”

“‘What’s happening is we are starting to see more concessions in the market,’ said Mike Buhl of Commercial Realty Resources Co. in Norman. ‘If you just drive around town, you see signs up at apartments like ‘$99 Move In’ and I saw one that said ‘Two Months Free.’ When you see signs like that for concessions, lower rents are a result. All of that is adding inventory, and I’m not sure there’s full demand for that inventory.’”

“Buhl said many investors bought older apartment properties thinking they could do some improvements and raise rents on those properties. ‘That may be much more difficult when the market is showing signs of softness,’ he said.”

The Sun Sentinel in Florida. “If you want to rent in the lap of luxury atop downtown Fort Lauderdale’s tallest building, you’ll have to pay eye-popping prices. Penthouses in the new 45-story Icon Las Olas apartment tower that offer panoramic water views will command $7,000 a month and up. A one-bedroom, 960-square-foot unit will rent for a more accessible $2,500 a month. Originally planned as a condo tower, the $200 million project at 500 E. Las Olas Blvd. is now best suited as a rental, says developer Jorge Perez, though he isn’t ruling out a conversion to condominiums at some point.”

“Lewis Goodkin, a longtime South Florida housing analyst, agrees that Perez’s best bet now is to cater to the rental market. He cited a softening condo market and challenges in acquiring financing. Apartments are safer investments, and Goodkin said the superb downtown location means Icon Las Olas won’t have trouble renting the more modest-sized units. But he’s less sure about demand for the priciest digs.”

“‘When you’re talking about $7,000 a month, the market thins out a lot,’ Goodkin said. ‘People who can afford that are pretty fussy about where they are.’”

From Multi-Housing News. “Jay Rollins, managing principal & co-founder of JCR Capital, talked to Multi-Housing News about the next stage in the cycle. MHN: Could you give us some details on a particular market where this theory could apply? Rollins: Many markets are overbuilt—such as Denver, L.A. and Tampa—and rents will fall, but lenders have been conservative in their underwriting, and they will be fine. It will be equity and mezzanine lenders who will be disappointed.”

“MHN: What are your predictions in connection to the multifamily market’s future? What is the next stage of this cycle going to look like? Rollins: Not very different, except you will not see much more new construction of Class A multifamily in urban markets for a while.”

From Forbes. “In the last 10 years, Treetop Development has become one of the major and more sophisticated multifamily housing players throughout the greater New York City area. The company, founded by Azi Mandel and Adam Mermelstein, now owns and manages about 8,500 apartments. However, at its peak, it had over 10,000 units. Over the last two years, Treetop sold a number of projects, specifically in northern Manhattan.”

“Omri Barzilay, Contributor: The markets are rallying for more than eight years. Do you think that’s something that can continue?”

“Mandel: Pointing to history, the real estate market has experienced a downturn every seven to 10 years, and some of the fundamentals that have forced market downturns in the past are in place right now. There are signs that demonstrate a disconnect between economics and reality. For example, apartment rents are going down while building prices are not, which is typically indicative of a bubble.”