October 3, 2017

Worries About Overbuilding And Overpaying

A report from National Real Estate Investor. “Investors continue to buy fewer apartment properties than they did last year. Yet prices continue to rise. So far in 2017, the usual declines have been steeper than normal. Experts say fewer properties are available for sale, especially compared to the peak year of 2015. ‘The volume of property sales was so big… you can’t do that kind of deal volume every year,’ says James Costello, senior vice president for Real Capital Analytics.”

“Buyers are still very interested in apartment properties, keeping prices high and cap rates low. But that interest is not always enough to overcome worries about overbuilding and overpaying for assets. It seems less and less likely that prices will rise as quickly in the future as they have in the recent past. ‘Buyers won’t have cap rate compression to paper over any mistakes they make in underwriting,’ says Costello.”

The Orange County Register in California. “This commercial real estate market reminds me of an open bag of potato chips — with 98.5 percent of them eaten. The full chips are consumed — functional buildings with good owner motivation, priced aggressively but still within reason. What remains are the remnants of the whole crunch — dysfunctional, overpriced locations with zero owner motivation to meet the market and make a deal! A normal ebb and flow of availabilities and interested buyers have been usurped with feeding frenzies and bidding wars.”

“Sellers are enjoying these times. Many of us are warning a correction is near, but we also struggle to pinpoint the trigger. Remember that call you received from a broker claiming to have a buyer interested in your building? You blew him off but he was persistent. A multitude of calls morphed into a tour and subsequently an unsolicited offer. The price caused you to do a doubletake. Well, if he’s willing to pay this today, what will the building be worth next year? You don’t want to be that guy at the cocktail party talking about the deal you should’ve done.”

“If a deal seems obscene, it is. Last week we toured a project which is light years from the freeway. Mismanaged was the theme: low rents, high expenses, ownership squabble, vacant space, sky-high asking price. Yep, you guessed it. Three full-ask offers. My buyer and I shook our heads in disbelief and consoled each other. The deal wasn’t for us!”

The Columbus Dispatch in Ohio. “In an era of increasingly luxurious Columbus apartments, Hubbard Park Place raises the bar even higher. The project will include 101 apartments and 12,000 square feet of offices in a seven-story building that looks more like two buildings when it’s finished in a few months. It will have prices to match, starting at $1,700 a month and topping $4,000 for a handful of penthouse units. ‘The project will push the market,’ said Mark Wood, president of the Wood Companies, which is developing the building with Schiff Capital Group.”

“The Hubbard may raise the bar a bit, but it’s far from alone. Together with other high-end projects in and around Downtown, it represents not just a new building but a new way of living in central Ohio.”

From The Advocate in Louisiana. “Most LSU freshmen will be required to live on campus starting in the fall of 2018, the school announced Friday. Craig Davenport, an appraiser who tracks the Baton Rouge apartment market, said the move will obviously have a significant impact on the LSU-area housing market. The student housing market has been softening because of decreasing enrollment and uncertainty over the TOPS program.”

“LSU had 30,099 students at the start of the fall semester, a 2.6 percent drop from the year before. If enrollment continues to drop, coupled with the new housing requirements, it could lead to ‘lower rents, more concessions and lower occupancy’ at the complexes that target students, Davenport said.”

“Over the past few years, there has been a building boom around LSU as luxury complexes came on line, featuring amenities such as rooftop pools, study spaces that look like upscale coffee shops, lazy rivers and common areas with giant HDTV sets. From the fall of 2010 to fall 2016, Davenport said private developers and the university added a net total of 6,352 beds to the student housing mix. That number has grown further; the Park Place complex that opened this semester at 222 East Boyd added 280 units.”

The Boulder Daily Camera in Colorado. “Baby boomers have inspired a building boom across Boulder County as developers rush to construct senior housing for a local population that, by 2030, will make up a fifth of the county’s residents. A dozen developments have been constructed since 2012, with three more under construction or in planning. All told, they will add nearly 1,000 units to the county’s stock of senior housing. But as the silver tsunami sweeps the local housing market, some areas are feeling flooded. Lafayette, home to more than a third of new senior housing since 2012, is contemplating a temporary halt to boomer-focused building that, it says, is overwhelming the city’s emergency services.”

“The glut of senior construction has not been restricted to Boulder County. Apartments and assisted living facilities are going up all along the Front Range. Elizabeth Borden said that, at any given time, she is tracking 30 properties under construction for her senior housing market analysis company, The Highland Group in Boulder.”

“Market-rate assisted living units average $4,000 per month on the low end, Borden said. Memory care dwellings begin at $5,000 per month. Only a handful of properties — four or five, according to Borden — in the county accept Medicaid. ‘If you’ve got enough money to pay for it, you can find the housing you need,’ said Borden. ‘If you can’t afford those market rents, you’re down to some very limited choices.’”

From Bisnow on Texas. “New data from Abodo Apartments puts Dallas at the eighth-highest decrease in multifamily rent growth nationwide going into October. According to the report, Dallas-Fort Worth rents have fallen by 2.82%. The biggest decrease was in Newark, New Jersey, at 6%. ‘With construction at its highest level since the 1980s, we believe that a steady decline in rent prices in rapidly growing, major metro areas like Dallas may be on the way,’ Abodo Apartments’ Senior Communications Manager Sam Radbil said. ‘Developers delivered 250,000 new rentals in 2015, and almost 285,000 more units were finished in 2016. As we have seen in the past, as more rental units become available, prices should continue to decrease.’”

“The trend is not unique to Dallas, as other supply-heavy multifamily markets around the nation experienced downturns in rent growth. ‘We anticipate that the rent growth might begin to slow in very large cities like Dallas, Houston, Chicago, San Francisco and New York because of the huge boom in multifamily construction and luxury developments coming to market,’ Radbil said.”