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Sales Have Stalled Due To An Oversaturation Of New Construction

A report from Barron’s on Massachusetts. “Since the Great Recession, Boston home values have risen steadily and are at an ‘all-time high,’ says Debbie Adamidis, an investment property specialist at Jacob Realty. Sales of high-end properties have somewhat stalled due to an oversaturation of new construction. Within the past year, ‘anything over $1 million isn’t really selling as quickly as it was,’ Adamidis says. ‘I don’t think they’re disappearing. I just don’t think they’re flying off the shelf the way they were.'”

The New York Post. “Residents of Brooklyn’s booming Barclays Center district will soon have even more new neighbors. In a breakthrough at the slow-moving Pacific Park project, big-league New York developers TF Cornerstone and the Brodsky Organization are taking control of three major sites from the 22-acre complex’s current owners, a joint venture dominated by Greenland USA, a subsidiary of Shanghai-based development giant Greenland Group, The Post has learned.”

“Pacific Park, originally called Atlantic Yards, was launched 13 years ago by Forest City Ratner. Ratner, once bullish on Pacific Park, lost its zeal over concerns that Brooklyn was becoming overbuilt with apartments. As a result, much of the site between Atlantic and Flatush avenues still has large, windswept gaps between the few apartment buildings that have gone up.”

From Curbed Atlanta in Georgia. “For Atlanta renters feeling frustrated that new apartment options are disproportionately luxurious beyond their means—well, there might be something to that. Metro Atlanta was among the most active regions in the country last year when it came to the high-end apartment sector, reflecting a trend from Texas to mid-Atlantic states and beyond, a new analysis has found.”

“Across the metro, nine out of 10 new Atlanta rentals qualified as ‘luxury’ in 2017, meaning the Yardi Matrix rental intelligence compendium classified them as Class B+ and above, according to a new report by RentCafé. (The data covered apartment projects finished in 2017 with 50 units or more). That’s good—or bad—enough for No. 9 in the country.”

“But at least Atlanta isn’t Las Vegas or St. Louis, where 100 percent of apartment projects last year crossed the high-end threshold.”

“So what’s going on here, broadly speaking? ‘A couple of years ago high-end buildings [on a national level] represented around half of the entire share, [but] recently these projects gained more popularity,’ a RentCafé rep wrote. ‘Based on the high demand, developers shifted toward building more luxury rental buildings. In 2017, the construction of luxury rental properties had risen to 79 percent of all apartment construction in the U.S.'”

From AZ Big Media in Arizona. “To identify the multifamily trends that people working in commercial real estate should know about, AZRE talked with Chris Brozina, executive vice president at Mark-Taylor Companies. AZRE: Downtown urban areas (Phoenix, Tucson, Gilbert, Mesa, Scottsdale) seem to be drawing much of the current multifamily development in the Valley. What’s driving this trend?”‘

“Chris Brozina: Equity. Developers develop where their equity source tells them to develop and that reflects, at least theoretically, where people want to live in apartments. The important point to understand, however, is that institutional-equity is generally headquartered on the coasts and almost never coming directly from Arizona. This means there will always be a coastal-market thought influence directing where equity is placed in a market like Phoenix. Today, the coastal, denser market trend is to build more mixed-use, dense, walkable apartments in locations that are suitable. You can see that influence in Phoenix today.”

“AZRE: How do you balance the expectations of residents who are looking for higher-end amenities with the higher cost of development that comes with these expectations? How do you balance the demand vs. costs when developing new communities?”

“Chris Brozina: It’s a pretty simple business – income from the community, once stabilized, must exceed the costs to develop. Obviously the key then, is predicting those two elements as accurately as possible. Every element of the development, from location, to subcontractors, to timing exerts pressure on one of those two elements. Developers will continue to build to a higher level of luxury so long as it translates to higher level of rent and vice versa. What you see today, later in an expansion, is so much pressure on both rents and costs, that everyone is slicing the pie thinner looking for smaller nuances to differentiate their product and generally accepting a lower margin of error. The biggest costs elements in a project are large trades like framing, concrete, roofing and drywall. These things don’t change no matter what type of finishes you are putting in the apartments. At some point, cost becomes too high to develop any longer.”

“AZRE: For years there’s been talk that we are overbuilding in the multifamily sector. Do you agree or disagree? ”

“Chris Brozina: In a rolling, macro sense, the market is not over-built today. No accurate operating data shows that. With that said, 2018 and 2019 are expected to be the first years where actual annual deliveries outpace actual annual demand for the first time this cycle. Developers have been refreshingly disciplined this cycle, which is probably a function of tighter financing and more conservative equity. We’re probably at a time now, where certain submarkets with heavy pipeline concentrations, will have localized supply/demand issues that could cause some pain, but it will likely be temporary pain.”

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This Post Has 24 Comments

  1. ‘Ratner, once bullish on Pacific Park, lost its zeal over concerns that Brooklyn was becoming overbuilt with apartments. As a result, much of the site between Atlantic and Flatush avenues still has large, windswept gaps between the few apartment buildings that have gone up’

    Wow, that’s some shortage. I recently posted a report saying NYC had the most vacant land of any metro in the US.

  2. ‘A couple of years ago high-end buildings [on a national level] represented around half of the entire share, [but] recently these projects gained more popularity…Based on the high demand, developers shifted toward building more luxury rental buildings’

    There it is again. The public demanded luxury. Like the students demanded luxury dorms. And seniors demanded luxury nursing homes.

    All at the same time! What a coincidence!

    1. Don’t bee a downer Debbie!
      “…home valu$s have risen $teadily and are at an ‘all-time high,’ says Debbie Adamidi$

      “where 100 percent of apartment project$ last year cro$$ed the high-end thre$hold.”

      Bee aware$!: inflated hou$ing/$helter price$ are a $eriou$ financial health i$$ue for your$elf & other loved one$!!! … Avoid @ all co$t$!!!

      “A pox on yer hou$e!”

      Monkeypox is related to:
      chickenpox, measles, scabies and syphilis

      Forget eeee-bola, that’$ lethal. Monkeypox, like over.priced hou$ing, you have to live with.

      Monkeypox is from Kenya, just like Obamacare!
      & it $pread$ bye hand $haking/dotted.line $igning contact!

      Mr. banker, put down that pen!

      https://www.independent.co.uk/news/health/monkeypox-virus-symptoms-treatment-vaccine-tropical-disease-nigeria-a8555446.html?amp

  3. “Within the past year, ‘anything over $1 million isn’t really selling as quickly as it was,’ Adamidis says. ‘I don’t think they’re disappearing. I just don’t think they’re flying off the shelf the way they were.’”

    Debbie’s rare ability to summarize the local RE market are what earns her the big bucks.

  4. ‘In a rolling, macro sense, the market is not over-built today. No accurate operating data shows that’

    Yeah, click your slippers and say, “there’s no place like home.”

    ‘Developers will continue to build to a higher level of luxury so long as it translates to higher level of rent and vice versa. What you see today, later in an expansion, is so much pressure on both rents and costs, that everyone is slicing the pie thinner looking for smaller nuances to differentiate their product and generally accepting a lower margin of error’

    This is where the central banks screwed up. By shoving huge amounts of cash out via QE, it started a rush to find returns. And by artificially keeping rates low, that return required higher risk. Everybody got this notion that multi-family was a one way bet, and a bubble was born.

    ‘The biggest costs elements in a project are large trades like framing, concrete, roofing and drywall. These things don’t change no matter what type of finishes you are putting in the apartments’

    Again, luxury doesn’t really cost more than ordinary apartments to build. We’ve seen that stated multiple times. It’s those stupid amenities, which are added just to justify the stupid rents.

    ‘At some point, cost becomes too high to develop any longer’

    As I said, because the central banks monkeyed with the entire formula for making these decisions, every single market we’ve looked at way overshot demand and continues to do so. Hey MSM, I just handed you a prize winning story!

    1. “Hey MSM, I just handed you a prize winning story!”

      Stick close to your phone, Ben. I expect you to be inundated shortly with calls from intrepid Real Journalists determined to break this important news story to their readers.

      1. Here’s a related example of how uninterested the media is about these bubbles. A few years ago all the buzz in dense metros was safe deposit box in the sky. It was a classic mania new paradigm investment around the globe. And it grew so ridiculously that we got $100 million airboxes built to flip! Now that whole nonsense has vanished.

        Now why doesn’t the media track down one broker or developer who talked up these safe deposit boxes and ask them, “how could you be so wrong?”

        1. “Now why doesn’t the media track down one broker or developer who talked up these safe deposit boxes and ask them, ‘how could you be so wrong?'”

          Er, because in business the customer is always right and in the newspaper business the customers are the pukes who
          pay for the ads.

          If you pukes believe that it is the readers of the newspapers that pay the bills then this explains why you are pukes.

          1. “If you don’t read the newspaper, you are uninformed. If you do read the newspaper, you are misinformed.” – Mark Twain

      2. plagiari$m … Mr. Ben’s hou$ing Bubble blog is the “$oups du jour” for many media indu$trie$ & “reporter$”

        That’$ my theorie$ & eye’m $tickin’ to it!

    2. “Again, luxury doesn’t really cost more than ordinary apartments to build.”

      This is true for all structures.

    3. “As I said, because the central bank$ monkeyed with the entire formula for making these deci$ions,”

      “A pox on yer Hou$e$!”

      Monkey pox$! … It’$ contagiou$! … Don’t $hake a realtor$ hand$, you’ll regret$ it for a looooooong time$!

  5. ‘Based on the high demand, developers shifted toward building more luxury rental buildings.’

    Where did this alleged high demand come from? Every apartment dweller I know wants affordable rents, responsive management, good quality construction, and they don’t want to share their building space or parking lots with riffraff.

  7. I see lots of Sr. Living in my area, all look high end. Prior residency about 115 miles away did not have the same high end look as a lot were older.
    Case-Shiller HPI was Up when announced yesterday. I think we are looking at 9 months to a year before the index goes negative. (End of Q2 or Q3). It will take a while for the whole nation to turn negative.

    1. If I understand it correctly, CS doesn’t even capture the shift to “luxury” or the tripling of house size, so it might never show a very real collapse of the mania.

      1. I think you’ve hit on an important nuance BlueSky. This is what economists refer to as a “compositional effect”. In other words, it’s apples vs. oranges. We are seeing this in the job market as well. As the economic recovery has taken hold, one possible explanation for why wage growth has been so subdued is that many of the newer positions being hired are at a lower starting pay, so the average hourly earnings goes down or stays the same because of more low wages workers being added to the pie.

  8. It’s interesting to see this develop in different areas. Where I live i wasn’t expecting this project http://www.oneoncentre.com to be as popular as it seems to be. It’s a fully furnished kind of luxury student housing. The studios and 1 bedrooms are sold out and they aren’t cheap. The 2 and 3 bedrooms have spaces, but they do a room mate matching thing if you don’t have people already planning to move in with you.

    Once again Pittsburgh is late to the party and it hopefully is good thing. Apartment rents here seem to have gone up a lot in the last two years though.

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