The Exuberance May Be Waning
A report from National Real Estate Investor. “Last year was a record year for commercial and multifamily mortgage originations at $530 billion. ‘We’re anticipating that 2018 will be down just a little bit from 2017, but we are still expecting a strong year,’ says Jamie Woodwell, vice president in the MBA’s Research and Economics group. Some of the headwinds that will create a drag on originations are rising interest rates and slowing NOI growth, notes Woodwell. ‘We’ve enjoyed roughly a decade of the trifecta—low interest rates, declining cap rates and strong fundamentals, which has been responsible for driving continually-higher prices and financing opportunities,’ says Hilary Provinse, executive vice president and head of mortgage banking at Berkadia.”
“Now interest rates are increasing and cap rates are steadying, leaving only NOI growth to support prices, she says. NOI growth has continued across property types and a few measures indicate that prices are continuing to increase, albeit more slowly. ‘While the market may not accelerate as quickly, it also doesn’t seem likely to go too far in reverse at this point,’ she adds.”
From Globest. “Multifamily has certainly been the favored asset class this cycle, but the exuberance may be waning. At RealShare Southern California, Kitty Wallace, EVP at Colliers International, said that properties are staying on the market longer, and in some cases for months. She spoke on the Multifamily—Overcoming the Affordability Crisis panel, and touched on the multifamily investment activity.”
“While properties are taking longer to trade, Wallace said that everyone is still a buyer in the market, and the demand remains strong. ‘Everyone is a buyer,’ she said on the panel. ‘The market isn’t like it was three or four years ago when you could put properties on the market and get multiple offers. Today, overpriced properties aren’t moving, because the market isn’t what it used to be.’”
From The State in South Carolina. “Private developers have their eyes on a pair of new student apartment projects in Columbia, possibly extending a recent student housing building boom in the city, but prompting some tensions among residents, developers and local leaders. Looking at the 908 Group and Reign plans, City Councilman Howard Duvall and others have raised the same question of whether Columbia’s student housing bubble is headed for a bust. ‘I think we are overbuilt now, and the type of dormitories they’re building for these students are not easily converted into usable housing once the students decide they don’t want to live there anymore,’ Duvall said.”
From KGW 8 News in Oregon. “After nine years of economic expansion and job growth in the Portland metro area, economic and population growth are both beginning to slow down, according to a new report from Portland State University. Portland’s red-hot housing market is starting to cool down, Potiowsky said. The consequence of that, he believes, is a lack of affordable housing.
Affordability is a big factor for renters, as well. The study shows many people are moving away from the city to find better prices. At the same time, rents in the area are starting to plateau, according to Tom Potiowsky, Director of the PSU center. One reason for that is more options for renters. ‘We finally have more multi-family housing available in the area. A lot of building happened,’ he said. ‘At the same time, the rents were going up very rapidly, and so I think with that greater supply, with the affordability aspect, that starts to put a lid on where rents can go. So we’ve seen that rise of rents really slow down.’”
From The Real Deal on Florida. “Three condo buyers are suing the developer of the Ritz-Carlton Residences, Miami Beach over the project’s construction delays, seeking to get their deposits refunded. The three lawsuits — one brought by a Dallas-based couple, one from a Miami-Dade resident and another from a Mexico-based entity — all claim to have entered into purchase agreements and put down deposits for condo units between 2014 and 2015. Their units ranged in price from $3 million to $4.8 million.”
“The plaintiffs allege that the developer stated in its contracts that the project would be substantially completed by June 30, 2017, which meant that the unit would be ‘physically habitable and usable for the purpose’ for which it was purchased, according to one complaint.”
“But the project is still under construction and the prospective owners allege that the developer has not begun construction of their units. As a result, the plaintiffs allege that the developer has breached its sales agreement. They are seeking a return of their deposits and to have their attorney fees covered.”
The Stamford Advocate in Connecticut. “Stamford has a bad, and well deserved, reputation for razing its history. Now it has a chance to correct — or at least improve upon — not one but three of those past mistakes. The city’s zoning board earlier this week approved an application to let a developer level one of the three St. John’s Towers, the silo-like downtown apartment buildings that are the arterial plaque of the heart that is our rapidly upscaling downtown.”
“In place of the St. John tower, which has been abandoned for three years now, Miami-based homebuilder Lennar wants to build — and you’ll never see this coming — 400 luxury apartments and street-level retail. Stamford needs more luxury apartments like it needs more potholes.”
The Buffalo News in New York. “The lender behind the Monarch 716 student-housing complex on Buffalo’s West Side has started foreclosure proceedings against developer DHD Ventures of Rochester, seeking to seize the troubled property and even go after DHD’s two principals personally. Acres Capital, which acts as an agent and adviser for three insurance companies, filed the first foreclosure paperwork Tuesday in State Supreme Court in Erie County, claiming it is owed more than $38 million and demanding payment.”
“The court documents list as defendants Buffalo State Ventures - the DHD entity that owns the property at 100 Forest Ave. - as well as partners Thomas Masaschi of Rochester and Jason Teller of North Carolina. It also cites various other contractors and vendors that have filed their own liens against DHD for failing to fully pay them for their work.”
“By raiding the headquarters of Morgan Communities, the FBI confirmed Monday that there’s a cloud around developer Robert C. Morgan’s companies. ‘It’s a very debilitating thing,’ said Dennis C. Penman, who spent a career developing properties, mostly for M.J. Peterson and Ciminelli Real Estate, and knows Morgan casually.”
“The existence of the FBI investigation shouldn’t affect the thousands of tenants in Morgan properties around Buffalo, and tens of thousands of tenants in other states, Penman said. But it could affect Morgan’s ability to proceed with other projects and purchases on the drawing board. ‘One would assume that lenders would be cautious at this point,’ Penman said. ‘It would concern me deeply.’”
“Morgan’s companies own some 36,000 units spread across 14 states, mostly east of the Mississippi. Morgan, who started out in Rochester, is a significant player in Western New York, too. His companies have come to own or manage 3,500 Buffalo-area apartments, and in October he spoke of plans to develop 1,000 more.”
“Morgan built his vast portfolio by, among other things, buying existing apartment complexes, fixing them up and then raising the rents. But in some purchases examined by The News, Morgan’s limited liability companies appeared in public records to borrow more than the purchases price. Lenders typically insist buyers use their own money for 20 percent of a purchase, and the loan covers the remaining 80 percent, to ensure that borrowers have a stake in the property and the risk.”
“Observers told The News they worry about the debt he has taken on and the amounts he borrows. ‘It makes me very, very, very incredulous as to how these things get done,’ Joseph Janowski, a long-standing local broker in the financing of real estate, especially commercial real estate and multifamily housing, told The News last year. ‘I don’t know how you pull it off.’”
“Morgan has previously told The News: ‘I borrow money the same way everyone else does in the U.S. There’s no hidden secrets. There’s no story to tell.’ But he also told The News his companies sometimes make special arrangements with sellers to ‘avoid showing full price’ on publicly available real estate documents. By doing so, tax assessors don’t see the full value and and the property tax bills ‘don’t go through the roof,’ Morgan told The News. His explanation raised concerns among others in the real estate industry.”
“Morgan explained then that sometimes his companies borrow enough to both buy and renovate the units. These ‘value-added loans,’ as the industry calls them, explain why a company might appear to borrow more than an apartment complex’s stated price, Morgan explained last year.
“Two sources told The News that FBI agents were examining, among other things, the purchase of a Syracuse apartment complex known as Rugby Square. Morgan and Buffalo’s Fitzpatrick formed a limited liability company that borrowed $5.56 million to buy the apartment complex in a distress sale in 2012.”
“Ten months later, however, the LLC told a new lender that Rugby Square had, in less than a year, experienced a turnaround, and it qualified for a new $9 million loan. The company’s documents, provided to the data-collection service Trepp, indicate Rugby Square’s appraised value had nearly tripled, from $4.75 million in early 2012 to $13 million by year’s end.”
“Industry sources contacted by The News were unable to remember any multifamily project that had tripled in value in such a short time. ‘It’s not something that never happens. Normally, it takes longer,’ Manus Clancy, the senior managing director of Trepp, has previously told The News.”
