May 28, 2017

It Is Obvious And Apparent There Will Be Oversupply

A report from the Star Tribune in Minnesota. “Even after almost four years of booming apartment construction, the Minneapolis-St. Paul metro still has the tightest vacancy rate of any major U.S. city, according to Witten Advisors, a national multifamily housing consulting firm. But some counterforces are emerging. Financial backers, who are seeing longer lease-up times for new luxury urban projects, are becoming more cautious. Those were some of the insights voiced by a panel of experts this week at a Minnesota Multi Housing Association seminar. Others on the panel, meanwhile, said they are seeing few signs that the apartment boom is in the ‘ninth inning,’ despite a bit of sluggish start to 2017. Opus Vice President Matt Rauenhorst said what’s most important in a new development now is that there be a compelling ’story’ and location differentiating it in an increasingly crowded multifamily market.”

“Rauenhorst said he’s aware of concerns about hitting the top of the market for rents. ‘But in talking to our residents, this is what they want,’ he said. ‘They’re saying, ‘We’ll pay more if you can give us condo-like finishes.’”

From Michigan Live. “It’s been more than three years since Happy’s Pizza burned down at the corner of Main and Madison streets in Ann Arbor. That was January 2014. And it’s been nearly two years since the City Council approved a private developer’s plans to breathe new life into the property and build a five-story building with 26 luxury apartments above ground-level retail. That was September 2015. But while other new developments are underway, including a new apartment building taking shape on the other side of Main Street, the southwest corner of Main and Madison remains a vacant lot.”

“Ann Arbor developer Dan Ketelaar said he’s had trouble locking in financing. He said he had financing lined up, but it fell through, and there are questions about the project’s viability now. When he won approval in September 2015, he expected to begin construction within a month. At the time, he was wrapping up work on another luxury apartment development on an adjacent site. Ketelaar said he’s still hoping to do something with the site, but he might need to come up with a different plan.”

The Memphis Daily News in Tennessee. “Even before he went to federal prison for 25 years on a racketeering conviction in 1995, Danny Owens had a real estate portfolio. Owens is like many buyers of single-family homes for rental purposes in the Memphis market in that he bought some of them sight unseen. Of all of the single-family home sales in Shelby County in 2016, 25 percent were sold to investors or non-occupants, according to Chandler Reports.”

“And his portfolio is relatively small and selective compared to investor groups that buy dozens and hundreds at a time – single-family and multifamily apartment complexes. Archie Willis, the president of Community Capital who is also part of the nonprofit Neighborhood Preservation Inc., talks to them frequently. ‘You’ve got your guys who come in and buy these for $9,000, $12,000 – whatever it is a unit – and that’s a bargain for them coming from Florida, New York and other high-cost housing markets,’ Willis said. ‘When they get here and realize what the economics are – it may be $12,000 but you can only rent it for X and you’ve got to spend way more than you think to make it habitable, and the math doesn’t work.’”

“The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them. The impact on neighborhoods is incalculable. ‘They will milk it. They will get it for whatever they can rent it for, do minimal improvements and obviously spiral downward,’ Willis said of the owners. ‘They will keep renting it, the rents go down. Eventually it will be only people who have no options. … Then eventually it goes totally vacant and they try to sell it.’”

From Bisnow on New York. “As one of the priciest and most luxurious high-rise residences in New York City, 432 Park does not seem like the type to have a sale — but that is just what is happening. As concessions have become the norm for landlords competing to fill the glut of available apartments and condos in Manhattan, the next logical step appears to be beginning — a drop in sticker price, at least at the upper end of the market in buildings such as 432 Park, The Real Deal reports.”

“Though the remaining units at 432 Park are gravy with the debt paid off, such a new building having to drop its asking price could be a bellwether for New York’s multifamily market. It appears the days of finding a billionaire to take a penthouse condo in New York may be over.”

From The Real Deal on California. “Construction sites litter almost every district of Downtown Los Angeles. If all proposed and under construction projects are completed, 29,383 new units will hit the market, according to a first quarter market report released by the Downtown Center Business Improvement District. Experts are concerned that demand in greater DTLA will not meet supply. Given that the vast majority of units in the pipeline fall in the luxury category, they worry an oversupply of expensive apartments is imminent. These fears are causing some lenders to be cautious about financing downtown construction projects, experts told The Real Deal.”

“Meanwhile, the number of rental units continues to skyrocket. Developers proposed 3,200 market rate and 350 affordable units in the first quarter alone. ‘It is obvious and apparent from all the projects in the pipeline that there will be some period of oversupply,’ said Mike Condon Jr. of Cushman & Wakefield. ‘But, at the same time, investors shouldn’t take a ‘the sky is falling’ approach to these temporary numbers.’”

The Associated Press. “Failed land-development deals in Idaho and Colorado have cost the Dallas Police and Fire Pension System approximately $100 million, officials for the system say. The deals account for a significant portion of the half-billion-dollar losses the fund has endured in recent years because of bad bets on real estate and private equity. The fund has spent $25 million just in fees to advisers and managers of the land deals. Earlier fund managers intended to build sprawling housing developments, but the plans were ruined when the housing bubble burst.”

“Speculative investments in past years also included luxury homes in Hawaii, a resort near Napa and high-rise condos in Dallas. Kelly Gottschalk said she was left in disbelief when she toured thousands of acres of empty land outside Boise, Idaho, shortly after she became director of the fund in 2015. She was left to wonder how prior leaders could allow a public pension, tasked with protecting the retirements of those who safeguard the city, throw away so much money on vacant land.”

“No lots were ever sold in Idaho and no homes were built. New appraisals of the land in Idaho and Colorado revealed more than $110 million invested by the pension ‘was no longer reflected in the value of the property,’ according to court records. ‘It was really shocking,’ Gottschalk told The Dallas Morning News. ‘I don’t know what they were ever thinking.’”

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Comment by Ben Jones
2017-05-28 08:00:23

‘Rauenhorst said what’s most important in a new development now is that there be a compelling ’story’

There’s that word again.

Comment by rms
2017-05-28 14:44:52

I know a guy who works for the government, and he uses words like, challenges, compelling, troubled, etc., which enables discussion about difficult situations while remaining neutral.

Comment by @AltFacts
2017-05-28 17:33:53


Lies make the real estate world go round.

Comment by Fan
2017-05-29 06:23:18

You mean green handshakes. There is at least one of them in every sale.

Comment by Ben Jones
2017-05-28 08:25:24

‘the number of rental units continues to skyrocket. Developers proposed 3,200 market rate and 350 affordable units in the first quarter alone…‘But, at the same time, investors shouldn’t take a ‘the sky is falling’ approach to these temporary numbers.’

That’s right Mike, don’t listen to these stopped clock doomsayers. Come up with a story and build baby build! Even if you’re wrong, it’s other peoples money.

Comment by Mr. Banker
2017-05-28 09:13:15

“Even if you’re wrong, it’s other peoples money.”

And it does not get much better that that.

Ahhhhh, life is indeed good.

Comment by Mr. Banker
2017-05-28 09:15:23

“that that” = “then that”, or perhaps “than that”.


Comment by Mr. Banker
2017-05-28 09:21:56

“The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them.”

“… clueless or just doesn’t care …”

Because …

(ta da)

He/she is most likely using money that belongs to somebody else.

Comment by Larry Littlefield
2017-05-28 09:29:53

“I don’t know what they were ever thinking.’

Heads we win, tails the suckers who are still living in Dallas lose?

Comment by azdude
2017-05-28 10:06:52

I have to imagine a lot of crow is being served up today.

Comment by Raymond K Hessel
2017-05-28 11:57:57

Not as much as the HBB’s resident China tout and shill is going to be dining on once China’s insanely over-leveraged Ponzi markets implode.

Comment by Albuquerquedan
2017-05-29 05:32:06

Probably explains the selloff which has already stopped. Unless it starts up again hard to see why the debt which is much like the margin debt in this country causes an implosion. Housing is a much bigger issue now seems under control:

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Comment by Albuquerquedan
2017-05-29 05:44:08
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Comment by MWR
2017-05-28 11:10:09

‘I don’t know what they were ever thinking.’”

Larry I was thinking they were thinking “how can I spend all the fees I collected from these smucks.”

Comment by oxide
2017-05-28 16:11:08

I know the HBB boyz won’t like this, BUT they were probably also thinking that it would be a brilliant idea to nominate a woman to take over the fund after they left it in tatters. Sorry, but this still happens. The guys in charge get diversity points and femme points for putting a woman in the top slot. But at the same time, if there is some favorite young gun that they are grooming for upper management, they hold off until the woman cleans it up (or fails at trying). After the woman succeeds or fails, they send her off with lots of praise and put the favorite into what is now a plum job.

Comment by @AltFacts
2017-05-28 17:37:18

Who’s the Better Investor: Men or Women?

Fidelity Investments® Survey Reveals Only Nine Percent of Women Think They Make Better Investors than Men, Despite Growing Evidence to the Contrary

Comment by azdude
2017-05-28 09:48:44

when I spend my free equity I think of you guys.

Comment by Financial Moralizer
2017-05-28 11:59:29

I thought of you when I read this the other day. Another big squeeze is coming.

Comment by @AltFacts
2017-05-28 17:38:50

Who are you going to think of when you go underwater in the next crash?

I’m guessing Uncle Fed, your friendly neighborhood bailout authority.

Comment by Blue Skye
2017-05-28 18:35:59

“free equity”

Some of us call that debt, spendthrift.

Comment by oxide
2017-05-29 05:12:32

+1 I never did like that “house as ATM” meme. Housing in 2005 was closest to buying stocks on margin in 1928. You gotta pay that money back somehow.

Comment by alphonso bedoya
2017-05-28 10:36:50

432 Park Avenue is the tallest residential building in New York City.
125 units
96 stories

Apt 38D in contract for $6.5million

$30K/month and you’re no longer in Oregon. Whaddaya say? Tell the little woman you’re ready to move up.
You getting 622 more square feet than your Oregon digs which was 800 sq.feet.

Comment by Ben Jones
2017-05-28 11:18:01

When the developer starts undercutting recent buyers, it’s walk away time. Imagine what the HOA fees are.

Comment by alphonso bedoya
2017-05-28 11:45:39

$3000/month for the $6.5 million pad. It looks to be proportional as the price of the dwelling rises.
125 units comprise the building. They supposedly need $10million/unit to break even.
When you’re ready, I’ll find you a nice quiet Chinese family above you. Singapore is good also.

Comment by azdude
2017-05-28 13:21:13
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Comment by aqius
2017-05-28 20:32:07

even spending $3000 (geez!) month, I’d STILL be running around the unit yammering:

* turn off the lights when you leave the room!
* close the damn doors! we’re not heating/cooling the ENTIRE NEIGHBORHOOD!!
* just reset the water filter alert: it’s still good.

frugal german dna

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Comment by 2banana
2017-05-29 01:00:45

Yes - there is definitely some undercutting…

But what is a $4-12M average loss among friends….?

Sales Listings
20 active sales ($7,657 per ft² avg, $30,096,250 avg price)
3 in contract sales ($6,563 per ft² avg, $22,791,666 avg price)
34 previous sales ($7,688 per ft² avg, $34,838,970 avg price)

Comment by alphonso bedoya
2017-05-28 11:08:32

432 Park Avenue

What fascinates me, having been born in New York, when it was clearly a different planet, is that if you live at 432 Park Avenue in its top 30 stories…..your expansive view of Manhattan below you, is of a bombed WW2 city. You literally lose architectural definition below you. Your view, therefore, is of rubble.
The tops of older buildings were fascinating in the 1940s. They were sculptured to give the appearance of 18th century France to those looking down from their offices. The Street folk never saw this and the academics never documented it. Also, the illusion was for Central Park to be the back lawn to your palace.

Look at the picture again.

Comment by In Colorado
2017-05-28 13:28:28

It’s OK, I don’t think any of the buyers is actually planning on living in one of those “safe deposit boxes in the sky”.

Comment by Galveston
2017-05-29 07:26:01

Thanks Alphonso, fascinating, I only visited N.Y. once a very long time ago, we were picking up a car at the airport to haul back to Houston and stayed at an older hotel, the neighborhood was beautiful and I kept looking for Archie Bunker, I always wonder what it looks like now.

Comment by Auslander
2017-05-29 07:33:07

WTF are you yammerin’ about?

Comment by Galveston
2017-05-29 08:44:04

The huge difference between Houston and N.Y.
and the stunning difference between aerial view and street view, if I had to choose between that tower or a small house in a working class neighborhood, which would I choose?
Are the working class neighborhoods disappearing?
Hope you understand.

Comment by Tarara Boomdea
2017-05-29 10:22:01

Are the working class neighborhoods disappearing?

From what I hear from a friend of mine who still lives in the northern Manhattan neighborhood where we were born and raised, yes. She’s still there because of rent stabilization. There’s still a large segment of illegal aliens mixed with hipsters, who were way bitchier customers than Dominicans (who generally were pretty nice.) She said the typical price of a burger and fries in a local pub is $14. This is not a great area even now, so that’s shocking.

My partner was a riot. He’d tell the Dominicans hey, when you go down to DR, say hello to my car. They’d roar laughing.

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Comment by Raymond K Hessel
Comment by acutehemroid
2017-05-29 06:56:31

“We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” said Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville, who didn’t get a single visitor to an open house on the weekend. “They don’t want to close anymore.”

They don’t want to close anymore? Well, well, well, that’s just terrible. Carissa can’t make a 6%. For some reason known only to my deranged subconscious, I keep hearing an old Lou Reed song- Sally Can’t Dance.

Comment by Raymond K Hessel
2017-05-29 07:05:38

“We are seeing people who paid those crazy prices over the last few months walking away from their deposits,” said Carissa Turnbull, a Royal LePage broker in the Toronto suburb of Oakville

I bet Carissa wasn’t calling the prices “crazy” when she was pitching future FBs on each “special” listing and trying to get them to sign on the dotted line.

Comment by Raymond K Hessel
Comment by kathy barrett
2017-05-28 15:18:33

I am looking for an investment blog to read. Does anyone know of one?

Comment by drumminj
2017-05-28 21:24:22

What kind of investment? Mainstream (stocks), fringe (permanent portfolio, gold, etc), US-based, international…?

Comment by Gordon Gekko
2017-05-29 05:55:38

Bogleheads is the only “investment blog” anyone needs.

Comment by AZgolfer
2017-05-30 12:34:15

thanks I will try Bogleheads blog.

Comment by Professor Bear
2017-05-28 20:17:06

“The goal then is to find another portfolio investor that is just as clueless or just doesn’t care and sell it to them. The impact on neighborhoods is incalculable.”

Isn’t it amazing how reporters on stories like this fail to discern the patent insanity of the narrative?

Comment by oxide
2017-05-29 05:18:13

And you would think that the greater fools would have figured out this tactic by now. Then again, experience keeps a dear school but fools will learn in no other.

Comment by Raymond K Hessel
2017-05-29 05:39:29

My wife’s parents have been all-in on buying into the Wall Street-Federal Reserve Ponzi market, despite my cautions. I’m pretty sure their retirement plan is going to involve our spare bedroom.

Comment by Raymond K Hessel
2017-05-29 05:41:42

Where would real estate in China, Hong Kong, Canada, and the West Coast be without Chinese money launderers?

Comment by Raymond K Hessel
2017-05-29 05:53:35

Who’d have thunk that those gold-plated public union pensions actually have to be funded somehow? The promise of 8% annual returns, even in the Fed’s Ponzi markets juiced by QE-to-Infinity, is a chimera given the Fed’s debasement of the currency and destruction of pensioners’ purchasing power.

Comment by Raymond K Hessel
2017-05-29 06:32:40
Comment by aNYCdj
2017-05-29 07:49:50

still dont get it …are so many people so brainwashed they just have to rent a luxury apartment?

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