The Housing Bubble

A report from the Mercury News in California. “The soaring cost of construction could hobble efforts in San Jose and other Bay Area cities to speed development of high-density housing such as apartment towers, according to a foreboding assessment being circulated in the South Bay. Even worse, while ordinary individuals already face dire financial obstacles when they buy or lease housing, residential rents likely would have to spiral even higher to render the vast majority of Bay Area apartment towers economically viable for developers, experts warned. ‘This is a housing crisis and a housing catastrophe, but if I’m going to kick off a new project, rents have to go higher,’ said Drew Hudacek, chief investment officer for development firm Sares Regis.”

“Renters would be forced to endure an eye-popping 25 percent increase in rents before most new residential towers could be built. ‘We have more than 6,000 units that are fully entitled and ready to be built,’ San Jose Mayor Sam Liccardo told this news organization. ‘But developers can’t get shovels in the ground because the development costs are scaring away the financing.’”

From National Real Estate Investor. “Local and regional banks are making more loans on apartment properties, in some cases significantly more. In one surprising example, the busiest construction lender in the U.S. in 2017 was Bank of the Ozarks. Banks are continuing to pour money into apartment projects, keeping the total number of units under construction high. The new developments will continue to stress the supply/demand balance in a growing number of apartment markets where vacancy rates are beginning to creep up and rent growth is slowing down.”

“‘Regional banks are still searching for yield in this flat yield curve environment… commercial real estate lending is an attractive alternative,’ says Justin Bakst, director of capital markets with research firm the CoStar Group. Banks are also highly conscious that developers are building more new apartments in some cities than the local markets can absorb. ‘Urban infill markets have seen a lot of supply,’ says Mitchell Kiffe, co-head of national production for the debt and structured finance group at CBRE Capital Markets.. That’s beginning to push the vacancy rates higher in some places. ‘Net effective rents probably have not achieved the pro forma estimates set for many projects,’ Kiffe notes.”

The Downtown Devil on Arizona. “A surge of multi-family construction is reshaping the housing market and approximately 2,000 units are set to be added to the skyline by 2020. It is no secret that downtown Phoenix is growing, and rapidly too. Founder of We Heart Houses and real estate investor Michael Del Prete is not surprised by the spur of new residential developments. ‘Money is cheap right now,’ said Del Prete. ‘It is easier for developers to get access to cash to build these buildings.’”

“When the Federal Reserve gives the gift of low-interest rates, investors take advantage. But as they are on the rise, their generosity is fleeting. These apartments, however, do come with a pretty price tag. Because there is a constrained supply of units and demand for housing is so high, according to Elliott Pollack, CEO of Elliott D. Pollack & Co., it is almost statistically impossible to overbuild the apartment market at this time. The market is saturated with one product—housing—but the number is not at all high enough to cause a problem.”

“‘If indeed, there are not enough people that will satisfy rent costs, concessions like six or eight weeks free of rent will be offered to lower the total leasing price. Regardless, at some price the units will be rented—the demand is here. ‘Am I shocked? Am I scared? No,’ Pollack said, trusting that an overbuild situation in downtown will generally be a good thing. ‘Somebody’s going to live in those units at some price and that means that there’s going to be more vibrancy to downtown because there’s going to be more people,’ Pollack said, ‘you can’t focus on what’s there now, you have to focus on what’s going to be there.’”

From Bisnow on Texas. “The Q1 numbers are in and it appears DFW is finally cooling off after years of manic growth. Office vacancy in the metro is up to 20.5%, multifamily is up to 5.6% vacancy. Demand fell short of the deliveries in the multifamily market, resulting in a rise to 5.6% vacancy. Class-A product in Frisco, Allen and McKinney is taking it especially hard as the delivery of thousands of luxury units caused up to 7.5% vacancy in these areas, some of the highest in the metro, according to Marcus & Millichap’s Q1 multifamily report. Much like the office market, job growth should bail DFW multifamily out of its slightly overbuilt pockets.”

From the Baton Rouge Business Report in Louisiana. “‘Where can I build some more apartments? Is there demand anywhere?’ I get asked these questions a lot. Apartments are usually popular developments because financing is easy to come by and developers can always hire ‘experts’ to tell them what they want to hear. The problem, however, is that very few ‘experts’ do the necessary analysis to determine if demand really exists. They use bad data from national sources that may overstate average rents and understate vacancy rates.”

“For example, I recently had the occasion to review one such report that said there was additional demand for student housing in Baton Rouge. Well, anyone who has driven down Burbank or Nicholson drives can tell you that conclusion may be suspect. Apartments identified as Class A, or those considered to be upscale properties, saw average rents decrease by 5.2%, while Class B, C and D properties all posted increases in average rental rates. Vacancy for all units averaged nearly 8%, which is up slightly from a year ago. And over 40% of the properties surveyed were offering some sort of concessions, such as free rent and reduced deposits, in an attempt to lure in tenants.”

“None of these facts, in and of themselves, are cause for concern—until you look at the construction taking place in our market. There were 7,774 units constructed or under construction from 2015 to 2018. That’s an average of 1,944 units per year. For historical comparison, consider that between 2006 and 2013 there were 6,937 units constructed, which is just 867 per year. To add insult to injury, another 2,290 units are proposed for 2019 and 2020, according to the survey.”

“I look at all the upscale student apartment complexes being built along Burbank and Nicholson drives and I think back to when Tigerland was the place to be—until a great new area was developed off Gardere Lane with lots of new ‘upscale units’ (or so they were considered back then) and students flocked to rent there. That didn’t end well. Just saying.”

From The Hook on North Carolina. “The oversaturation of student housing around Greenville, driven by the growth of East Carolina University and Pitt Community College, has led to a split on the city council of how to address the problem. The analysis said the next 10 years the city’s supply of student housing will increase to 2,586, with 1,930 bedrooms currently under construction and expected to be on the market in the next two years. The 2,586 bedrooms will be added on top of the 720 vacant bedrooms which apartment complexes around Greenville currently have, according to the report.”

“In a recent analysis performed by Jessica Rossi, a planner at Kimley Horn, a planning and design consulting group, revealed the city’s supply of student housing is double of what the demand for housing is. ‘Ultimately what the analysis came down to was we found there to be an excess supply of student housing,’ said Rossi.”

From Bisnow on New York. “For the past five years, Douglaston Development Chairman Jeff Levine hasn’t made a single acquisition in New York City. Buying simply hasn’t made sense. ‘The reason being is that in the post-rate-recession environment banks stopped financing. Condos stopped selling,’ he said. ‘Land has not come back to earth far enough … [421a replacement] Affordable New York is not worth the paper it’s printed on.’”

“Levine, who is developing the 554-unit rental building in Williamsburg, Brooklyn, said rentals are a safer bet than condominiums right now. ‘I’ve done condos … couldn’t give them way… I struggled to pay back my debt,’ he said. ‘In a rental, I have more than one bite of the apple.’”

“Increasingly, developers are looking for ways to provide a cheaper product to buyers as they are still working to chew through the oversupply of luxury product on the market. Naftali Group has been inactive for a number of years, but it has recently began acquiring development sites once more, and founder Miki Naftali told the audience he believes $3K per SF is what he would consider the high end of the market. ‘The $5K or $6K a foot is just a dream that happened a few years ago, or at places like 220 Central Park South,’ he said. ‘In 2015, we started to see the market is getting to the point that it is just too expensive.’”

“Alchemy Properties founder Kenneth Horn said there is an oversupply of units in the $5K per SF price point, which he said is not a market he has ever wanted to be in, adding his company prefers to be selling apartments priced from $2,500 to $3K per SF. Alchemy is redeveloping the historic Woolworth Building in Lower Manhattan into luxury condominiums, with a penthouse priced at $100M. If it were to sell at that price, it would smash all Downtown residential records. ‘Two or three years ago, there was certain expectation that prices would go up and up and up,’ he said.”