August 3, 2017

The Question That Seemed Unthinkable

A report from Habitat Magazine on New York. “Since 2013, developers have poured thousands of new Manhattan condo units onto the market. In 2017’s second quarter, condo inventory in the borough stood at around 5,900 – up 35 percent year over year, according to Halstead Property Development Marketing. And prices for new condos are significantly down amid a slow down in luxury sales. Translation: developers citywide are sitting on unsold units. Lawyers, brokers and developers acknowledged that people are starting to sweat. Nikki Field of Sotheby’s International Realty said the pressure from lenders has ramped up in the past 18 months as the market has struggled to absorb a glut of new units. ‘The banks are calling in, and developers have got to deliver,’ she says. ‘They have deadlines to hit for signed contracts, they have pressure. The longer [a project] goes, the more it costs developers. There’s a real sense of urgency to move product.’”

“And it’s not just banks turning up the heat. The private equity funds that ramped up lending when traditional banks pulled back are also under the gun, because their funds have strict timelines that cannot be extended. That unease has prompted some developers to turn to a variety of strategies to curtail financial damage and salvage profits, including cutting prices, dangling concessions, selling blocks of unsold units and seeking inventory loans, which use sponsor apartments as collateral.”

“People are beginning to ask the question that seemed unthinkable just a couple of years ago: did the condo building blitz go too far?”

The Real Deal on New York. “The vacancy rate for New York’s rental apartments could soar from a current 3.8 percent to more than 11 percent by the end of 2018, according to a new analysis. The culprit: a surge in new construction. ‘It seems inevitable that you are going to see some pain in the market,’ Ten-X chief economist Peter Muoio wrote. The firm also predicts rents will fall as more new apartments hit the market, citing a slowdown in job growth that is likely to hurt demand.”

From Bisnow on Washington DC. “The unprecedented number of apartment units coming to the D.C. market this year is beginning to take its toll on rent prices. The District will welcome a record 7,054 apartment units this year, most heavily concentrated in the Capitol Riverfront and NoMa submarkets. The second quarter was the year’s busiest period for apartment deliveries, creating intense competition among landlords. More than 2,400 units delivered in the District in Q2 alone, according to Newmark Knight Frank’s Q2 multifamily report. A total of 12,621 units are under construction, promising to continue the heavy supply surge for the next 18 months or more.”

“‘It has been an unprecedented amount of deliveries,’ NKF researcher Bethany Schneider said. ‘It seems like every quarter there is a question of, ‘When will we be oversupplied? When will the other shoe drop?’”

“That question appears to have been answered this past quarter. The competition is being most felt in the concessions landlords offer, Schneider said, a metric that is factored into the effective rent. Landlords with hundreds of units to fill are ramping up the incentives they offer to prospective tenants. ‘This is really the first indication that the supply is starting to outpace the demand,’ Schneider said.”

From KHOU in Texas. “There’s a boom in downtown Houston. Right now, there is more than a billion dollars’ worth of construction going on, and much of it is residential. ‘You know, we think it’s a smart gamble,’ said Hines project director David Haltom. ‘The real estate game is about making smart bets, and we believe in the future of Houston and the future of this area in downtown Houston in particular.’”

“Hines is a $120 million residential project. There are 224 units at Aris, which run from around $1,700 a month to more than $10,000. Despite those prices, Haltom and others believe there is pent up demand downtown while other parts of Houston deal with an apartment glut. According to the Downtown District, the average asking price for an apartment is $2,654. The average home value is $489,390.”

The Real Deal on Florida. “One of the previous developers of the oft-delayed, oft-troubled Conrad Fort Lauderdale Beach condo-hotel project lost between $55 million to $85 million when it sold its stake to Quebec, Canada-based Heafey Group seven months ago, according to a lawsuit recently filed in Miami-Dade Circuit Court.”

“As a result, the former developer, Doral-based Conrad FLB Management is unable to pay back a $1 million promissory note plus accrued unpaid interest it obtained from Diego Investments Ltd. in 2013, the lawsuit states. Diego Investments is suing Conrad FLB for allegedly defaulting on the loan and unjust enrichment. On the third anniversary of the loan, Diego Investments exercised an option for full payment of the note, plus accrued unpaid interest, the lawsuit claims. Unbeknownst to Diego Investments, Conrad FLB’s affiliate sold its stake to Heafey at a ‘material loss’ and ‘the borrower is now in an inferior financial position’ than at the time the note was issued, according to the suit.”

“‘When the note was called, they were nowhere to be found,’ said Jason Giller, Diego Investments’ attorney. ‘And it was only during our investigation did we learn that the project was surreptitiously sold, without notice, consent or substitution.’”

From MarketWatch. “The ninth inning of a baseball game is often the point when all of the game’s story lines come to a head. In the commercial real-estate business, we have a ninth inning as well. But ours is exciting for a different reason: Instead of the last moments of a well-played game, the ninth inning in real estate is defined by a last-minute flurry of activity before an overhyped, overpriced market finally flames out and falls back down to Earth.”

“There might still be some deals to be found, but it is not what we call a ‘wholesale market’ anymore. At this stage, you are buying near the top, just as prices are about to plateau or even dip. The problem for investors is that often, especially as markets are heating up, many people forget their Economics 101. They forget that what goes up can, and must, also go down. They get caught up in the hype, in the idea that things have been so strong for so long that they can never go down again.”

“But that’s not reality. Economies do cool off and they do correct themselves. It happens every time.”