March 24, 2018

Investors Are Talking About Unloading Their Properties

A weekend topic starting with Bisnow. “Investor confidence in the stability of the multifamily sector this year remains strong, despite robust new supply levels and concerns regarding rising inflation and aggressive interest rate hikes. As the cycle continues to mature, investors are shifting their investment strategies to focus less on appreciation to generate crazy returns, and more on stability and betting on assets that will generate steady cash flow. Marcus & Millichap anticipates 335,000 units will come online this year — down from 2017’s 380,000 completions. New deliveries will be largely concentrated in Dallas, New York City, Washington, D.C., and Atlanta.”

“‘Last year we saw a very significant wave of construction … the most completions on record and likely the most we’ve seen since the ’80s,’ said Marcus & Millichap First VP of Research Services John Chang. ‘[We] do anticipate it tapering a bit in 2018, coming down to 335,000 units, which is still a lot. We’re still looking at a very deep pipeline of construction that should continue to come to market.’”

The San Francisco Chronicle in California. “Is the long run up of San Francisco rental prices finally coming to an end? In certain neighborhoods at least, the signs seem to be pointing to a resounding yes, according to Zumper. The apartment listing site says that the median asking prices for one-bedrooms in Cole Valley are down 14 percent to $2,950, while the Inner Richmond is down 11 percent to $2,550 and Mission Dolores is down 9 percent to $3,350 since the same time last year.”

“‘Last year, in the Inner Richmond and Cole Valley, rents were spiking due to a lot of demand present, since these areas are safe/low on crime and tend to be less expensive than living in the surrounding neighborhoods like Hayes Valley or NOPA,’ explained Zumper’s Crystal Chen. ‘While the demand will always be there for these neighborhoods, the price has come down from last year since less people are looking to move right now and it seems a ceiling has been hit.’”

The Herald Net in Washington. “In December the average rental price fell 2.9 percent across Snohomish and King counties, according to a widely heralded landlord survey by Apartment Insights/Real Data. Was the decrease — the largest this decade — an anomaly, or the start of a downward trend? A little of both, analysts say. Dylan Simon, an executive vice president and head of the Multifamily Team at Collier’s International in Seattle, ridiculed news stories that suggested rents are ‘dropping significantly’ in the Puget Sound area.”

“Sean Martin isn’t so certain. He is the interim director of the Rental Housing Association of Washington, a consortium of more than 5,000 independent rental owners and managers. ‘This is a little bit more than the natural slow-down at this time of year,’ Martin said. ‘A lot of our members are saying rents are pretty stagnant.’”

“A rash of recent apartment construction across the region is stabilizing the market, he said. More than 2,000 rental units are being built in Snohomish County, with some 5,000 more in the planning stages.”

The Miami Herald in Florida. “The federal government says its hunt for dirty money in luxury real estate in South Florida and other high-priced housing markets is working — and the temporary initiative is being extended yet again. Since 2016, the U.S. Treasury Department has mandated that secretive shell companies buying luxury homes with cash in certain areas disclose their true owners to the government. The anti-money-laundering initiative began in Manhattan and Miami-Dade County — to the protests of South Florida politicians — and has gradually been expanded to other areas in Florida, New York, California, Texas and Hawaii.”

“Drug dealers, corrupt officials, money launderers and other criminals often buy expensive real estate to legitimize dirty cash. They use shell companies — which don’t have to disclose their owners — in order to keep their identities hidden, frustrating law enforcement agents and sometimes stopping investigations dead in their tracks. Anti-corruption advocates have called for the disclosure rules to be made permanent. The flood of foreign money — most of it clean — pouring into markets like South Florida is partially blamed for rising home prices.”

“The temporary orders, issued by a Treasury agency called the U.S. Financial Crimes Enforcement Network (FinCEN), are known as geographic targeting orders, or GTOs. Last year, FinCEN reported that 30 percent of home deals reported under the GTOs were linked to people who had been the subject of ’suspicious activity reports’ filed by banks.”

From The Oregonian. “Residents of downtown Portland’s Ladd Tower last year started noticing a growing number of strangers in their building’s lobby and elevators, often with luggage in tow. They arrived at a time when residents were already on edge over a series of break-ins, and crime prevention officials had warned them to watch out for unfamiliar people. It wasn’t clear where they were coming from — until residents found the building listed on the website Stay Alfred, which rents out vacant apartments to travelers.”

“‘I signed up to live in a home, not a hotel,’ said Lisa Cox, a resident of the building. ‘Holland Residential has turned this into a hotel without me even knowing.’”

“Ladd Tower, owned by Holland, isn’t alone. The owners of a handful of high-end apartment buildings are now offering rooms to rent by the night through Stay Alfred and a Portland-based competitor, Vacasa. It’s part of a small but growing industry that allows building owners to make money off of empty units.”

The New York Times. “As South Lake Tahoe struggles with a proliferation of vacation-home rentals in its residential neighborhoods, the El Dorado County town has enacted tough new rules, slapping $1,000 fines on both vacation-rental guests and owners for infractions related to noise, parking, trash, too many visitors, too many cars or hot-tubbing after 10 p.m. Homeowners say the influx of weekend visitors, some of whom they describe as drunken revelers, destroys their tranquillity and neighborhood character. They point to new McMansions with eight or more bedrooms being built specifically to house tourists. They’d like to ban vacation rentals altogether in residential areas.”

“Already some real estate investors are talking about unloading their properties. ‘Sooner or later we will sell our house,’ said one vacation-rental owner who has already received two $1,000 citations for guests who briefly had an extra car. If she gets another one, she can no longer rent to tourists. If scores follow her example, the inventory flood could exert downward pressure on home prices.”

The Missoula Current on Montana. “Sterling CRE adviser Matt Mellott offered his company’s top investment opportunities – and risks – for investors looking at commercial real estate property in Missoula. Mellott said investors building spec homes in Missoula priced over $350,000 are fine for now, though that could change if the market corrects itself. ‘If there’s a market correction, you can still sell a $250,000 house, but you’ll have a very difficult time selling a $350,000 or $450,000 house.’”

“Stabilized multi-family properties you don’t plan to keep through an entire cycle: ‘If you buy a property that has a net operating income, right now, of $100,000, and you buy at a 5.5 percent cap rate, which is typical for this area, you’re going to pay $1.82 million,’ Mellott said.”

“But if that same investor assumes his or her rent will grow 3 percent each year, pushing his or her net operating income to $109,000 three years from now, a life-changing event that requires the investor to sell could spell disaster in an environment with rising interest rates. ‘A 6.5 cap rate on a $109,000 net operating income means you’ll sell for $1.86 million, which means a net loss of $140,000 three years from now. Rising interest rates are not your friend when you talk about buying low cap-rate products.’”