The Housing Bubble

August 24, 2018

A report from Ithaca.com on New York. “Recent trends show the seemingly bottomless demand for student housing might have actually met its bottom, or is at least approaching it. ‘We are hearing the same complaints and it is getting stronger than it has in the last few years,’ Tompkins County Assessor Jay Franklin wrote in an email. ‘Ten years ago, I would say that vacancy wasn’t an issue at all. But starting 2 years ago, we started hearing more from landlords about vacancies they were experiencing. I think it will only get worse with the number of apartments we have being built, are in the planning stage, and also the projects that haven’t been formally announced yet.’”

“‘You’re definitely seeing a higher vacancy rate across the board because of all the new inventory that has come online,’ said Visum CEO Todd Fox. ‘Most of the growth has come in the student housing market. Because of all the new student housing beds being added to the market, we are starting to see price compression in rents [...] You cannot deny how it’s becoming increasingly difficult to lease apartments and how it’s taken significantly longer to get buildings rented. If you don’t think there is softening in the student housing market you’re either delusional or uninformed.’”

“Fox did not respond to questions regarding the possibility of a student housing ‘bubble.’ ‘Real estate is like musical chairs,’ Fox said. ‘Each time a new building gets built, the less opportunity exists in the market. The difference in the real estate industry is that you don’t want to be the last one to grab the chair.’”

“Landlords Association of Tompkins County Vice President Brian McElroy confirmed that they are hearing constant stories of landlords having to reduce monthly rents significantly and, even after that, still struggling to occupy their properties. ‘A lot of landlords who are having a hard time renting their apartments. I know of several landlords who are sitting on empty apartments, who have taken their rent down to 2012-2013 prices who still aren’t able to fill their apartment. This year has been a lot softer than people have talked about.’”

“As development continues, the remaining chances to jump into the market grows ever smaller, Fox said. With that comes more anxiety that a developer who gets into the market too late will end up holding the bag, and quite a few unoccupied units, when demand is finally satisfied.”

From the Tennessean. “Robert Piraino was just starting to feel at home, six months after moving into one of Nashville’s newest luxury buildings, when an email arrived saying that a new owner is transforming the complex into part-time hotel rooms. Piraino was not asked to move out of the Olmsted in SoBro. Instead, he was told he may be soon living in a building filled with revolving streams of tourist neighbors.”

“Miami-based Newgard Development Group bought the six-story understated charcoal-colored building for $90 million last week. The group is now rebranding the building in partnership with Airbnb for a new home-sharing apartment community startup called Niido. Thousands of new hotel rooms are under construction at more than 100 new hotels. Those new buildings are expected to open their doors in the next few years across the greater metropolitan area.”

“‘Professional people live in this building. Now we’re going to have strangers coming and going,’ Piraino said. ‘One of their ads says: ‘It’s spring break all year-round at Niido.’ I don’t want to come home to a place where people don’t care and leave garbage everywhere. That’s not the community vibe I want to live in.’”

From Curbed DC. “The District’s top lawyer is notifying landlords who appear to lease apartments like hotel rooms that they may be breaking the law. D.C. Attorney General Karl Racine sent letters requesting information about short-term rental practices from 19 owners and managers of 33 multifamily buildings in the city suspected of running hotel-type operations. In a release, Racine’s office does not specify the landlords or their buildings, but says blocks of short-term rentals—usually advertised on vacation websites—are ‘concentrated in neighborhoods like Logan Circle, Dupont Circle, Capitol Hill, and Chinatown.’”

“Laws require businesses to provide adequate disclosures about the material terms of the goods or services they sell, and prohibit landlords from converting rent-controlled units into temporary accommodations, respectively. Racine’s office argues that operating rentals less than 90 days in length in apartment buildings is misleading when tenants are not made aware of the activity.”

“Public complaints about the disruptions that short-term rental guests can cause have also seen an uptick. In December, residents of a luxury apartment building in Logan Circle told the Washington City Paper that temporary visitors threw loud parties and clogged common areas, and that their landlord had not fully disclosed the extent of the activity before they moved in.”

“Residents of another luxury apartment building, along the H Street NE corridor, also told the paper in July that they had experienced similar issues, including ‘[drunk] interns launching fireworks off the roof’ and overtaking the building’s pool.”

From Bisnow. “Market forces in most cities are making it nearly impossible to build new housing that the middle class can afford — and the gap between subsidized low-income housing and high-end apartments is wider than ever. From coastal economic hubs to Midwestern industrial towns, cities have experienced rising rents that have not been matched by wage increases. For middle-class renters who cannot qualify for subsidized housing, finding affordable apartments on the market has become more challenging by the year.”

“While cost burdens for most renters have gone up, those with the means to splurge on an apartment have been presented with more options than ever. There has been a boom of high-end apartment construction this cycle, accompanied by a stagnant — and in some cases shrinking — supply of affordable, middle-class housing. Since the recession, the number of Class-A multifamily units, those commanding the highest rents, has grown to 5 million nationwide, up from 3.9 million, while the stock of Class-B and C units has remained virtually unchanged at 5.7 million, according to Fannie Mae.”

“Developers are often seen as a major cause of the problem, viewed as avaricious operators who only want to build luxury condominiums. The reality, developers told Bisnow, is far more complex. Their ability to build housing is stymied by the price of land, rising construction costs, few tax incentives and, ultimately, a lending environment that simply does not support workforce housing. When it comes to building housing, developers said, they don’t set the rent.”

“‘The reality is, the bank is saying, ‘If all else fails, we need to make sure we are not losing money,’ said André Bueno, the founder of Los Angeles-based real estate investment firm Bueno Group. ‘[They say] here’s where your rents need to be, and here’s the cap rate we are applying to the project.’”

From KFOR in Oklahoma. “Students at the University of Oklahoma are moving this week into student housing. However, not many are choosing the new luxury student apartments on campus. ‘Those residents halls not getting filled is a huge issue,’ said student Asher Nees. ‘When I saw that they were constructing them, I thought didn’t they just build two great brand new ones across from Headington, yes and I don’t think they can even fill those ones,’ Nees said.”

“The apartments have rates close to $4,000 for a two bedroom and more than $6,000 for a one bedroom with a bath, per semester. The apartments are only 70 percent filled - a waste of money, according to some students. The newest apartment, Cross, is only 28 percent occupied.”

From Williamette Week in Oregon. “Last week, WW wrote about luxury apartment owners using an approach to attract new renters: offering move-in freebies like Amazon gift cards, Visa check cards, six weeks free rent and yearlong health club memberships. Here’s how readers weighed in. PostMichael McKeeism: ‘What a brilliant idea: build unaffordable housing and then bribe potential residents with gift cards that transfer wealth to a company largely responsible for its home city’s housing crisis.’”

“Bobby Benson: ‘Or you know, they could build housing that people could afford and forget about the perks. Just a thought.’”

http://thehousingbubbleblog.com/?p=10568

August 28, 2018

A report from the Colorado Real Estate Journal. “Interest rates that continue to creep up have not had a major impact on Front Range lending activity. With an unprecedented amount of money on the sidelines, there remains too much money chasing too few deals. Nowhere is this more evident than in the disparity between interest rates and cap rates. To the casual observer, they appear disconnected, if not unhinged. Factoring in too much money chasing too few deals handily reconciles the difference.”

“The loosening of these lending standards may not bode well for multifamily landlords in softer markets. A slowdown in construction for pricey, Class A multifamily products may prevent this problem from spiraling out of control in some submarkets, particularly ones that already are saturated with elite housing options where affordability is experiencing various forms of obsolescence from rent concessions to outright vacancy.”

“While multifamily remains popular, the ratio of income to housing costs creates an intuitive nervousness: How long residents can spend more than 50 percent of their income on rent or mortgages? Traditionally, rents could not exceed 30 percent of a tenant’s income. Now it is closer to 50 percent. None of this is lost on bank regulators, some of whom are privately expressing concerns about today’s renter being no different than the overleveraged 2006 sub-prime homeowner.”

From KGTV in California. “A new study from the Public Religion Research Institute paints a grim picture of people struggling to make ends meet in San Diego. It says 45% of San Diegans fall into an auspicious category: people who work full time and still struggle with poverty. On the low end, the Bay Area had just 27% of people in that category. Los Angeles was at 49%. The San Joaquin Valley had the highest percent at 68%.”

The Des Moines Register in Iowa. “Des Moines has many complexes that have fallen into deep disrepair, local property managers say. ‘It’s pretty simple. Slum landlords exist throughout the U.S. because it’s a very profitable business to be into,’ said Jim Conlin, who has owned and managed properties in Des Moines for 50 years.”

“‘There’s been so much money chasing the acquisition of these kinds of apartments. People buy something that is not well maintained and then try to flip it for $10,000 a unit,’ he said. ‘When the music stops playing … there’s going to be an adjustment. And those with deteriorated properties, unqualified tenants and negative cash flow aren’t going to be standing when that adjustment is over.’”

“A mix of research shows Des Moines residents enjoy a high standard of living and a glut of higher-income rentals downtown, but the housing crisis afflicting lower-income families and minimum-wage workers is growing worse.”

The St. Louis Business Journal on Missouri. “Commercial lending in St. Louis isn’t keeping pace with other markets, and apartment construction may be reaching the saturation point, according to local banking professionals. ‘We talked with our Atlanta Fed colleagues who did a proprietary study that looks at all lenders — banks, insurance companies, REITs, pension funds,’ said Julie Stackhouse, executive vice president of the Federal Reserve Bank of St. Louis. ‘What it showed is exactly what the bankers are saying: CRE lending has flattened in St. Louis. Commercial multi-family lending grew solidly in 2016 and 2017. Thus far in 2018, it is slightly down. Is St. Louis overbuilt? We’re somewhere in that vicinity.’”

The Daily Texan. “West Campus is notorious for ever-expanding growth, and the past year was no exception. Four new student housing projects were completed in 2018 and have recently opened for students. There are 10 more slated for completion in 2019. The abundance of new units for rent does not necessarily correlate to lower prices, said Laura Cochrane, an Austin-based realtor with REspace Realty.”

‘Cochrane, who has worked with students in West Campus for 25 years, said newer developments would rather have vacancies than drop their rental rates. Instead, Cochrane said students should stay away from high rises and look for older, individually owned condos and houses. ‘Even though they’re older, they’re almost as nice as the newer stuff,’ Cochrane said. ‘They might not have all of the amenities, but (they are) a quarter of the price marked down. These developments are just shooting themselves in the foot.’”

From Bisnow on New York. “Two years after the luxury market began to slow down, some New York City developers are finding the only way to get a pricey condominium sale done is to offer a compromise. ‘There’s only one tool in the toolbox — it’s called the price,’ said Olshan Realty President Donna Olshan, whose firm tracks contracts signed on units priced at or above $4M. ‘2013, 2014 and 2015 were the golden years of new development in New York. We are past that … Rarely have I seen buyers be so aggressive and make such low offers.’”

“In 2015, the uber-luxury craze had developers rushing to build ritzy towers to capitalize on the hot demand. Flash-forward three years, and the city is awash with new development options, and buyers are nervous about paying too much. The last week saw 24 contracts close on all types of Manhattan units over $4M, a stellar number for late August, according to Olshan’s report. But her figures indicate that units at that price point are sitting on the market for an average of 439 days, the highest rate in 12 years.”

“Meanwhile, prices are being cut by an average of 9% before going into contract, she said, which means the units are selling for at least a 15% discount. It is a challenging set of realities for those selling new units. ‘[Sponsors] are discounting. They are whispering in the brokers’ ears: ‘Just give me an offer.’”

“Sources told Bisnow that while some developers may have patient equity partners that are able to let them hold out for a certain price, many are under pressure to get product sold. Complicating matters is that, with interest rates rising, political uncertainty and fears that tax law changes will squeeze some of New York City’s wealthiest residents, a sense of insecurity is spreading among high-end buyers.”

“‘There’s oversupply, there’s just way too many choices. People are wondering what’s going to happen and they pause,’ said Corcoran Group broker Vickey Barron, who is marketing a condo at Magnum Real Estate’s 100 Barclay St. for $59M.”

“In the first half of the year, there were 303 sales of condominiums priced at $5M and above, a 39% fall from the year before, according to the half yearly report from Stribling private brokerage. ‘These first-half numbers were really shocking,’ Stribling Vice Chairman Kirk Henckels said. He believes the improved co-ops numbers are the result of sellers in that sector seeing the writing on the wall and cutting asking prices. ‘It’s really the consumer saying ‘this is enough,’ he said. ‘New developments showed a huge decline, falling 54% while resale condos only fell 25%.’”

“Already steep competition could be set to steepen. Manhattan’s new condo inventory is projected to hit 7,900 next year, The Real Deal reported earlier this summer, citing data from appraisal firm Miller Samuel. That is a significant increase on the average from the last few years — which has sat between 3,000 and 4,000 units — and means it would take about four-and-a-half years to sell all the units.”

“‘There is lot of inventory but it’s not meeting the buyers’ need,’ Compass President Leonard Steinberg said. He said the right product at the right price will still attract plenty of interest. He noted that many of the steep discounts are the result of overpricing when the listings first came to market. ‘After excess there is pullback,’ he said.”

http://thehousingbubbleblog.com/?p=10578

They may inadvertently end up turning these places into short-term rental slums with either rock bottom rental rates or high vacancies, along with the blight associated with a low-end clientele, in case the stable long-term tenants get fed up and leave.

‘With an unprecedented amount of money on the sidelines, there remains too much money chasing too few deals. Nowhere is this more evident than in the disparity between interest rates and cap rates. To the casual observer, they appear disconnected, if not unhinged. Factoring in too much money chasing too few deals handily reconciles the difference’

It’s still unhinged. You can’t stray into lala land with commercial real estate without it kicking your ass. The Chinese are finding this out all over the world right now. (I’ll have a post on that later).

February 8, 2017

From Bisnow on New York. “New York City is still the No. 1 destination for foreign capital in the world, according to this year’s AFIRE rankings, but it is no longer an environment in which foreign money — particularly from China — will buy anything in the market at any price. This year, China has clamped down on outbound foreign investment, and firms caught flouting the new laws will be punished harshly, China First Capital CEO Peter Fuhrman said. While most New Yorkers in commercial real estate are aware of the capital slowdown, Fuhrman said they are probably not taking it seriously enough.”

“‘I have the perception that the full weight and severity of these capital controls hadn’t been fully felt here,’ Fuhrman said. ‘It’d be fair to say that the Chinese central government dropped a financial bomb on its businesses.’”

“One of the Chinese government’s chief concerns when instituting the investment restrictions, Fuhrman said, is over outbound investors getting fleeced while paying record-breaking prices. ‘A concern of Chinese regulators is their investors have been really bad buyers,’ Fuhrman said. ‘This can sadly be seen more and more in the larger real estate deals they have done. What they are extremely concerned about is just about every acquisition the Chinese have made, is they have overpaid severely and foolishly, and that has spurred a loss of a lot of Chinese sovereign wealth.’”

http://thehousingbubbleblog.com/?p=9989

‘You’re definitely seeing a higher vacancy rate across the board because of all the new inventory that has come online,’

The higher vacancy problem is not due to a glut of new inventory that has come online. Rather, it reflects a stubborn unwillingness to lower rents to levels the market will bear.

I guess the landlords don’t want to just give it away?

‘A concern of Chinese regulators is their investors have been really bad buyers,’

Stupid is as stupid does.

-– Forrest Gump

@Professor Bear

For the most part, they don’t feel that’s even an option. First, they are under tremendous pressure to produce ROI and secondly their costs exceeded their initial estimates.

In a hot market like Seattle where building has exploded, the costs of building have exploded even more.

The jacked up permitting and studies costs pale in comparison to Labor, Materials and Equipment - those guys are in such demand that for a good while now they just laugh anyone off who isn’t offering top-dollar. Manufacturers of things like exterior window glass for the buildings have been working overtime but can’t always keep up. I’ve seen a few stories around here of completion dates being pushed back months due to an inability to get the materials when the developers originally expected.

“First, they are under tremendous pressure to produce ROI and secondly their costs exceeded their initial estimates.”

I’m missing the contribution of empty units to ROI. If the concern is that giving a couple of months’ free rent or other incentives will somehow lead to lower rents down the road on already-occupied units, then I kind of get it. But if lower rents or better quality housing for the same rent is available elsewhere nearby, then the market will leave them with still more vacant units in the future unless they adjust their rents downward.

“The higher vacancy problem is not due to a glut of new inventory that has come online. Rather, it reflects a stubborn unwillingness to lower rents to levels the market will bear.”

Meanwhile the county’s assessor is unwilling to adjust property taxes lower.

I like it too.

“Do as I say, not as I do.”

That’s a huge sore spot that’s growing. I expect to see ongoing backlash for years.

I wonder where they are getting the furniture for these short-term rentals? If corporate landlords are going to run an off-license flophouse - er, I mean, “disruptive bed and breakfast” - the very least they need is a mattress, sheets, maybe a chair and some hangers.

Are building managers all running to Ikea and buying bulk, like their mom-and-pop buy-to-let predecessors? Are they doing deals with bankrupt companies in parallel sectors like Mattress Firm? Sweetheart deals with companies with surplus stock like Restoration Hardware? (I’m pretty sure stagers have some special arrangement with RH - every open house these days looks like their catalogue).

What a total waste of resources, and an environmental disaster.

Let me speak to this. As some on this board know, I am an RN. I recently took up a part-time job as a leasing agent at a large apartment complex in Salt Lake City. I still do one shift a week at the hospital, but I’ve got a good thing going on in that we get free rent as part of my compensation.

The building I lease is 175 units. The 2nd phase is going up now. These are market rate units and they are very nice units. 1 bedroom starts at $1085. The owner is leasing out 10 units on AirBnB on a short-term basis, but only until occupancy is near 100%. At our run rate we’ll probably be fully occupied by December/January as we are at 55% right now and have only been leasing for a few months.

The furniture for these short-term leases came mostly from Target, Walmart, Ikea, and Wayfair. What we are learning is that it’s best not go all-out and furnish these to the hilt unless you are trying to actually run a hotel. The plan here is just get little incremental cash from an idle asset.

All of the AirBnBs are limited to one wing of the complex so there is little disturbance. There is a decent use case for having some short-term rentals in the apartment complex because there are quite a few IT contractors and short-term free lancers who come in for a few months and need something like this. A couple of our AirBnB stays have turned into 8-month leases.

“The furniture”

Thanks very much for the answer to my question! I was hoping someone on here would have first-hand experience.

May I ask how the extra work of the airbnb units is divided? Ie, is it building staff who check people in and out, chose the furniture, hire the cleaning staff, etc? As a leasing agent, do you have to vet the short-term renters or process their airbnb paperwork?

“Decent case…short-term free lancers who come in for a few months”

I agree there is a need for medium-term furnished rentals on a corporate scale to fill the gap between nightly hotels and year-long leases.

The leasing and the AirBnBs are run as separate businesses. I’ve argued to bring it all under one roof with the same management company, but right now there is just one individual who is running the 10 AirBnBs and managing that side. This individual does all the booking, cleaning, and restocking of supplies, etc. The only reason I know so much about these is because sometimes the tenants will come to our leasing office and ask us questions (we just redirect these back to the AirBnB point person). But we do interface with the AirBnB individual from time to time, so we get a feel for how things go on that side of the business.

The owner has thought about expanding it to 20 units, but we are renting up so fast here in Salt Lake City that the capital outlay to purchase just bare bones furnishings (e.g. bed, shower curtain, utensils, bar stool, etc.) might not be worth it depending if we keep our trajectory. On the whole, the AirBnB tenants are very good. We’ve had no major problems (yet). We probably have more problems with our tenants that have leases (but they are quite good too, so overall it’s good). All in all, the short-term rentals are good guests.

From what I’ve heard from the owner, AirBnB is good to work with as far as damage or anything is concerned. I can’t speak to the vetting process with AirBnB because I don’t manage that. But I have used AirBnB and I assume that the profiles are visible from Facebook, Twitter, LinkedIn, etc. There are rules surrounding the AirBnB rentals, so if residents break them or cause excess wear and tear, AirBnB is on the hook for compensation, which speaks to the value-add that AirBnB tries to position itself as since it is really just an intermediary taking a cut.

That’s cool. My wife, a couple of close high school friends, and one of my grandmas also earned degrees there. And I played outdoor summer concerts with an orchestra on campus for many years. Makes me feel like part of their network, even though I was never a student there.

Thanks music has always been a part of my life and i was never dedicated enough to learn to play instruments other then records and cd’s which in its own way is time consuming and requires lots of people skills too. How do you delicately get a drunk bride to sign a check before they run off to the honeymoon?