The Housing Bubble

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.”