August 12, 2018

The Downside Of A Glut

A report from Curbed Seattle in Washington. “Last week, developers Solterra announced that a planned apartment building in Capitol Hill would be condos, not apartments—following a similar announcement about a Denny Triangle project back in June. Now, three more projects, all scheduled for occupancy this fall, have made the switch. Between the three buildings, 133 condos will be completed, which, as Puget Sound Business Journal points out, could more than double condo inventory in both neighborhoods.”

“Until recently (and still, compared to for-rent apartment construction), condos were pretty rare. But in rapidly growing Seattle, developers are increasingly deciding these projects are worth the risk—over this summer alone, condos scheduled to deliver in Seattle before 2020 have jumped from about five to at least nine.”

The Sun Sentinel on Florida. “Nearly 9,800 new apartment units are expected to open in South Florida by the end of 2018 as developers move to meet increasing demand fueled by an increasing population, according to RENTCafe. Jennifer Morejon, executive director of the city’s Downtown Development Authority, said that aside from the 4,000 new apartment units under construction downtown, there are ‘another 4,000 to 5,000 in some kind of planning or review stage.’”

“Another in the pipeline is a 348-unit high rise called The Rise Flagler Village by developer Art Falcone’s Encore Capital Management. Started in the first quarter of this year, the building is aimed at young professionals. In announcing the project last year, Falcone declared that many of his target tenants ‘prefer to rent in an amenity-rich apartment building, rather than worry about purchasing a home.’”

The Tallahassee Democrat in Florida, “if there are really 12,000 or so fewer college students in Tallahassee than there were a decade or so ago, it raises an interesting question: Who’s going to fill up all that new student housing, much of which is being built by out-of-town developers lured by incentives proffered by the Community Redevelopment Agency? Would it have been built were it not for those incentives?”

“Then again, if the student housing complexes along the fringes of the campuses fill up, who will fill up the student housing complexes much farther away? Will they end up half empty, go into decline, become Section 8 housing, or get boarded up and become a nuisance attracting squatters and vandals, as has occurred at some of Tallahassee’s vacant motels and homes from time to time?”

“Bottom line: Inquiring minds wonder if Tallahassee is developing a student housing glut aided by some of the CRA’s practices. If so, city officials and neighborhood leaders in the areas that are the most likely to be impacted by the downside of such a glut ought to be asking questions before it’s too late.”

The US News and World Report. “As the back-to-school season gets under way, you may be shopping around for new investments for your portfolio. Real estate is a solid diversification tool and student housing is an under-the-radar sector to consider this fall. Student housing can also be threatened by large exposure to new development, says Beth Mallette, real estate series fund manager at Manning & Napier Advisors. ‘This can provide investors with a growth engine however, it also brings with it the potential for periods of oversupply at specific universities, which can put stress on leasing progress as new supply is digested.’”

From The Buffalo News. “There’s new trouble for the owner of Buffalo’s struggling Monarch 716 student-housing complex: A second similar large-scale complex aimed at a collegiate population is now embroiled in foreclosure. DHD Ventures – which is already facing foreclosure and numerous other financial, safety and public relations challenges in Buffalo – is now more than 90 days late on a $31.9 million loan for its Monarch 815 apartment complex.”

“That’s a 576-bed facility in Johnson City, Tenn., designed to house students from nearby East Tennessee State University. It’s similar in size and scale – and trouble – to Monarch 716, the 592-bed complex for SUNY Buffalo State students on Forest Avenue. The developer, led by Thomas Masaschi of Rochester and Jason Teller of Charlotte, N.C., made its last payment on the Tennessee loan in early March and now owes nearly $537,000, according to data from Trepp, a national commercial real estate research firm. Meanwhile, the property also was cited in inspections for numerous ‘life safety issues.’”

“As a result, the 3-year-old loan was transferred in June to a ’special servicer,’ which handles administration, collection and disposal of debts that are in default. That company, Miami Beach-based LNR Partners, started foreclosure proceedings last month.”

“Built in 2016-2017, the 10-building complex features nine residential buildings and a one-story clubhouse, with 176 one-, two- and three-bedroom suites. But it’s been a continual source of problems for the developer since it opened a year ago, in time for the start of the academic year. DHD and its first management firm, King Residential, lured tenants by offering special discounts and perks, like two months of free rent. But they ended up bringing in many non-students as well, only to evict them later for not paying. One local attorney said more than 100 people have been evicted, and local real estate sources say the occupancy is now down to 60 percent, though only 35 percent are paying full rent.”

“If that’s not enough, a third DHD student housing project is also creating concern. Monarch 544 is located at Coastal Carolina University in Conway, S.C., about 350 miles southeast of the Johnson City property. DHD has been late in payment four times in the past year, and the $23.6 million loan backed by the facility has been on the servicer watch list since early July. Built in 2012, that 440-bed complex is now 82 percent occupied – down from 100 percent when the loan was originated.”

The Quad City Times. “A former Rock Island cotton mill converted into apartments 20 years ago is scheduled to be sold at a foreclosure auction on Aug. 21. Mike Farrell, an attorney for Sterling Federal Bank who is handling the foreclosure auction, said the building currently has residents. Those he has spoken with in the past, Farrell said, have said that they like the facility.”

“‘It’s a housing facility, and we want to make sure those options are out there,’ said Chandler Poole, Rock Island’s community and economic development director. He added that the city has no plans to take over the property and would prefer to see it remain as a senior housing facility.”

The Commercial Observer. “In New York’s dynamic and fluid housing market, it’s not unusual for developers to hold unsold units for a variety of reasons. Given the volume of new construction in recent years and the subsequent inventory of condominium units, developers are turning to condominium inventory loans to repay maturing construction loans and hold units for sale at a later date.”

“Inventory loans are most often associated with mid-market condominium developments, which still make up a large portion of these deals, but there has also been a surge in the luxury sector. Morris Betesh, a Meridian Senior Managing Director, recently closed two loans in Manhattan that reflect this trend and speak to the expanding range of property types that inventory loans support.”

“The first of these is a $20 million loan for 17 condo units at a 52-unit property located on Wall Street in New York City’s Financial District. Betesh secured the 24-month loan from a balance sheet lender. He also secured a 36-month inventory loan for a five-story luxury townhouse in Chelsea, which is currently on the market for nearly $30 million. ‘It’s typically harder to secure inventory loans for ‘super-luxury’ assets, but this is hardly a one-off situation,’ says Betesh. ‘Right now, we’re working on several deals for similar high-end properties around New York City.’”

“Meanwhile, sponsors gain more time to achieve their prices for units and in some cases can recapture equity and lower their interest rates by 1.5 percent to 2 percent by switching from a construction loan. Sponsors may also consider this a good time to hold onto unsold inventory. As the economy continues to grow and lucrative tech, media, and life sciences businesses expand in New York, more buyers will emerge.”

Local Market Observations

What do you see in your local housing market? Falling prices? “Portland-area real estate: 10 places where home prices are falling.”

Or overbuilding? “Walking down Brand Avenue in downtown Glendale, one can’t help but notice the sudden glut of luxury apartments all cheerfully advertising vacancies. Over the last three years, dozens of these developments have been greenlit and built adding thousands of units to the city.”

In you local law enforcement? “To conceal earnings made by allegedly exploiting undocumented workers, suspects in a large-scale racket busted by federal agents this week purchased at least four houses in the Las Vegas Valley, according to a federal complaint unsealed Thursday.”

“The documents spotlight an elaborate conspiracy allegedly perpetrated by a syndicate that mostly operated in Nebraska and Minnesota, which was described by a federal official as ‘one of the largest’ for the investigative arm of U.S. Immigration and Customs Enforcement.”

“Federal prosecutors in Nebraska allege various workers were exploited through force, coercion and the threat of deportation, according to ICE. The alleged crimes took place between 2015 to July this year. Three suspects, immigrants themselves — one who’d been previously deported — would cash some of the illicitly earned checks. One of them, Anayancy Castro Hernandez, a Deferred Action for Childhood Arrivals (DACA) recipient, allegedly did this through employment with a bank.”

“Authorities identified more than $8 million in transactions made by the suspects from the financial institution that employed Hernandez. At least one of the suspects, Sanchez Delgado, would withhold money from the workers’ paychecks, telling them that he would pay their federal taxes. Instead, that money was pocketed.”

The Slowdown Is An Indicator Of A Housing Bubble

A report from King 5 News in Washington. “Real estate experts are seeing a slight slowdown in the housing market around Seattle – and the trend has led to high dollar price drops on some homes. Ahmad Rabi is selling a home at 11259 Roseberg Ave S in Burien. ‘It’s a very nice place. It’s been remodeled down to the studs,’ he said. ‘Got new floors, doors, trim, triple pane windows.’ But the property, originally listed at nearly $600,000, has languished on the market for nearly four months. ‘It is a long time,’ said Rabi. ‘We had predicted the market was going to continue to go up. We overshot it, but we’re still getting a lot of traction.’”

“It led him to drop the list price by more than $100,000. It’s now listed on Redfin for $484,950. It’s not the only home with a large price drop. Brandon Carlson of Rock River Realty said he’d been forced to reduce the price of a home on Sylvester Way by more than $100,000. Carlson said it surprised him, judging by how hot the home market was just a few months ago. ‘I couldn’t get property out to buyers fast enough,’ he said.”

“Zillow senior economist Aaron Terrazas said these large pricing drops are more of a market correction than a bursting bubble. Carlson agreed that the price drops weren’t disastrous. Rabi echoed that of the home on Roseberg Avenue. ‘Yes, it was a big drop in price, but we were overshooting,’ he said. ‘They way we saw it, if it hits $600 or $550, that’s still way over what we projected to sell it for when we bought it a year ago.’”

The Post and Courier in South Carolina. “Charleston-area home sales slipped slightly in July for a second consecutive month. Home sales have been see-sawing for much of this year, and the back-to-back declines come after record-breaking sales in 2017. The president of the Charleston Trident Association of Realtors said the market is likely becoming more balanced rather than trending down. Kimberly Lease also noted that some experts believe the national summer slowdown is an initial indicator of a housing bubble because prices continue to escalate. She doesn’t think that’s the case locally.”

“‘I don’t believe an evening of the market will have negative consequences for us in Charleston,’ Lease said.”

From Nevada Business. “Local home prices are leveling off this summer as the housing supply has stopped shrinking but still remains tight. That’s according to a report released by the Greater Las Vegas Association of REALTORS. ‘Local home prices had been on the rise for most of 2018, but have been slowing down this summer,’ said GLVAR President Chris Bishop. ‘Sales have been leveling off, too. We’re glad to see the housing supply increasing slightly in recent months, but our inventory is still very tight. That tight supply has been dragging down home sales. At this rate, we’re on pace to sell fewer existing homes this year than we did last year. And it may be some time before local home prices get back to their all-time peak from 2006.’”

From Houston Agent Magazine in Texas. “Primary Luxury Auctions is putting another mansion in the Woodlands up for auction. The $6.75 million mansion will be sold without a reserve on Saturday, August 18. The mansion, located on 1.5 acres of land in the Carlton Woods area of The Woodlands, was built in 2016 with five bedrooms (with a room that could be a sixth), eight full bathrooms, two half bathrooms, a two-car garage, outdoor infinity pool and various other amenities. Seeing a luxury mansion sold in auction became a common situation in the Houston area since the decline in the oil industry, according to the Houston Business Journal.”

From Mansion Global on New York. “Earlier this month, two deep-pocketed Manhattan buyers bagged themselves a good deal. First, a penthouse unit at Manhattan’s prestigious and ever-so-rectangular 432 Park Avenue sold for $30.79 million, a 24% discount from its original $40.75 million price tag. Then, further downtown, a penthouse at 160 Leroy changed hands for $43.5 million, a 14% discount from the $51 million for which it was first listed.”

‘The two big bargains are not anomalies, Manhattan’s luxury real estate market has been on sale for nearly three years. Between Jan. 1 and May 31 of this year, 58.6% of luxury homes sold in Manhattan—defined as those priced at $4 million and over— were discounted between hitting the market and closing, according to data compiled for Mansion Global by StreetEasy. The median discount they received was $980,000.”

“It’s a steep rise from the 36.3% of luxury homes that received a discount between being listed and closing in 2016, and slightly up from the 54% of big-ticket homes that sold for a discount last year. In fact, it’s the highest proportion of reductions seen on luxury property since 2010, when 69% of Manhattan’s luxury sales received some form of discount, according to the data.”

“Discounts are happening more now due to rising price pragmatism from sellers, experts suggest, their hands somewhat forced by an oversupply in luxury inventory and dealing with buyers unwilling to budge on their budgets when the market is leaning their way. ‘A lot of [developers] have been building on strong demand for luxury homes in New York, but the building has outpaced the demand, and finding the right price is tricky at this point,’ Grant Long, senior economist at StreetEasy told Mansion Global.”

“Now, he said, sellers are trying to find their footing amidst the glut of supply. And they’re willing to adjust their prices. In Tribeca, an over-saturation of new development is what’s causing its prices to be adjusted downward. ‘Tribeca has a glut of new product on the market,’ said Manhattan real estate broker Richard Steinberg. ‘Developers are negotiating more because they have to get rid of their supply.’”