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As Owners Realize Their Predicament, They Will Flood The Market

A report from Sparefoot. “The influx of people moving from the west coast and an increase in apartment complexes in Arizona has created a huge demand for people to buy new self-storage facilities. The Arizona market is beneficial to investors right now, but there are some concerns that the market could become oversaturated.”

“However, I don’t see the Arizona market oversaturating anytime soon and developers are currently having great success finding financing for self-storage units and ultimately selling these units. The risk is often mitigated for most developers because the facility is sold before they even break ground.”

From Guru Focus. “Real estate pros are in broad agreement that a slowdown is coming, with many also anticipating a downturn in the not-too-distant future. Yet, while they agree the current cycle is long in the tooth, there is considerable diversity of opinion on how best to play it as investors.”

“Multifamily housing has long been a staple of real estate investing, but the asset class has been experiencing some headwinds of late. Self-storage has been one of the top performers among niche real estate classes over the last several years. But, according to Tom de Jong of Colliers International
the fun may soon be over as owners flood the market.”

“While the growth cycle started earlier for most other commercial property types, the self-storage boom only really got started in 2015. Since then, capital has flooded in from a multitude of sources. In de Long’s view, historically low cap rates will soon begin to climb, which will inevitably push down asset prices. The deluge of capital has led to prices being bid up. As owners realize their predicament, they will flood the market.”

The Los Angeles Times in California. “Construction of Oceanwide Plaza, a $1-billion real estate development in downtown Los Angeles, remains stalled amid questions about whether the Beijing-based developer can find the funds to complete it.”

“Work on the mixed-use complex near Staples Center stopped late last month, bringing widespread attention to the rare sight of a three-skyscraper construction site devoid of activity when it should be swarming with hard-hatted laborers.”

“The project is being built by Oceanwide Holdings, a publicly traded international conglomerate that reported revenue of $2.37 billion in 2017 but was pronounced to have a ‘negative’ financial outlook by ratings firm Standard & Poor’s last October.
Oceanwide said in a statement Jan. 24 that the holdup was due to a recapitalization of the project and that work would resume by the middle of February. Work is still stalled, however, and Oceanwide declined to comment further Friday.”

“The company has been hit with more than $50 million in mechanic’s lien claims by contractors who say they are owed money by Oceanwide. In January, Oceanwide cited financing challenges as the reason for the cessation of construction.”

“The general manager of the city Department of Building and Safety, Frank Bush, said last month that his agency had received a call from Lendlease, the general contractor on the project, saying it was canceling an inspection that had been scheduled for that day.”

“‘They said they were stopping work on the project at this time, and had no further explanation,’ said Bush, who noted at the time that the shutdown had nothing to do with any inspections or permitting issues involving his agency.”

“Oceanwide has large real estate developments planned in Hawaii and New York that haven’t gotten underway. Work is, however, continuing on Oceanwide Center, a two-skyscraper condo, hotel and office complex in San Francisco launched in 2016, according to its construction manager Aecom Tishman.”

“The Los Angeles development, which started in 2015, is well underway and was expected to be completed this year. The three towers, which are to house more than 500 luxury condos and a Park Hyatt hotel, have already reached their peak heights of as much as 55 stories. Work was taking place inside the structures when construction stopped, though they are still partially exposed to the elements.”

“The halt of a Chinese-backed real estate project raised concerns that it may be related to Chinese government policies restricting the flow of money out of the country. The policies, put in place in 2016, sent shock waves through real estate circles because China has become a major investor and developer in the U.S.”

“‘We have not been seeing as much new investment as we were seeing before’ the government crackdown on overseas investment, said Stephen Cheung, president of World Trade Center Los Angeles, which promotes local businesses overseas and seeks to attract foreign investment to the region.”

“The Oceanwide shutdown ‘surprised us all a little bit,’ Cheung said, because multinational conglomerates like Oceanwide have other ways of funding U.S. projects besides taking money out of China, such as selling assets in other countries. ‘I am hoping that this is an isolated incident, not a general trend,’ Cheung said. “If it is, that will be very problematic for us.'”

“The 504 luxury condos at Oceanwide Plaza represent a substantial block of for-sale housing. They would hit the market in the wake of another big Chinese-backed condo and hotel development downtown called Metropolis that will have more than 1,500 units upon completion.”

“The developers of both projects expected to sell many of their units to Chinese citizens looking for overseas investments, but the Chinese government’s squeeze on cash leaving the country has affected condo sales in Los Angeles.”

“Metropolis developer Greenland USA ‘relied on a lot of overseas buyers’ to purchase units in the first of its three towers that was completed in 2017, said Maranda Blanton of Compass Development, which will oversee marketing of the units for sale at Oceanwide Plaza. ‘Now Greenland has had to really start focusing on the local market,’ she said, which includes Southern Californians and some Chinese and Korean nationals who already have money in the U.S.”

“It’s unclear whether that shift has been a financial strain, but Greenland late last year put its third, unfinished Metropolis condo tower on the market while construction continues. Other examples of Chinese pullbacks are evident, including the sale in November by Dalian Wanda Group of a prized parcel on Wilshire Boulevard in Beverly Hills, where the large privately held company had planned to build a $1.2-billion condo and hotel complex.”

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This Post Has 30 Comments

  1. ‘I don’t see the Arizona market oversaturating anytime soon and developers are currently having great success finding financing for self-storage units and ultimately selling these units’

    Again, we find commercial real estate being built, not because of any supply or demand, but rather because financing is available and they can flip it. This same phenomenon has rolled through multiple asset classes including multi-family (apartments and condos), senior living, student, storage, you name it.

  2. ‘The developers of both projects expected to sell many of their units to Chinese citizens looking for overseas investments’

    How many readers remember this? It was a joke then and it’s more of a joke now. And LA finds itself looking up at stalled, unfinished towers like Miami and New York City.

    1. I recall stories about skyscrapers that were under construction in the late 1920s which ended at the onset of the Great Depression, never to resume. I wonder if a similar fate awaits these New Era highrise investment projects?

  5. From Seeking Alpha:

    “Housing Bubble #1 wasn’t allowed to fully retrace the bubble, as the Federal Reserve lowered interest rates to near-zero in 2009 and bought $1+ trillion in sketchy mortgage-backed securities (MBS), essentially turning America’s mortgage market into a branch of the central bank and federal agency guarantors of mortgages (Fannie and Freddie, VA, FHA).”

    I can’t be sure, but I seem to remember people saying this on some HousingBubbleBlog somewhere.

    1. “These unprecedented measures stopped the bubble decline by instantly making millions of people who previously could not qualify for a privately originated mortgage into qualified buyers. This vast expansion of the pool of buyers (expanded by a flood of buyers from China and other hot-money locales) drove sales and prices higher for six years (2012-2018).
      .
      .
      .
      Millennials are burdened with $1 trillion in student loans and most don’t earn enough to afford a home at today’s nosebleed prices. When the Fed drops the Fed Funds Rate to zero, it doesn’t follow that mortgage rates drop to zero. They drop a bit, but not enough to transform an unaffordable house into an affordable one.

      Buying up $1 trillion in sketchy mortgages worked in 2009 because it bailed out everyone who was at risk of absorbing huge losses as a percentage of those mortgages defaulted.

      The problem now isn’t one of liquidity or iffy mortgages: it’s the generation that would like to buy homes, finds they don’t earn enough, and their incomes are not secure enough, to gamble everything on an overpriced house that chains them to a local economy they might want to leave if opportunities arise elsewhere.”

      Conclusion: prices were/are too damn high and measures such as more QE ain’t going to help keep them afloat.

  8. “Metropolis developer Greenland USA ‘relied on a lot of overseas buyers’ to purchase units in the first of its three towers that was completed in 2017, said Maranda Blanton of Compass Development, which will oversee marketing of the units for sale at Oceanwide Plaza. ‘Now Greenland has had to really start focusing on the local market,’ she said, which includes Southern Californians and some Chinese and Korean nationals who already have money in the U.S.”

    How is this different than from Japanese buying up the places in the late 80’s?

  10. These guys sent a sales pair by to try and install solar on my roof. Downside they would own that part of my roof forever. These Sales tools were a slippery pair trying a scare tactic like earthquakes would take out the grid but my roof top solar would keep me safe. Or your power bill is going to double with the new CPA ( California power alliance) . Hard to get any real info out of them just weird stuff like CA power will come from Ohio. I had a good laugh they didn’t.

    “Vivint Solar, backed by Blackstone, a private-equity firm, has brought in a new chief executive, David Bywater. He has redirected sales staff to the most promising markets, such as California. “At the end of the day you have to be a rational economic actor,” says Mr Bywater. He is pursuing more modest but profitable growth. The market nodded approvingly for much of the year—until November 30th, when Vivint said that a vehicle controlled by Blackstone would sell 8m shares at a discount, sending the firm’s stock price plunging.”

  11. Not that I wish for recessions, but they do have the effect of re-arranging priorities and idealisms. Trends toward socialism and feel good measures such as mandatory solar in CA new construction and other economically foolish measures tend to get reset once the bomb drops.

    One fish in the pond get scarce the fishermen start thinking about how to fish better and worry less about the weather and flowers around them.

    As for the solar, I think claims of saving and average of $200 per month on power are debatable and protrusions through roof surfaces are in invitation to roof leaks. The customer will not continue to pay for things like this and the new house market is already retreating. These measures will only exacerbate an economic slowdown, but it will take the slowdown to reverse the measures.

    Anyone remember what happened when Congress mandated ethanol production and adaption. Corn when way up along with all things affected by corn prices. Just plain foolish. However, if it wrecks housing market and economy, I am ready to purchase a waterfront house with boat dock for cheap. So bring it on.

    1. I got rearended last year in a hit and run at Broadway and Evans a few blocks from this used house for sale.

      It’s not safe to let your kidz walk to school in this part of Denver 🙁

  16. Well this is rich. Jerome Powell calls out AOC on her plans to fund her New Green Deal pie in the sky with unlimited borrowing. So tell me, Jerome, how is that any less sound than the Fed’s unlimited money-printing? Oh, right – AOC’s plan at least redistributes the fake money to the 99%, while the sole beneficiaries of the Fed’s QE-to-Infinity will be the oligarchs and Wall Street grifters.

    https://www.cnbc.com/2019/02/26/fed-chief-says-economic-theory-of-unlimited-borrowing-supported-by-ocasio-cortez-is-just-wrong.html

    2. ‘Oh, right – AOC’s plan at least redistributes the fake money to the 99%’

      I always suspected you were really a Sandinista.

    3. how is that any less sound

      Seems a rather short arc along the moral compass. Should we be debating who should be in charge of the rape?

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