The Housing Bubble

A report from the Post and Courier in South Carolina. “The Lowcountry kept pace in recording substantial apartment growth but the rapid expansion could result in a higher share of units empty next year, Marcus & Millichap predicts. ‘Another year of elevated apartment deliveries’ — when the communities are actually built — ‘will overtake renter demand and push vacancy higher,’ according to Marcus and & Millichap. The company says that many of the new rentals are large buildings in desirable neighborhoods near downtown Charleston, and ‘apartment operators are expanding the use of concessions to fill available units.’ The surge in new inventory during 2017 overwhelmed the net absorption of 2,400 apartments, raising metro wide vacancy 0.9 percent to 6.1 percent at year end.”

“As new apartments in the downtown, Mount Pleasant and islands leased, class B vacancy here soared 1.6 percent year over year. Rental completions reached the highest annual total since 2000 as 3,460 apartments were finalized in 2017. This was more than double the prior year’s sum. Deliveries will remain heightened as builders have nearly 5,000 rentals underway with completions scheduled into 2019. More than 2,700 of the units are in the downtown/Mount Pleasant/islands submarket. Operators expanded the use of concessions to fill units resulting in reduced rent gains.”

From The Real Deal in New York. “At this point, it seems like concessions at New York rentals set new records almost every month. In January, the number of deals with concessions hit 47.5 percent in Brooklyn and 50.8 percent in Queens, records that lasted all the way until March, when deals with concessions shot up to almost 48 percent in Brooklyn and 63 percent in Queens, according to Douglas Elliman market reports. In Manhattan, the number of new leases with concessions also hit a high in January at 49.3 percent.”

“Although a recent StreetEasy study found that renters are less likely to find price cuts during the summer, when units tend not to stay available for as long, multiple real estate experts said that concessions are too ingrained in the market at this point for typical seasonal trends to make a dent. ‘Some locations may see a modest uptick, a modest decline, or stay flat,’ said Jonathan Miller, CEO of the appraisal firm Miller Samuel and author of the Elliman reports, ‘but I don’t see it as a respite for the need for concessions because every month that goes by, there is more product entering the market.’”

“It is too late to do anything about excess supply at this point, according to Miller. ‘The idea of supply coming in slowing down I think is a fantasy,’ he said. ‘A lot of what’s coming out now was planned a few years ago. It’s not like they can turn off the tap.’”

“In years past, said Eric Benaim, CEO of Modern Spaces, it was generally standard to see developers just offer one month of free rent during the offseason. ‘Now, you’re seeing one month free during the peak season,’ he said, ‘and I’m assuming once the fall comes and the season’s over, you’ll probably see concessions jump up again.’”

From American Banker. “A high-profile foreclosure in New York is highlighting the importance of disciplined underwriting. Preferred Bank in Los Angeles disclosed recently that it has begun foreclosure proceedings on a pair of luxury apartment buildings in Manhattan, a move that will dramatically increase the level of nonperforming assets on its balance sheet. The loans have an outstanding balance of $41.7 million. Those who get too aggressive could be burned when the economic cycle takes the inevitable turn for the worse, bankers and industry observers said.”

“‘If you’re going to compete on commodities — that’s where the cycle starts to turn,’ said Joseph Campanelli, CEO at the $2.1 billion-asset Needham Bank in Massachusetts, adding that it can be tempting to follow the pack in areas such as rate and terms. ‘Well, so-and-so is doing this rate, so let’s match it,’ Campanelli said. ‘Or so-and-so is doing it without recourse, or doing a higher loan-to-value, let’s match it. That’s the slippery slope.’”

“‘Problems can cascade,’ said Jon Winick, CEO of the Chicago advisory firm Clark Street Capital. ‘Trouble with one project drags down another one. … A borrower can be highly coveted and, all of the sudden, no one wants to touch them.’ ‘What else does that developer or real estate group have going on?’ Campanelli said. ‘If they’re overleveraged in other areas, you would have to conclude that, on a global basis, the cash flows aren’t strong enough, even though the individual project looks OK.’”

The Colorado Springs Gazette. “Apartment owners often offer incentives to woo renters when the market slows down. Now, the rapidly growing Colorado Springs-area senior housing sector is following suit amid concerns of oversupply. Four complexes have opened in the Colorado Springs area since September, adding 320 independent-living apartments with meal service, assisted-living and memory-care units to a market that added eight projects between 2011 and 2015. Another four complexes with 316 senior housing units are scheduled to open during the next six months, boosting the area’s senior housing supply by nearly 25 percent in 13 months.”

“Several of the complexes have trimmed rental rates by hundreds of dollars, are waiving or cutting move-in fees or are offering help with moving expenses - all in an effort to remain competitive during the building boom. Angela Spence, executive director of Springs Ranch Memory Care, said her complex is offering an all-inclusive monthly rate that won’t change as long as the resident lives there - instead of a room rate that is subject to annual increases plus additional fees based on the level of care the resident needs. The new structure reduces the monthly cost for residents by up to $1,400. Springs Ranch, which opens May 15, also cut its move-in fee by $1,000.”

“‘We made some adjustments due to changes in the market, which is a lot more supply coming into this market,’ Spence said. ‘The supply of memory care units (designed for residents with Alzheimer’s disease, dementia or other memory impairments) will double over two years.’”

“Beth Mace, senior economist for the National Investment Center for Senior Housing and Care in Annapolis, Md., said owners ‘may face some challenges in leasing up these properties. If history is a guide, it took several years to absorb’ the last round of senior housing projects. The Aspen at Woodland Park, a 21-bed assisted-living center expected to open in late May, cut its rental rates by about one-third ‘due to all of the supply coming onto the market,’ said Angela Waterbury, the facility’s vice president of resident experience.”

From National Real Estate Investor. “Student housing developers are playing it safe and building most of their new projects close to the largest universities. This late in the real estate cycle, developers are no longer focused on the search for undiscovered markets, where few or no developers have gone before. Instead, they are betting on universities where the demand for student housing has been strong and is likely to get stronger.”

“‘Tier one markets continue to attract the most development and are still being targeted by the institutional capital that is pouring into the space,’ says Taylor Gunn, student housing analytics lead for data company MPF Research.”

“The demand for student housing properties around Florida State University has been very strong for a very long time. ‘It is consistent. This is a market that looked good even through the recession,’ says Jamie Swick, senior associate in the national student housing group for real estate services firm Colliers International. Developers plan to open 2,700 new student housing beds in the market for fall 2018, making it the busiest market nationally. However, demand should be strong enough at the university to absorb the new supply, says Swick.”

“Developers have already added 16,500 student housing beds to the Texas A&M University market since 2011, including both on-campus and off-campus housing, according to MPF. That’s significantly more than the increase in enrollment of 12,700 over the same period. The market is struggling to absorb all the new beds and the off-campus inventory is expected to grow by another 6.0 percent this fall.”

“As of March, 51.2 percent of the student housing beds in the market had leased for the fall academic year. That’s 188 basis point ahead of where the pre-leasing rate was at the same time last year. To achieve that improvement, however, properties have dropped rents by an average of 6.7 percent.”

“Developers have already opened thousands of new beds at the University of Texas at Austin—and they will add even more this year and the next. New projects have added 6,181 new beds to the market since 2012, including 1,480 this year. ‘Many markets will see developments activity slow or stop given the volume this year, but a few, such as Florida State and UT Austin, are expected to see a similar development pipeline next year,’ says Gunn.”

“Developers have been opening new properties at a very consistent rate over the past few years, averaging between 44,000 and 48,000 beds each year. This fall will be similar, with developers expected to open another 46,200 beds, according MPF.”

From WRAL in North Carolina. “The likely next chairman of the University of North Carolina system’s Board of Governors, already accused in a lawsuit of pushing North Carolina Central University officials toward a deal with business partners, spent months in 2016 exploring a housing deal near East Carolina University that hinged on a university policy change to help fill apartments.”

“The deal never went through, and Harry Smith, who was on the Board of Governors at the time and is running unopposed this month to become chairman, says he wanted ECU to take advantage of a big opportunity: a foreclosed apartment complex next to the school’s intramural fields. But Smith acknowledged that, had the deal gone forward under one of his proposals, he likely would have been part of the purchasing group. That’s borne out by emails released by the university, which show key leaders expressing concerns about a deal they ultimately rejected.”

“‘Harry first told me about this four to six months ago,’ Rick Niswander, then vice chancellor for administration and finance, wrote to Chancellor Cecil Staton in September 2016. ‘He was thinking that, if he could get it at a steal and have a contract with ECU to fill the beds, he would split the profits with us.’”

“Niswander laid out arguments against the project in a 2016 email released through the open records act: The Greenville apartment market was overbuilt. The complex in question was 3 miles from campus. How could the university tell parents that sophomores have to live on campus, then place them that far away? ‘That is a disaster,’ Niswander wrote. ‘The project is in foreclosure for a reason, not by accident.’”