January 23, 2018

The Glut Of Supply Is Showing Up

A report from Bloomberg on California. “Landlords counting on downtown Los Angeles as a cash machine may be in for the same bout of pain as their counterparts in Manhattan, where a flood of supply has started to drive down rents. More than 4,000 new apartments are forecast to hit the Los Angeles market this quarter, according to CoStar Group Inc., as the first wave of as many as 30,000 in the next three years. Much of the construction is concentrated downtown, where it’s easier to build than in other parts of L.A., and almost all the new apartments will be at the higher end of the market. The glut of supply is showing up in flattening growth and concessions, such as six weeks of free rent, said CoStar analyst Steve Basham. These economics are similar to those of the Manhattan real estate market, where last month the median rent declined 2.7 percent from a year earlier as demand fell short of supply.”

From Patch Brooklyn on New York. “The average Brooklyn apartment got cheaper for buyers and renters alike at the end of 2017. The borough’s average home sale price for the last three months of 2017 dipped about 4 percent from 2016 to $853,000, according to a Corcoran report. A slowdown at the most expensive end of the Brooklyn market drove the price drops, the reports suggest. The trends in Brooklyn mirror a similar drop in Manhattan housing prices at the end of last year.”

“Brooklyn rents ‘had become so overpriced in terms of rent, that they were due for a correction,’ RentCafe’s report says.”

From the Denver Post in Colorado. “Thousands of new apartments continued to pour onto the market in metro Denver last year, pushing down rents and pushing up vacancy rates to their highest level in seven years, according to the Denver Metro Apartment Vacancy and Rent report for the fourth quarter. Metro Denver absorbed 11,821 new apartments last year, up from 11,056 in 2016. That represents the most in records going back to 1981, although the 1970s had years with more robust construction.”

“‘These are the largest years on record in the survey, and I am told we would need to go back to the 1970s to find numbers of this monster magnitude,’ Ron Throupe, associate professor of real estate and construction management at the University of Denver’s Daniels College of Business, said in his report.”

“Denver had an estimated 21,541 vacant units at the end of last year, the most since 2009, when the recession was weighing on the economy. Vacancy rates haven’t been this high in about seven years and in markets with heavy new construction, the rate is much higher. Castle Rock reported a vacancy rate above 25 percent and in northwest Denver it was above 30 percent in the fourth quarter. With so much new supply coming, apartment developers need net migration to hold up. There are signs, however, that higher housing costs and congestion are motivating more people to leave the region.”

The Pittsburgh Post Gazette in Pennsylvania. “Apartment rents have soared so high in some of the hottest Pittsburgh communities that it has become cheaper in many cases to buy a home rather than rent. That’s especially true in the East End, where luxury apartments in Bakery Square, Lawrenceville and East Liberty have multiplied in recent years. Ben Atwood, an analyst for Costar Market Analytics, told members of the Apartment Association of Metropolitan Pittsburgh last week buildings that opened up in 2017 have a cumulative vacancy rate of about 40 percent. The majority of new buildings were high-end apartments where the cost of a two-bedroom unit could run more than $4,000 a month.”

“‘The problem that you are about to have is the Downtown area is about to add about 1,000 more new units over the course of 2018,’ Mr. Atwood said. ‘That is going to expand the inventory pool by close to 14 percent in one year alone. I don’t think there is much of a way to sugarcoat this,’ he said. ‘I don’t think that vacancies are going to stay close to what they are now, and I don’t think rents can grow in an environment like that. Vacancies for new units are three times higher than for older buildings, which suggests that the Pittsburgh multifamily market is overbuilt.’”

From The Oklahoman. “Last year was a pleasant surprise repeat for metro-area apartment investing, a longtime multifamily broker said. Again. Interest rates fell and capitalization rates stayed low, keeping demand high and prices up in 2017, said Mike Buhl, owner of Commercial Realty Resources Co. in Norman. A capitalization rate — or cap rate — is a percent measurement used to gauge investment risk and value by dividing a property’s purchase price by its net operating income.”

“The higher the cap rate, the lower the risk and the lower the property value; the lower the cap rate, the higher the risk and the higher the property value. So, the lower cap rates are, the better for sellers. ‘You look at the employment rate for Oklahoma City. The economy is doing very well here when you compare it to other parts of the country,’ he said. ‘On cap rates, although they’ve been trending downward, they’re still very reasonable — and the market offers a lot for investors here.’”

“Most of the sales increase was for older apartments, those built before 1980; Buhl counted 5,500 units sold. Fewer than 1,900 units of 1980-present apartments sold, he said. ‘What that means is that investors are less choosy about the properties they buy and the prices they are willing to pay,’ the report said.”

“The other main attraction of older, stable apartments has to do with financing, Buhl said. ‘If a property has a good historical occupancy over 90 percent,’ he said in his report, ‘then it will qualify for (government) agency financing, which offers the best combination of maximum loan proceeds and attractive interest rates.’ Some of the sales in 2017 were financed with loans as low as 4 percent with 30-year amortization, 10-year maturity dates, and interest-only payments in the beginning year(s). Freddie Mac continues to be the leader, making more permanent loans on apartment properties than any other type of lender.’”

From The Daily News in Washington. “In 2008, real estate developer Larry Wood had just started a townhouse development in West Longview when the recession hit and the housing market tanked. He was forced to declare bankruptcy and abandon the project. As the market recovered, Wood got back on his feet and bought back the project two years ago. ‘Banks are willing to work with people (again). It’s easy to be successful because it’s an easy market,’ Wood said. ‘But it makes me sad. I can do well just targeting the higher end, and I see a need for the higher end. But I also really see a need for these affordable townhomes and (other projects).’”

“Nearly a decade after the market crash, Longview developer Chuck Bond’s new 20-unit Copperwood Apartments, is the only apartment complex built in Longview since 2006, according to the city. Bond’s Copperwood project opened in October. To recoup his investment, Bond said, he would have to charge $1,295 a month for the new, 960 square-foot apartments. However, after a slow start to leasing out the units, Bond said he had to drop rents by $200 a month. The complex filled up in a month. Yet Bond said rents will probably have to creep back up to $1,295 for him to profit off the $2 million investment.”

From the Villages News on Florida. “Construction of a large mixed-use project on farmland across from Pinellas Plaza along County Road 466A could begin this summer. Wildwood commissioners voted Monday night to extend the project’s planned development ordinance for a year upon the request of a Sarasota engineering firm. The ordinance, which required that construction begin within two years, expired Jan. 11.”

“Last March, Wellstone Living applied for a permit to grade the property and complete a drainage plan so utility construction could begin. The former owner, WholeLife Properties, announced in December 2015 that the planned development on 154 acres would include more than 700 homes and apartments. The first phase, scheduled to begin nearly two years ago, included 400 luxury bungalows expected to rent to adults age 55 and older on three-year leases for $3,000 to $4,000 a month. An apartment building of up to six stories also was planned.”

“The project was delayed when WholeLIfe Properties filed for Chapter 11 bankruptcy protection in June 2016 after a lender’s letter threatened foreclosure on property the company owns in McKinney, Texas.”