January 13, 2018

More Of A Supply Problem Than A Demand Problem

A report from the Seattle Times in Washington. “Rents are dropping significantly across the Seattle area for the first time this decade, as a flood of new construction has left apartments sitting empty in Seattle’s hottest neighborhoods. The biggest rent decreases were mostly in the popular Seattle neighborhoods that are getting the most new apartments. Rents dipped more than 6 percent compared with the prior quarter in First Hill, downtown Seattle, Belltown, South Lake Union and Ballard, along with Redmond and the Sammamish/Issaquah area.”

“More apartments are sitting empty — particularly throughout downtown Seattle — giving renters more negotiating power over landlords. And even more new apartments are set to open in 2018, leading analysts to suggest the rental market will keep cooling. Among the brand-new buildings in South Lake Union, about one-third of apartments are sitting empty. And in the core of downtown, about two-thirds of newly opened apartments are vacant. Overall, there are 24,500 apartments under construction now across King and Snohomish counties. There are an additional 35,000 units in the pipeline.”

“The city of Seattle is getting more apartments this decade than in the prior 50 years combined.”

The Journal Sentinel in Wisconsin. “By June, Milwaukee’s first new apartment high-rise in six years will open — with another under construction. But three other upscale apartment towers in the downtown and east side area remain on hold, as the developers continue to assess the market and seek financing. There have been concerns about the number of new higher-end apartments being developed throughout the greater downtown area outstripping demand.”

“The Milwaukee area’s apartment vacancy rate of 7% will likely rise to around 7.5% to 8% by the end of 2018, said Richard Aaronson, CEO of Atlanta-based Atlantic Realty Partners, which last year opened two large mid-rise apartment developments in Milwaukee and Wauwatosa. ‘Absorption is going to need to catch up,’ said Aaronson.”

From Bisnow Washington, DC. “D.C.’s apartment market finished 2017 with rents falling for the third consecutive quarter as the ongoing supply boom has created heated competition among landlords. Rents for Class-A multifamily properties across the District fell 3.9% from the end of 2016 to the end of 2017, according to Delta Associates, bringing the average Class-A rent to $2,491 per month. This stretch represents the first time since 2009-10 that D.C. rents have declined for three straight quarters.”

“The drop in rents coincided with the delivery of 4,789 Class-A apartment units across the District in 2017, a 45% increase from 2016. The rapid pace of supply growth is expected to increase even more this year, with Delta projecting the completion of 5,972 units in 2018. ‘The issue in the District is more of a supply problem than a demand problem,’ said Delta Associates President Will Rich.”

“The rent drop was most pronounced in the Northeast D.C. submarket, which experienced a 7.9% decline in rents year over year. The submarket includes Ivy City, Edgewood, Brentwood and Brookland but not NoMa or H Street, neighborhoods Delta separates into their own category. Concessions such as free months of rent, which are factored into the effective rent numbers Delta reports, have become common in the Northeast D.C. submarket as vacancy rises, Rich said. ‘Vacancy is the highest in that submarket of all the ones we track. It’s about 10%, which is fairly unusual.’”

The Real Deal on New York. “The rental market was facing all kinds of headwinds as the year came to an end. The share of rentals offering concessions set records in Manhattan, Brooklyn and Queens, according to a report from Douglas Elliman, even accounting for seasonality. In Manhattan, the share of apartments with concessions offered was at 36.2 percent, 37 percent higher than last December, and in Brooklyn, it more than tripled since last year to 46.1 percent of the market. Concessions were offered at 48 percent of new development rentals.”

“‘This is still an important tool to protect face rents, to put on the best face so to speak,’ said Jonathan Miller of appraisal firm Miller Samuel and author of the report. ‘They’re fighting a battle against the oversupply, so they’re putting out all the stops.’”

“Queens saw the biggest slides in rents, with a 3.5 percent year-over-year drop to $2,750, and a 5.6 percent drop in net effective rents, settling at $2,649. Both Brooklyn and Queens showed declines in luxury rents and number of leases. ‘This is a precursor for what we’re going to see for most of 2018, largely because all markets have a lot of rental units coming in to them,’ said Miller, who expects concessions to remain elevated.”

From Bloomberg. “TruAmerica Multifamily is teaming with Blackstone Group LP to acquire apartment buildings in Denver and Seattle for $126.5 million. The deal, which marks the Los Angeles-based real estate investor’s first transaction with the private equity giant, encompasses 635 units at two communities, one in each city, TruAmerica said in a statement. The buildings, while about 94 percent occupied, have barely been renovated since being constructed about 30 years ago, giving the new owners an opportunity to improve the properties and collect the upside.”

“‘The value-add opportunities available at each property are highly attractive,’ Zach Rivas, director of acquisitions at TruAmerica, said in the statement.”

“Apartment values soared to records during the past decade as U.S. households turned to renting in the wake of the financial crisis. More recently, gains in coastal cities like New York and San Francisco have slowed amid a glut of construction of high-end rentals. Smaller cities such as Denver are still poised for growth, according to data provider Axiometrics.”

The Real Deal on Colorado. “Since 2015, 12,000 new apartments have been built in Denver and another 22,000 are under construction, according to CoStar Group. Of those apartments, 90 percent are considered luxury units. Denver is trying out a pay-what-you-can program for some tenants. Under the program, the city will pay the difference between what lower income tenants — like teachers, hotel workers, medical technicians and food service workers — can afford to pay and the market-rate rent, the Wall Street Journal reported.”

“A housing expert told the Journal that there are risks in not allowing the market to take shape naturally. ‘What you would hope is that excess supply leads to lower rents. If the city is pumping subsidies in, aren’t they going to be propping up the upper end of the market?’ said Chris Herbert, managing director of Harvard University’s Joint Center for Housing Studies.”

The Dallas Morning News in Texas. “After years of booming construction, America’s apartment-building binge is cooling. Dallas-Fort Worth has already seen a dip in the number of apartments in the development pipeline. At the end of the year, about 30,000 apartments were being built in North Texas. That’s down from over 38,000 in third-quarter 2016, according to RealPage. Even with the decline, D-FW is still the country’s second-busiest apartment building market behind only New York.”

“‘There are a half-dozen spots where we’re concerned that starts could prove a little too aggressive simply because demand has been so strong over the past few years,’ said Robert Dietz, chief economist with the National Association of Home Builders. ‘Dallas tops that list, while other locations we’ll be monitoring closely are Seattle, Denver, Charlotte, Nashville and Boston.’”

“The flood of apartments coming on the market in North Texas is already impacting developers and landlords. Apartment rent increases in North Texas declined from as much as 6 percent in recent years to only 2.9 percent in 2017.”

From KCWY 13 in Wyoming. “Rent, rent, rent can be seen all over Casper Classifieds on Facebook and leasing managers and real estate agents say Casper’s renting market is finally stabilizing. Broker One Rentals Agent, Gary Bryan shared, ‘We’ve seen prices come down over the past, say 2015, 20-16 you saw prices come down in rentals and you’ve seen them pretty stable over the last year.’ Luxury apartments were the hardest hit a few years ago. ‘When the oil down-turn came, a lot of the higher-end apartments definitely took a hit. They were renting to a lot of oil company employees. So they saw a mass exodus and their apartments were pretty empty.’”