We Definitely Have An Oversupply
A report from the Seattle Times in Washington. “Seattle’s sky-high crane count has dropped significantly for the first time in years, suggesting the ongoing construction boom could be starting to lose some steam — even as the city continues to lead the country in total cranes. Most of the new buildings under construction are apartments. A flood of new rental high-rises hitting the market late last year led to the first significant rent drop in Seattle this decade, with 6 percent declines downtown, where the bulk of the new towers are.”
“The apartment frenzy could be slowing, though. Developers have noted that banks have started to pull back on funding new apartment towers as rents have begun to lag behind rising construction costs. Seattle still has more cranes than New York and San Francisco combined. But it remains well behind Toronto, which has 88, for the most in North America. Several other international cities from Australia to the Middle East have more than Seattle, as well.”
From the Portland Tribune in Oregon. “Although Portland rents dipped slightly last year, they were still the 20th highest in the country in January, according to Zumper. On a year over year basis, two bedroom rent is down nearly 5 percent. The Reed and Brooklyn Action Corps neighborhoods saw some of the biggest rent dips, down over 15 percent.”
The Dallas Morning News in Texas. “If North Texas lands Amazon’s HQ2, housing those thousands of new workers won’t be a problem. Last year D-FW builders constructed more than 30,000 single-family homes. And developers completed about 35,000 apartments in North Texas. More new housing was built in the area in 2017 than any other U.S. metro area. ‘Product availability in metro Dallas totals about 57,000 apartments - roughly 33,000 vacant units in existing properties and another 24,000 or so units in projects that are under construction,’ RealPage chief economist Greg Willett said.”
From Crain’s Chicago Business in Illinois. “The developers of the Marquee at Block 37 wanted a big price—about $370 million—when they put the new Loop apartment tower up for sale last year. But they found another way to score a hefty payday. They refinanced the 690-unit high-rise last month with a $225 million loan from New York-based Blackstone Mortgage Trust, allowing them to pull tens of millions of dollars out of the property and still retain ownership.”
“It’s one consequence of an overbuilt downtown apartment market. With developers completing as many as 8,500 units in downtown Chicago over the next two years, investors have grown wary of paying up for shiny new buildings. Unable to get their price, developers are refinancing instead, capitalizing on low interest rates and a positive lending climate.”
“By refinancing, many developers can score a loan that’s large enough to pay off all their construction debt and return all their equity and then some. By borrowing $225 million, the Marquee’s developers, CIM Group of Los Angeles and Toronto-based Morguard, could pay off a $110 million construction loan and pocket much of the $115 million in proceeds.”
“Cash-out financing is nothing new in real estate. When prices are rising, homeowners can borrow more against their residences, allowing them to keep the difference between old and new loan amounts. Refinancing in commercial real estate works in much the same way, though developers can often boost their debt significantly. Lenders are willing to provide a much larger loan against a building that’s completed and leased up than one that only exists on a piece of paper. Developers also don’t have to pay capital gains taxes like they would in a sale, or take on the challenge of redeploying their capital in a new project.”
“Many investors that buy high-end buildings are just waiting to see how the downtown market shakes out over the next 18 to 24 months. Prices for luxury downtown properties have plateaued, or even started to fall, as the swelling supply of new apartments has forced many landlords to offer generous concessions like free rent. As a result, the average net rent, which includes concessions, at top-tier, or Class A downtown buildings, fell to $2.83 per square foot in the third quarter. Apartment sales also have dropped.”
“Though CEO of Fifield Cos., Steve Fifield still speaks with a developer’s optimism, he has no illusions about the near future of the downtown apartment market: ‘We definitely have an oversupply in Chicago. ‘18 and ‘19 are going to be very competitive.’”
From Curbed New York. “NYC renters had more leverage with landlords in the fourth quarter of 2017 than they’ve had in a long while, StreetEasy claims. In Manhattan a little over a third of the rentals had their prices cut, which was the highest percentage since StreetEasy started tracking these records in 2010. Queens and Brooklyn both had 28 percent of its rentals offered up with price cuts, which was the highest in Queens since 2012, and the second highest in Brooklyn.”
“In Manhattan, neighborhoods like Morningside Heights, Stuyvesant Town, and Lincoln Square were all ideal if renters were looking for big discounts; in Brooklyn the same could be said about some areas around Prospect Park; and parts of Northwest Queens. ‘While a flood of new construction has been the main driver of the rental market slowdown we’ve witnessed over the last year, the fourth quarter’s rent cuts are more far-reaching than in years past,’ said StreetEasy Senior Economist Grant Long.”
