May 28, 2017

It Is Obvious And Apparent There Will Be Oversupply

A report from the Star Tribune in Minnesota. “Even after almost four years of booming apartment construction, the Minneapolis-St. Paul metro still has the tightest vacancy rate of any major U.S. city, according to Witten Advisors, a national multifamily housing consulting firm. But some counterforces are emerging. Financial backers, who are seeing longer lease-up times for new luxury urban projects, are becoming more cautious. Those were some of the insights voiced by a panel of experts this week at a Minnesota Multi Housing Association seminar. Others on the panel, meanwhile, said they are seeing few signs that the apartment boom is in the ‘ninth inning,’ despite a bit of sluggish start to 2017. Opus Vice President Matt Rauenhorst said what’s most important in a new development now is that there be a compelling ’story’ and location differentiating it in an increasingly crowded multifamily market.”

“Rauenhorst said he’s aware of concerns about hitting the top of the market for rents. ‘But in talking to our residents, this is what they want,’ he said. ‘They’re saying, ‘We’ll pay more if you can give us condo-like finishes.’”

From Michigan Live. “It’s been more than three years since Happy’s Pizza burned down at the corner of Main and Madison streets in Ann Arbor. That was January 2014. And it’s been nearly two years since the City Council approved a private developer’s plans to breathe new life into the property and build a five-story building with 26 luxury apartments above ground-level retail. That was September 2015. But while other new developments are underway, including a new apartment building taking shape on the other side of Main Street, the southwest corner of Main and Madison remains a vacant lot.”

“Ann Arbor developer Dan Ketelaar said he’s had trouble locking in financing. He said he had financing lined up, but it fell through, and there are questions about the project’s viability now. When he won approval in September 2015, he expected to begin construction within a month. At the time, he was wrapping up work on another luxury apartment development on an adjacent site. Ketelaar said he’s still hoping to do something with the site, but he might need to come up with a different plan.”

The Memphis Daily News in Tennessee. “Even before he went to federal prison for 25 years on a racketeering conviction in 1995, Danny Owens had a real estate portfolio. Owens is like many buyers of single-family homes for rental purposes in the Memphis market in that he bought some of them sight unseen. Of all of the single-family home sales in Shelby County in 2016, 25 percent were sold to investors or non-occupants, according to Chandler Reports.”

“And his portfolio is relatively small and selective compared to investor groups that buy dozens and hundreds at a time – single-family and multifamily apartment complexes. Archie Willis, the president of Community Capital who is also part of the nonprofit Neighborhood Preservation Inc., talks to them frequently. ‘You’ve got your guys who come in and buy these for $9,000, $12,000 – whatever it is a unit – and that’s a bargain for them coming from Florida, New York and other high-cost housing markets,’ Willis said. ‘When they get here and realize what the economics are – it may be $12,000 but you can only rent it for X and you’ve got to spend way more than you think to make it habitable, and the math doesn’t work.’”

“The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them. The impact on neighborhoods is incalculable. ‘They will milk it. They will get it for whatever they can rent it for, do minimal improvements and obviously spiral downward,’ Willis said of the owners. ‘They will keep renting it, the rents go down. Eventually it will be only people who have no options. … Then eventually it goes totally vacant and they try to sell it.’”

From Bisnow on New York. “As one of the priciest and most luxurious high-rise residences in New York City, 432 Park does not seem like the type to have a sale — but that is just what is happening. As concessions have become the norm for landlords competing to fill the glut of available apartments and condos in Manhattan, the next logical step appears to be beginning — a drop in sticker price, at least at the upper end of the market in buildings such as 432 Park, The Real Deal reports.”

“Though the remaining units at 432 Park are gravy with the debt paid off, such a new building having to drop its asking price could be a bellwether for New York’s multifamily market. It appears the days of finding a billionaire to take a penthouse condo in New York may be over.”

From The Real Deal on California. “Construction sites litter almost every district of Downtown Los Angeles. If all proposed and under construction projects are completed, 29,383 new units will hit the market, according to a first quarter market report released by the Downtown Center Business Improvement District. Experts are concerned that demand in greater DTLA will not meet supply. Given that the vast majority of units in the pipeline fall in the luxury category, they worry an oversupply of expensive apartments is imminent. These fears are causing some lenders to be cautious about financing downtown construction projects, experts told The Real Deal.”

“Meanwhile, the number of rental units continues to skyrocket. Developers proposed 3,200 market rate and 350 affordable units in the first quarter alone. ‘It is obvious and apparent from all the projects in the pipeline that there will be some period of oversupply,’ said Mike Condon Jr. of Cushman & Wakefield. ‘But, at the same time, investors shouldn’t take a ‘the sky is falling’ approach to these temporary numbers.’”

The Associated Press. “Failed land-development deals in Idaho and Colorado have cost the Dallas Police and Fire Pension System approximately $100 million, officials for the system say. The deals account for a significant portion of the half-billion-dollar losses the fund has endured in recent years because of bad bets on real estate and private equity. The fund has spent $25 million just in fees to advisers and managers of the land deals. Earlier fund managers intended to build sprawling housing developments, but the plans were ruined when the housing bubble burst.”

“Speculative investments in past years also included luxury homes in Hawaii, a resort near Napa and high-rise condos in Dallas. Kelly Gottschalk said she was left in disbelief when she toured thousands of acres of empty land outside Boise, Idaho, shortly after she became director of the fund in 2015. She was left to wonder how prior leaders could allow a public pension, tasked with protecting the retirements of those who safeguard the city, throw away so much money on vacant land.”

“No lots were ever sold in Idaho and no homes were built. New appraisals of the land in Idaho and Colorado revealed more than $110 million invested by the pension ‘was no longer reflected in the value of the property,’ according to court records. ‘It was really shocking,’ Gottschalk told The Dallas Morning News. ‘I don’t know what they were ever thinking.’”