The Housing Bubble

A weekend topic starting with Bisnow. “Someone at the International Monetary Fund has been thinking about chaos theory. Specifically the butterfly effect, the name for the branch of chaos theory which argues that a butterfly flapping its wings in one part of the world can be the very tiny incident that builds up to a hurricane on the other side of the globe. The IMF took this principle and applied it to global housing markets. Since the financial crash, global housing markets have become more synchronised: prices and the way they move have become more and more correlated, particularly in major gateway cities. A combination of low interest rate policies around the world, improved economic growth and the increasing importance of global capital has caused this alignment.”

“These conditions are even more true in the commercial real estate world, where there are fewer properties and global capital plays an even greater role. The problem with this situation, according to the IMF, is that it makes downturns harder to contain — if one market experiences a sharp correction, other correlated markets are likely to experience the same fate. Might a butterfly flapping its wings in Midtown Manhattan herald bad news in London’s West End or La Defense in Paris?”

From Think Realty. “Renters are getting more bang for their buck these days due to an increase in rental concessions. According to a report from CoStar, an increasing number of developers are offering concessions to new and renewing residents in order to keep occupancy up. Lynn Bora, vice president of operations at Winn Companies, a firm managing nearly 100,000 apartments across the country, observed, ‘Concessions are back with a vengeance.’ There is a growing glut of high-end and mid-level multifamily housing. Some cities, like Nashville, are seeing 30% increases apartment inventory.”

From the Daily Gazette in New York. “Local experts expect the long-running apartment construction boom in the Capital Region to start tapering off. Until recently, Sunrise President Jesse Holland said as an illustration, Sunrise didn’t offer two-year leases because one-year leases increase the tenant turnover rate, and every turnover is a chance to raise the rent. Now, he said, Sunrise sees two-year leases as a way to retain tenants and maintain high occupancy. Other companies, he said, have gone as far as offering two or three months’ free rent to attract new tenants.”

“SEFCU Commercial Banking Vice President Ed Jennings said lenders are not financing apartment projects as freely as they once did. ‘Where is the saturation point in the multifamily market?’ he asked. ‘I think the lenders are looking at that very closely.’”

From The Real Deal on New York. “Concessions hit record highs in Brooklyn and Queens in April, per Douglas Elliman, with 65.1 percent of new deals in Northwest Queens including them and 51 percent of new deals in Brooklyn including them — marking the first time the borough has cracked the 50 percent mark. In Manhattan, 44.3 percent of new leases in April included concessions. These unprecedented highs could lead to changes in what landlords decide to offer on lease renewals going forward, according to sources.”

“In previous cycles, many New York City landlords would knock off concessions and jack up rent once the initial lease ended. ‘That free rent may come into play on second-generation leases where the tenants decide to stay, and even if it goes back on the market, they’re probably going to be giving a month free at least,’ said Elliman broker Matthew Villetto. ‘You do have situations where a landlord would give a concession to keep someone in the building. It comes down to the math,’ said Citi Habitats’ David Maundrell.”

From Bisnow on Georgia. “The Vue is the latest in new apartment projects being announced in Atlanta and is part of a group of developments still taking the chance on the metro area’s renter appetite for new apartments. Over the next 12 months, more than 8,000 units are slated to hit the market, representing a ‘high water-mark for in-town deliveries,’ Haddow & Co. recently stated in a report. Since 2015, some 19,000 new apartment units delivered in Atlanta. This glut of new apartments is having its toll on rents. According to Haddow, developers are having to sweeten concession packages to attract renters. Rents at high-rise apartments fell nearly 5% from a year ago to $2.30/SF, and the average number of new units getting snapped up by renters also dropped to 15 per month from 20 per month in 2017.”

From Bloomberg. “Park West, a 3,400-bed student housing complex near the Texas A&M University campus in College Station has a resort-style rooftop pool, three gyms and lounges with billiard tables, ping pong and flat screen televisions. What it doesn’t have are students — or rather their parents — willing or able to pay as much as $1,000 a month to live there. Just over half the beds at the complex, financed largely by tax-exempt municipal bonds, were filled during the last academic year.”

“About 360 miles (580 kilometers) north in Norman, Oklahoma, a 1,230-bed residence hall at the University of Oklahoma featuring a ‘blow dry bar and salon,’ a market with grass-fed local meats, and a cycling studio is just 26 percent leased, according to a securities filing. It opens in August. ‘We have seen some projects go through a little bit of stress,’ said Jessica Matsumori, an analyst at S&P Global Ratings. S&P has rated about 60 privatized municipal student-housing deals, most of them BBB-, the lowest investment grade.”

“Few restrictions apply to tax-exempt financings by non-profit entities, said Mark Scott, a former head of the U.S. Internal Revenue Service’s Tax-Exempt Bond Office. ‘The real question is why an entity that builds luxury apartments is entitled to non-profit status,’ he said. Park West only rented 54 percent of beds in the fall semester and 52 percent in the spring, according to S&P. Management told S&P the market study didn’t capture all the new housing supply coming on line in the area surrounding the campus. S&P downgraded the bonds eight levels to CCC in December.”

From the Commercial Observer. “Ask a dozen multifamily experts what should become of Fannie Mae and Freddie Mac, the public-private corporations that guarantee American residential mortgages, and you’re likely to hear three dozen suggestions. But the one thing everyone can agree on is that no one expected the so-called government-sponsored entities (GSEs) to still be where they are today.”

“The federal government had no choice but to intervene to save a modicum of liquidity in residential finance markets, seizing control of the GSEs and injecting hundreds of billions of dollars to rescue them. It was never supposed to last. Willy Walker, who in his role as CEO of Walker & Dunlop leads the company that’s the biggest contributor to Fannie Mae multifamily mortgages and the third-biggest to Freddie Mac’s, knows all too well that conservatorship was never meant to be a permanent solution.”

“‘We have to keep in mind the fact that Fannie Mae and Freddie Mac [were put] into conservatorship to prop up the global economic system,’ rather than for reasons inherent to their own operations, Walker said. ‘The idea that anyone had any vision about what they would be in the future [is false].’”

“Fannie Mae and Freddie Mac don’t originate their own loans. Instead, they buy them from banks and other lenders, package them for sale in the commercial and residential mortgage-backed securities markets and make an implicit guarantee to investors in the case of defaults. Given how important the agencies’ operations are to multifamily markets, it’s no surprise Walker is frustrated with the lack of progress in reorganizing them.”

“‘All the proposals [to reorganize the GSEs] are way too complicated,’ he said, noting that only a few debt markets, such as the trade in U.S. Treasurys, are larger. ‘You can’t draft legislation that will allow you to get everyone around the table to agree if you are trying to wholly change [one of the] largest bond markets in the world.’”

“The inertia over what to do with the giant institutions might be less severe if the agencies weren’t so central to U.S. housing markets—or, if the government’s conservatorship had been less lucrative. Combined, the agencies provided about $1 trillion in liquidity to mortgage markets last year, financing millions of apartment units and even more single-family homes along the way.”

“The most vocal proponents of banishing the government guarantee in the housing markets entirely, a think tank at the American Enterprise Institute (AEI) led by Peter Wallison and Edward Pinto, argue that by extending affordable credit to some marginal housing buyers who’d otherwise be shut out of housing markets, Fannie and Freddie’s role has been to accelerate the cost of low-income housing, contributing to a perpetual seller’s market that leads to constant instability: booms and busts.”

“The GSE’s ‘effort to make housing more affordable…actually makes housing more expensive, because you haven’t solved the supply-demand imbalance,’ Pinto said. ‘Now, we’re [more than five years] into a seller’s market, and we’re getting the exact same response from the market’ as before the financial crisis, with rising prices for low-tier housing.”

“The trouble, according to economist Mark Zandi, is that during the steady economic expansion of the late 2010s, there’s been little impetus to shake up a system that has extended as-yet untested credit to residential borrowers and returned billions of dollars to taxpayers. ‘The main sticking point is that the system works,’ Zandi said. ‘You’re not happy with the pipes, but the water’s flowing. Do you really want to change the plumbing?’”

From the Democrat and Chronicle. “The current criminal case alleging wrongdoing by relatives of area developer Robert Morgan has led to many questions about the criminal charges and the possible impact locally. In all, authorities allege that hoodwinked lenders provided loans totaling $167.5 million for seven different properties. The alleged skulduggery included inflating the value of apartment projects with falsified information about how many people resided there. In some cases, prosecutors say, the alleged conspirators submitted fake documentation to property appraisers, convincing the appraisers that apartments were significantly more valuable than they really were. Those appraisals then became the centerpiece of loan requests.”

“In two cases, Giacobbe and others allegedly conjured up fictitious loans — one for $3.5 million, the other for $1.4 million — and persuaded lenders to roll those sums into the amounts the Morgan company was refinancing. In another case, in December 2016 Frank Giacobbe, a Buffalo-based mortgage broker, allegedly told a lender for a Pittsburgh property that the apartments were more than 95 percent occupied. Three months later an employee of the complex, unaware of the earlier claims, sent an accurate report to the lender that showed less than 70 percent of the complex was occupied.”

“Debt outstripped assessed value for all but one of 40 Morgan projects or purchases in the Rochester area examined by the Democrat and Chronicle, suggesting the properties were mortgaged for more than they were worth. In some cases, the debt was more than double the assessed value.”