August 30, 2017

The Boom Has Created A Vast Oversupply

A report from Crain’s Chicago Business in Illinois. “The laws of economics dictate that growing demand drives prices up, but not if supply is rising by a greater amount. That’s exactly what’s happening in the downtown Chicago apartment market. Landlords are losing some of their leverage over tenants as a flood of new apartments washes over the downtown market, a historic surge in supply that’s more than offsetting rising demand. A key measure of apartment demand, absorption—the change in the number of occupied downtown units—tells another part of the story.”

“Absorption rose to a record 2,582 units last year, according to Appraisal Research. After a surprisingly strong second quarter of leasing, Appraisal Research Vice President Ron DeVries expects downtown absorption to hit 3,000 this year and 3,200 in both 2018 and 2019. Those are big numbers—9,400 units over three years—but the expected supply of new apartments—12,500 units—is even bigger, meaning the market could be out of balance for a while.”

“Several more buildings will open by the end of the year, and demand tends to taper off after Labor Day. That’s why DeVries expects some developers to start offering more deals on rent in the coming months. ‘There’s a lot of units still coming on line this year, and the prime leasing season is pretty much over,’ he said.”

The Norman Transcript in Oklahoma. “Despite increased evidence that new multifamily properties marketed toward students are rolling out too quickly for the demand, investors still love Norman apartments, according to Mike Buhl of Commercial Realty Resources Co. ‘I tie it back to interest rates, but I think investors are just convincing themselves that this makes good sense,’ Buhl said. ‘They’re going to put money into them, and then reposition them and raise rents. That looks good on paper, but I don’t think it’s a good time to do that in Norman.’”

“Buhl tracks the historical trend from fall 2008 when enrollment was 26,201, an increase of 1,736 students over the nine year period between 2008 and 2016. While student demand is constant, he said, the construction boom has created ‘a vast oversupply of student housing.’”

“Not counting construction of on-campus housing by OU, Buhl reported 3,195 student bedrooms added to the market since 2014. ‘Adding smaller duplex developments that include six to eight bedrooms each, along with the OU housing, and the number surpasses 4,000 new student bedrooms to the market,’ Buhl said in his mid-year report. ‘While it’s a tough time to be a student landlord in Norman, the effects of overbuilding the sector will have a broad impact. We’ve created an inventory of units that’s not going to be absorbed in the next two or three years, if you look at historical trends.’”

From Multi-Housing News on New York. “Aleksandra Scepanovic, co-founder and managing director of Ideal Properties Group, a Brooklyn-based real estate brokerage, recently took time to talk to MHN about the state of affairs of multifamily in Brooklyn. MHN: What have you seen so far in 2017 when it comes to multifamily investment opportunities in your area? Scepanovic: A glut of new Class A supply is causing a weakening in the rental apartment absorption rate, coupled with a steady supply of concessions.”

“MHN: What do you see as the trends in multifamily housing in your sector? What is on your radar? Scepanovic: Enduring rent concessions are wide-spread as the existing assets try to compete with the influx of new developments.”

“MHN: What’s your biggest piece of advice with today’s current market? Scepanovic: Analyze, analyze, analyze, and only then invest. If a project doesn’t pencil out, remember the old adage: ‘Some of the best deals are the ones you don’t make.’”

The Real Deal on New York. “The rise of foreign investment in Manhattan over the past few years has been a boon to the real estate industry. But as 2017 passes the mid-year mark, the trend’s flipside is increasingly becoming apparent. Back in November, Chinese capital was still king here, paying top dollar for the glitziest assets and telegraphing much more to come. Then Beijing took action, and things changed rapidly. The Chinese government began enacting a series of controls designed to curb capital outflows, particularly bets on what it deems risky investments.”

“When The Real Deal took an in-depth look at the issue in May, brokers channeled their supernatural optimism and said they don’t see it having a big impact on New York. It’s getting harder to defend that stance now. This month, Morgan Stanley reported that Chinese overseas real estate investment could fall by 84 percent this year. And Chinese regulators formalized capital controls, vowing to no longer tolerate ‘irrational’ investment overseas, particularly in real estate.”

“The problem is that several big overseas investors retreating from New York would no longer just be a hiccup — it could shake the market to the core. Foreign buyers often bid top dollar for trophy assets, setting new benchmarks for pricing. It may not be a coincidence that the spread between the average cap rate of prime Manhattan properties and the 10-year Treasury yield (an imperfect but useful indicator of how overpriced a market is) is far lower now than it was in 2012 or 2013 (see chart, courtesy of RCA).”

“‘I don’t think you can ignore what’s going on globally,’ said Savills Studley’s Heidi Learner. ‘It’s not just true for commercial real estate.’”