The Housing Bubble

A report from the Colorado Real Estate Journal. “In advance of the Emerging Trends in Capital Markets conference, I posed some questions on capital markets for Pete Schippits, senior managing director and market leader for the Colorado Region of CBRE. Q: How do the capital markets in Denver stack up against other markets across the U.S.? Schippits: With a lack of suitable alternatives, much of today’s ‘wall of global capital’ continues searching for yield in U.S. commercial real estate. This has pushed many foreign and domestic investors out of the gateway markets and into strong secondary markets like Denver, Atlanta, Seattle and others. Last year multifamily dominated Denver commercial real estate investment sales, making up 63 percent of the total $10.1 billion in volume.”

“However, on the fundamentals side (e.g., rents/occupancy/NOIs), there will be areas of softness in all sectors. For example, downtown multifamily fundamentals are flat due to significant supply headwinds.”

The Detroit Free Press in Michigan. “So many new residential units are being built in the greater downtown Detroit that the question naturally arises: Are there really people to fill them all? Businessman Dan Gilbert’s Bedrock real estate arm has at least 1,500 new residential units either under construction or in near-term planning in the greater downtown area. The total of new apartments and condos either recently opened, under construction or in planning pushes toward 5,000 units. And that in a downtown virtually abandoned as recently as 15 to 20 years ago. Many developers scoff at the idea that the greater downtown is getting overbuilt.”

“Aside from the residential market, the downtown boom has raised some fears of overbuilding in other markets. So many new restaurants have opened in and around downtown recently that a bubble probably exists. By the standards of many other post-industrial cities, Detroit is still just beginning its comeback. ‘Of course we’re going to have as many people living in our downtown as Cleveland, and we’re a third of the way there,’ said David DiRita, a partner in the Roxbury Group, which has completed several projects.”

“So fears of overbuilding the downtown area may be premature, at least for now. The next recession might chill things, sharply rising prices could dent demand, and marginal projects with dicey financing can always go bust. But even citing those possibilities feels like a silver lining looking for a cloud. For now, the end of the downtown residential boom still looks a long way off.”

From the Centre Daily in Pennsylvania. “Penn State has reported that its undergraduate and graduate student enrollment at University Park is basically flat, but student housing complexes are being built all over the Centre Region. So what’s happening? Looking at the numbers of new student housing being built, it definitely outpaces both student enrollment and population growth, said Jim May, Centre Regional Planning Agency director.”

“CRPA’s opinion is that developers still think there’s a market here for student housing, he said, and generally, developers are going to do a market study for their projects to get financing and make sure that the projects will work. ‘We’re not quite sure what’s happening in the rest of the market. Our initial impression is people are just simply moving around to newer places. Maybe some of the older units are just having two or three students rather than four or more students,’ May said.”

“About five or six years ago, after the economy started to recover, May said people were looking for new places to put their money. Institutional investors saw it as an opportunity to put money into student housing. Additionally, he said the Centre Region’s housing is older and so the new complexes being built are updating the housing stock to be more in line with students’ and parents’ expectations. May said it’s hard to say whether the market’s been saturated yet. But he said he thinks there’s still room for more growth for a least a few more years. ‘This region has always had a very low vacancy rate,’ he said.”

“The vacancy rate for rental units in the Centre Region is 9 percent, but almost one-third of those are ’seasonal, recreational or occasional,’ according to the Centre Region State of Housing Report 2016 — prepared by CRPA and the most recent available.”

“The majority of vacant rental units — 1,427 — are rented but not occupied, according to the report. There are 210 units that are for rent and vacant.”

From Bisnow. “There are many more jobs nationwide now than qualified people to fill them, and that is a drag on the health of U.S. commercial real estate. ‘Labor shortages result in higher vacancy rates, lower asking rents and greater concessions across markets,’ JLL’s ‘Where Are All The Workers?’ report said. Moreover, the impact isn’t just on the office sector, but also on industrial, retail and apartments. There is also a geographical mismatch between where available jobs exist and where potential labor lives. Increasingly, jobs are becoming concentrated in major metropolitan areas.”

“Theoretically, labor could relocate, but as a practical matter, there are barriers to entry for workers — especially the high cost of residential real estate in major metros.”

From The Real Deal on California. “It’s been nearly sixth months since construction wrapped up at Century West Partners’ luxury apartment building in Koreatown. But even with leasing in full force, one subcontractor isn’t going away. A company hired to install drywall at Next on Sixth in Koreatown is suing the development’s contractor, developer and lender for $315,000 in unpaid work, according to a complaint filed last week in Los Angeles County Superior Court.”

“In the lawsuit, San Dimas-based Rockwall Drywall, alleges the contractor, Cobalt Construction, still owes the money for its work on the 398-unit building at 620 South Virgil Avenue. The complex includes units with 9-foot ceilings along with amenities that include a resort-style pool, rooftop grills and a lounge. The seven-story complex, located on the corner of Sixth and Virgil, features a Target retail store on the ground floor, as well as a fitness center, coffee bar, screening room and an indoor simulated golf range. It includes a mix of studio, one-, and two- bedroom units.”

“Century West bought the site in March 2014 for $20.8 million, according to Real Capital Analytics. The firm, led by Michael Sorochinsky, also developed the three-building ‘K2LA’ in the same neighborhood. It’s also behind several residential complexes in Santa Monica and a retail development on Broadway, among others.”

From Mansion Global on New York. “Manhattan’s ultra-luxury rentals cooled off in April, with both the median and average rents for those leases—priced at $15,000 a month and more—posting double-digit declines, according to data compiled for Mansion Global by real estate appraisal firm Miller Samuel. There were 52 ultra-luxury leases signed in April, unchanged from the same period last year. However, the median rent fell 11% to $18,250 per month, while the average rent was also down 10.6% to $21,177, according to Jonathan Miller, chief executive of Miller Samuel.”

“When taking into account landlords’ concessions, Manhattan’s high-end rental market actually was weaker than a year ago, according to Mr. Miller. About 41.4% of all luxury leases in April had a concession, compared to 29.3% in April 2017. Meanwhile, the average concession reached an equivalent of 1.3 months of free rent, rising from 1.2 months a year ago, according to Mr. Miller. The majority of rental developments built over the last five years ’skewed toward luxury, and oversupply in this market forced landlords to offer concessions in order to keep vacancy rate low,’ Mr. Miller said.”

From The Real Deal on New York. “Concessions in Manhattan earned yet another superlative last month, rising to the third highest market share recorded in the past seven-and-a-half years. The share of new leases with concessions hit 44.3 percent in April, up from 28.6 percent at the same time last year, according to Douglas Elliman’s latest market report.”

“Jonathan Miller, author of the Elliman report, noted that concessions were prevalent throughout the market, not just the high end. For instance, 38.3 percent of newly leased studios and 45.9 percent of one-bedrooms apartments came with concessions. At the entry-level sector of the market, concessions are offered because landlords are being too aggressive in driving up rents, Miller said. On the high-end, climbing inventory is the primary reason landlords are offering concessions to renters.”

“‘Somewhat different reasons, but the same result,’ Miller said. ‘The concessions are the vehicle to bridge the gap between landlords and tenants.’”