The Housing Bubble

A weekend topic starting with Eurasian Review By Doug French. “Sin City’s projected 5,000 new apartment units for this year makes no noise nationally in the latest real estate craze. I’ve written before about the high-rise crane craze in Seattle, but that’s nothing compared to New York and Dallas, that are adding 27,000 and 25,000 units, respectively. Chicago is adding 7,800 units despite a shrinking population and rents decreasing 19 percent. Not surprisingly, Fannie Mae and Freddie Mac are financing this rental housing boom. I wrote recently, the GSEs made 53% of all apartment loans in 2016, down from their combined 68% market share in 2012. ‘So, their conservator, The Federal Housing Finance Agency (FHFA), recently eased the GSE’s lending caps so they can crank out even more loans.’”

“Mary Salmonsen writes for multifamilyexecutive.com, ‘Currently, Fannie and Freddie are particularly dominant in garden apartments [and] in student housing, with 62% and 61% shares, respectively. The two remain the largest mid-/high-rise lenders but hold only 35% of the market.’”

From Costar Group. “By a number of measures, the multifamily sector continues to defy expectations of ‘cooling down’ over the second half of the year and loan origination projections for multifamily property is now projected to grow for the rest of 2017 and into 2018, according to new analysis from Freddie Mac and Kroll Bond Rating Agency analysis of Freddie Mac lending. The revised projection comes even as the number of multifamily construction projects is peaking between now and early 2018 and thus moderating overall growth.”

“That construction activity is pushing up vacancy rates and making absorption of new units take longer in some areas than in prior years, putting some downward pressure on rent growth, especially in certain larger metropolitan areas such as San Francisco, New York City, Washington DC and Miami. Separately, in analyzing Freddie Mac loan securitizations, Kroll Bond Rating Agency is finding a similar strong performance but with some softening. The cyclically high levels of construction are impacting Class A properties more than classes B and C, where construction remains fairly muted, the firm said. ”

The Times Free Press in Tennessee. “One of the biggest deals ever for an apartment complex in Hamilton County has closed for $40.5 million as the Chattanooga area real estate market continues to ride a wave of investor interest. The deal for The Havens is the equivalent of $127,358 per unit. Marcus Lyons of Berkadia Real Estate Advisors in Chattanooga said he expects the interest by investors in apartments to continue ‘for the time being.’ ‘There’s access to cheap money,’ he added about the number of deals involving apartments.”

From Bisnow on Colorado. “Denver’s continued construction boom has led to a glut of Class-A multifamily properties, but rent growth for the asset has slowed as residents search for more affordable housing options. Quasi-government lenders Fannie Mae and Freddie Mac offer widely available funds and aggressive loan pricing for properties that fall within the multifamily midmarket. The Denver midmarket has also seen an increasing number of 1031 exchanges, said JLL Multifamily Capital Markets Group Vice President Craig Kalman. Individuals are unlikely to purchase a property above $30M, and midmarket multifamily offers an ideal place to park equity and defer paying taxes, he said. Institutional players tend to make fewer 1031 exchanges.”

“‘With institutional players, they have all these funds, and sell off all the assets in a fund at the end of its life span. They usually are not doing a 1031 with the proceeds, they are returning equity to investors or redeploying that capital into other funds,’ he said. ‘There are a lot more 1031 buyers in the midmarket, and they get more aggressive with pricing.’”

The Real Deal on Florida. “Three new apartment buildings are scheduled to open within two blocks of each other in downtown West Palm Beach over the next year or so, adding over 800 units to the market in a move that local real estate insiders bet will put downward pressure on rents. At the moment, the downtown West Palm Beach market has a little over 6,700 condominium and rental units, city estimates show, and average rents hover at about $2.25 per square foot, according to Jeff Greene, a real estate investor and developer who has made a number of big bets on the area.”

“The new buildings would increase the area’s inventory by about 12 percent. Unless demand suddenly leaps, that means a drop in rents. ‘Unless there is a sudden surge in high-paying jobs that I’m not aware of or a surge of movement into downtown West Palm Beach of retirees, I don’t see where the demand is for 800-plus new luxury rental units,’ Greene said.”

“Even if rents soften in the short-term, some remain bullish on the area. ‘The West Palm Beach location keeps on getting better,’ said Neil Kozokoff, a principal at Parkland Companies, who just opened an apartment building north of downtown. ‘Whatever glut there is of new product will ultimately be offset by increased demand.’”

The Real Deal on New York. “Three years after the condo boom swept through New York, developers citywide are sitting on unsold units. In 2017’s second quarter, condo inventory in the borough stood at around 5,900 — up 35 percent year over year, according to Halstead Property Development Marketing. And prices for new condos are significantly down amid a slowdown in luxury sales. For developers who already have skin in the game, the numbers are alarming, particularly since many penciled out their projects several years ago, when the market was on a (seemingly) unstoppable upswing.”

“While there are no public numbers quantifying the outstanding (and soon-to-be-due) debt on New York condo projects, it’s undoubtedly in the billions. Nikki Field of Sotheby’s International Realty said the pressure from lenders has ramped up in the past 18 months as the market has struggled to absorb a glut of new units. ‘The banks are calling in, and developers have got to deliver. They have deadlines to hit for signed contracts, they have pressure,’ she said. ‘The longer [a project] goes, the more it costs developers. There’s a real sense of urgency to move product.’”

“Manhattan-based real estate attorney Terry Oved agreed. ‘The clock is ticking,’ he said. ‘You have bank obligations.’”

“And it’s not just banks turning up the heat. The private equity funds that ramped up lending when traditional banks pulled back are also under the gun, because their funds have strict timelines that cannot be extended. ‘Remember that a lot of this equity is high-octane equity — they have to give them back the money with a return,’ added one developer.”

“Behind closed doors, this new reality has led to something of a standoff between developers and their lenders — who may have competing interests. On the one side are lenders, whose top priority is getting paid back (with interest) on time. On the other side are developers who often want to hold out for higher prices to maximize profits. David Blatt, CEO of investment banking firm CapStack Partners, said both sides are more anxious than they were a year ago. ‘What is unsettling is that we’ve been in such a long bull run relative to history,’ he said. ‘Inevitably, the music has to stop.’”

The South China Morning Post by Nicholas Spiro. “Alan Greenspan, the former chairman of the Federal Reserve, is not ideally placed to opine on the threat posed by asset bubbles in financial markets. This is, after all, the central banker who is widely blamed for having sewn the seeds of the 2008 global financial crisis by refusing to prick the US housing bubble which triggered the crash. Yet Greenspan’s words still carry a lot of weight with market commentators and investors. So when he warned in an interview on Tuesday that ‘we are experiencing a bubble, not in stock prices, but in bond prices’ which ‘is not discounted in the marketplace,’ it received a lot of attention.”

“The ‘hunt for yield,’ which has intensified since the yields on a large portion of the stock of government debt in Europe and Japan turned negative due to aggressive programmes of quantitative easing, has become one of the most conspicuous trends in markets over the past several years, and one that is setting off alarm bells.”

“What is particularly troubling is that there is no indication that the hunt for yield is likely to abate – indeed, quite the opposite. Given ultra-low borrowing costs in developed markets – almost a fifth of the stock of global sovereign debt is negative-yielding, with nearly 30 per cent of eurozone bond yields in negative territory, according to JPMorgan – investors have little choice but to move into riskier asset classes in order to generate adequate returns.”

“Yet the fiercer the hunt, the larger the bubbles and the greater the risk of a sharp and disorderly correction in bond markets if investors get spooked by the removal of monetary stimulus.”