May 22, 2018

A Veritable Avalanche Of New Supply

A report from the Richmond Times-Dispatch in Virginia. “The Richmond area has been in an apartment building boom in recent years and that continues, with more than two dozen apartment complexes near completion or under construction. In all, more than 3,000 apartment units are on tap to come onto the rental market in the Richmond area this year and in 2019 and 2020, and hundreds more apartment units are in the development pipeline. Since 2000, more than 17,400 apartment units have been added in the Richmond region. ‘We’ve gone through a period where a lot of the headlines are around the amount of supply being built. It raises the question of too much supply or not enough,’ said Max Peker, a market analyst for real estate research firm CoStar Group. ‘Certainly we need the housing units coming in, but what is coming in and what is being built is at the top end of the market.’”

“Andrew R. Little, an investment banker and a principal a Richmond-based real estate investment firm, said the apartment market here ‘is pretty much still on fire.’ ‘There are older apartments that are trading at valuations that are surprising,’ he said. ‘The price per unit on some of those trades versus what it costs to build new apartments, the difference would appear not to be great enough to buy the older assets. Just build the new assets.’”

From National Real Estate Investor. “Apartment landlords can no longer raise rents like they used to. So many new apartment units are opening that the percentage that vacancy is inching higher across the country. The number of new apartments opening has been trending higher than the number of apartments absorbed. Developers are expected to open a little more than 300,000 new units a year through 2019, matching the current high level of production, according to RealPage.”

“All the new development is putting stress on the apartment sector. ‘Vacancies have been rising since late 2016 as a veritable avalanche of new supply (a record high for some areas) works as a counterbalancing force,’ says Victor Calanog, chief economist of data firm Reis Inc.”

From Bisnow on Colorado. “The 20,000 apartment units under construction in metro Denver represent a 10% increase in the region’s inventory, CoStar market analyst David Pierce said. ‘That’s one of the top five highest amount of construction we’re seeing in the country, in terms of percentage,’ Pierce said. ‘Rents have grown by 1% a year in downtown for the last two years. For the higher-end stuff, rent growth is barely positive.’”

“Because there are so many new buildings to choose from — and 6,000 more units under construction — it is also the neighborhood that offers the most concessions, Pierce said. ‘There have been at least 10 properties in the lease-up stage since the end of 2013,’ Pierce said. ‘It’s not a leasing environment that’s conducive to asking someone for a 5% rent hike. If you’re looking for a deal — maybe a month or two free rent — you can find that.’”

The Rochester Business Journal in New York. “There are 1,700 new housing units in the works that, when occupied, will bring Rochester’s downtown population to 10,000 by 2021, according to the Rochester Downtown Development Corp. Why the resurgence and revival of downtown living? Developers aren’t exactly sure, other than it may be nothing more than Rochester riding the wave of a continuing national trend. ‘I can’t tell you why, all I know is it’s real,’ said Andy Crossed, managing partner with Rochester-based Park Grove Realty. ‘People are moving back to urban areas.’”

From the Democrat and Chronicle in New York. “A prominent downtown Rochester developer is facing a $38 million foreclosure action in Buffalo, having allegedly defaulted on loans for a student housing complex. Developer Tom Masaschi and DHD Ventures also are named in Rochester lawsuits by contractors that worked on 88 Elm St., an upscale housing tower adjacent the Midtown block. The Buffalo property in question is called Monarch 716, a 10-building complex with a clubhouse located near the State University College at Buffalo campus. Opened last fall, Monarch soon was put up for sale and began collecting liens and lawsuits shortly thereafter.”

From WGCU on Florida. “The seas are rising, frequently flooding the streets even when no storms are on the horizon. But that hasn’t stopped foreign investors from shelling out big dollars for Miami real estate. Many are in it for the relatively short-term investment, then they’ll try to sell before climate change takes its toll, observers of the local market say.”

“Broker Peter Zalewski is one of Miami’s most consulted condo specialists, especially by foreign buyers. ‘Many of the people I deal with — I’m not dealing with a family of four and a dog, I’m dealing with the investor — they’re going to be in and out,’ he says. ‘Their horizon is typically three, five, seven years they’re in and out. It’s kind of an issue if you’re worried about 10 or 20 years from now. It’s not an issue if you’re looking to capitalize on current market trends. It’s a trader mentality.’”

From The Real Deal on Florida. “During a period when banks across Florida were hesitant about lending on large construction projects, Bank of the Ozarks was on a tear: With just over $22 billion in assets on its books, it provided more than $1.2 billion in construction loans in the Miami metropolitan area from 2013 through 2017, according to the company’s annual reports. In Miami-Dade alone, the bank was the largest condo construction lender for the county’s biggest projects, responsible for 26.5 percent of the total dollar volume of loans issued to the 25 biggest projects during the last five years, an analysis by The Real Deal shows.”

“While some believe that Ozarks is a disciplined lender that’s merely filling a big void in lending activity, others question if it is overly exposed to one of the country’s most speculative real estate markets. Its critics draw comparisons to Corus Bank, a Chicago-based lender that aggressively financed condo construction in South Florida and was seized by regulators in 2009 after the condo market collapsed.”

“Charles Penan of Miami-based debt brokerage Aztec Group, noted the bank has the ability to make very large loans and offer non-recourse financing, which is unusual in the development lending business today. ‘They are not the cheapest bank in town, but they are offering non-recourse and a lot of borrowers are offering to pay for non-recourse,’ he said.”

“A spokesperson for the bank said that the real estate group’s ‘focus is on building a loan portfolio with the lowest credit and interest rate risks utilizing discipline and expertise.’ Some, however, have questioned whether its strategy is sustainable. Carson Block, a well-known short seller who made a name for himself exposing fraud in Chinese companies, warned in a presentation in 2016 that Ozarks is overexposed to commercial real estate and construction lending in particular. He said the bank had too many unfunded balance sheet commitments, meaning it will need to continue to make acquisitions in order to fund its lending.”