September 13, 2017

The Question Of The Market Over-Building

A report from the Deseret News in Utah. “For the eighth straight year, vacancy rates for rental apartments in the Salt Lake metro area have declined — down to the lowest rates ever. ‘This low vacancy is fueling a record-breaking level of construction of new apartment buildings,’ said Kip Paul, executive director of investment sales at Cushman & Wakefield’s Salt Lake office. ‘This begs the question of whether the market is over-building. The data shows that even with previously unmatched levels of development, the demand is such that there is no sign of oversupply in the foreseeable future and property investment, particularly in midsize communities, is particularly attractive to buyers.’”

“‘In my experience, this (market cycle) is quite unique because of the extended duration of this (high) phase of the cycle,’ said Dan Lofgren, CEO of Cowboy Properties. He said a full cycle can take between seven and 10 years to go from a high demand peak down to a low point, then return to the next cyclical peak. That has not been the case in this current cycle, he noted. ‘We have been at this high part of the cycle for six or seven years,’ he said.”

From AZ Big Media in Arizona. “The Phoenix apartment market has notched a strong two years, as occupancy has remained essentially full and rent growth levels have trended well above national norms. A total of 13,356 units were under construction at the end of 2nd quarter 2017, the fourth straight quarter in which construction volumes topped the 13,000-unit mark. Those levels are in line with the ongoing construction highs seen in the previous cycle’s peak in 2007 and 2008.”

“Meanwhile, building activity is still sparse in the western suburbs, which are traditionally weaker-performing areas. But those areas should be watched for near-term starts. Permitting volumes remain elevated in the metro, and big blocks of product emerging on the west side historically have been a signal that the metro is overheating.”

The Dallas Morning News in Texas. “The long-predicted slowdown in North Texas apartment construction may finally be in the works. With over 50,000 rental units under construction, Dallas-Fort Worth has been the top apartment building market in the country in recent years. But a significant slowdown in permits for new apartments this year may herald a decline in building cranes on our horizon. Apartment analysts have been forecasting a slowdown in North Texas building starts to let the market catch up with several years of dramatic construction.”

“‘It only took me three or four years of saying ‘this is the peak’ to be right,’ said RealPage economist Greg Willett. ‘While the permit volumes can move around quite a bit from one month to the next, the slide in the most recent stats is big enough to look like the inflection point in building activity. Now that we’re seeing rent growth cool or even flatten in the urban core and Frisco, where completions are heaviest, some capital sources are beginning to take a wait-and-see attitude before placing more money in the apartment sector.’”

“But that doesn’t mean North Texas won’t have plenty of new apartments. Almost 30,000 units are opening their doors in the area this year. ‘With around 50,000 units under construction, we’re still going to be delivering lots of apartments for at least another couple years,’ Willett said.”

From National Real Estate Investor. “This summer, for the first time in several years, student housings beds were not leasing as quickly as the year before. ‘The student housing market moderated this year,’ says Taylor Gunn, student housing analytics lead for data firm Axiometrics. ‘This was anticipated to occur at some point after several consecutive years of record performance. The space is becoming more competitive with new operators and investors, more supply and universities revitalizing their housing. A lot of these factors can be expected with a growing industry, but can prove to be a challenge for some going forward.’”

“Developers were expected to deliver 46,000 new student housing beds for the fall 2017 semester, though some of those bed have surely been delayed, potentially into 2018, according to Axiometrics. That’s roughly the same number of beds developers opened in 2015 and 2016. ‘Oversupply at the top end of the market is also something we’re closely monitoring,’ says JJ Smith, president of CA Student Living.”

From Minnesota Daily. “Hundreds of college students spill from the fraternity houses lining University Avenue on Friday nights. During the week, the houses are emptier than normal. Despite the fact 11 percent of the University of Minnesota’s students participate in Greek life, some Greek houses struggle to attract members to fill their rooms. The development of multiple luxury apartment complexes around campus may keep members from living in fraternity houses, said Chi Psi President Dylan Marvel and Phi Sigma Kappa President Garrett Caddes in an email.”

“‘Frat houses are older and do not typically have the same amenities as some of the new apartments popping up around campus,’ Caddes said. Other apartments scattering the borders of the University campus are often the first choice for students, pushing fraternities to adjust their prices to stay competitive, Caddes said.”

“‘Really, if you don’t have a good number of live-ins, that can really cause your house to flop,’ Marvel said.”

The Real Deal on New York. “Price chopping this week was through the roof. The very roof some of these owners are trying hard to escape. Reductions on the city’s most expensive homes’ price tags slowed over the summer. But last week, more than 20 pads in the over-$10 million market were discounted by more than 5 percent, according to data from StreetEasy. 151 East 58th Street, 47A. Previous Price: $14 million. Current Price: $11.8 million ($3,858 per square foot). Percentage Drop: 16 percent. It hit the market for $14 million last October and has been steadily trending down since. Its price was reduced earlier this year.”

“Compass’ Victoria Shtainer and Gabriel Zapata have the listing. ‘I had a long conversation with my owner,’ Shtainer said. ‘We feel that $11.8 million is where the market is today.’”

The San Diego Reader in California. “Is the demand for housing suitable to fill the thousands of rental units that have sprung up in downtown’s East Village since the mid-2000s, and enough to sustain even more units currently under construction or in the planning phases? If so, some longtime business owners wonder where their customers have gone, and residents of new projects are confused as to why so many of the units in their buildings are offered on the short-term rental market to vacationers or other travelers.”

“Gina Rodriguez, one of the first tenants to move into the Form 15 mid-rise in October of 2014. She and her husband began having problems when Essex Apartments took over as the property manager. ‘Once the new management team took over, [Airbnb-style listings] started popping up as soon as leases were up, it seemed,’ Rodriguez continued. She says that by the time she moved out last September (breaking her lease to do so), at least 20 units in the building were being used full-time as short-term rentals.”

“‘They would treat the building like a hotel and use it to host loud parties, take over the amenities, and generally trash the place. It was always the same known Airbnb apartments that would receive complaints and nothing was ever done to address the issue. I think the most aggravating part was that management not only did nothing about it, but they were the ones orchestrating it!’ she said.”

“Walking the neighborhood, even while residential upper floors show signs of life, a number of vacant street-level storefronts stand out. Across the street from the mostly unoccupied ground level of Form 15 lies the building that once housed Salazar’s Fine Mexican Food, a business Marta Radcliffe and her family operated for 45 years until it was shuttered in late July.”

“‘It was a sad, slow, kind of drawn-out death,’ Radcliffe says. ‘The business has just died over the last ten years or so. A lot of high-rises went in, and they’re all empty. Historically we had a lot of small local businesses — our breakfast and lunch were our strong times. But as they built all the high-rises, we lost our breakfast and lunch business because all the local workers were gone. It’s like a ghost town down there now,’ Radcliffe continues. ‘There are a lot of homeless people nearby; they’re about the only ones we’d see the last few years.’”