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When A Market Gets Hot, There Always Seems To Be A Tendency To Overbuild

A report from the Knoxville News Sentinel in Tennessee. “Knoxville is awaiting an increase in multifamily developments. There are more than 1,100 units under construction and scheduled to be completed in the next 24 months. ‘When a market gets hot and investors start realizing it and they start to build, there always seems to be a tendency to overbuild,’ said Clay Reed, president of the Apartment Association of Greater Knoxville.”

“Heidi Adams, senior adviser with NAI Koella RM Moore, said she’s been waiting for the multifamily market in Hardin Valley to reach saturation. And two more developments are on the way, she said. ‘(Developers) understand the risks involved, but I just think at some point in the near future, Hardin Valley is going to reach saturation,’ she said.”

“Avison Young senior vice president Rick Gentry said there may be areas of town with a need for more multifamily, but it’s not as simple as that. ‘The problem is that construction costs are so high that you just about have to build (multifamily) in high-income areas,’ Gentry said.”

“As space dwindles, developable land will come at more of a premium. That’s changing the types of apartment and condo buildings that will be built in the future. Adams anticipates more five-story or higher Class A buildings, veering away from the sprawling, garden-style communities. It mirrors a national trend, she said.”

“‘In order to make the numbers work because construction costs continue to rise, they’re going to have to be upscale, 4-star developments,’ Adams said.”

The West Bloomfield Beacon in Minnesota. “A housing market study finalized in March reveals that the township of West Bloomfield has become oversaturated with senior living facilities. There are several senior housing projects in West Bloomfield that either have been recently completed or are being planned.”

“‘The market is currently over-built with independent and assisted living apartments,’ it states. ‘The township is carrying more than its share of the load for the county and region. There may be a need and justification for a longer-term moratorium on these super-size building formats.'”

From Bloomberg on New York. “A tony prewar building on Manhattan’s Park Avenue has a sprawling, fully renovated three-bedroom co-op for sale at a discount. Don’t expect to find it on a web search. After listing the unit unsuccessfully, the sellers took a break, cut the price by 15 percent and decided to try again — this time offline, said Martin Eiden, a broker at Compass.”

“The apartment’s owners didn’t want the world to know they were desperate enough to accept about $600,000 less than they initially sought, Eiden said, and that motivated their decision to keep it off the portals that publicly post such details.”

“‘Sellers don’t want to see their listings all over the internet, building up days on market and having buyers question what’s going on,’ said Pamela Liebman, president of brokerage Corcoran Group. ‘They want to be more private. It makes them feel that they’re doing something different in a market that’s not very tight.'”

The Marin Independent Journal in California. “A downtown San Jose residential and retail tower has defaulted on its development agreement with the city following construction delays for what would be a prominent project.”

“An uncertain future confronts the development, which is located in the North San Pedro Square area of San Jose and was proposed by Z & L Properties. Z & L, a China-based developer with a Foster City office, has launched efforts to construct several ambitious projects in the urban core of the Bay Area’s largest city.”

“‘Z & L Properties is in default of its obligations pursuant to a disposition and development agreement for Block H in the North San Pedro Housing Project Area,’ according to a staff report prepared for a San Jose City Council meeting scheduled for April 16.”

“San Jose Mayor Sam Liccardo indicated disappointment with the delays that have surfaced for this project, which is being developed by an affiliate of Z & L Properties. ‘The firm has missed deadlines on several projects, including this one,’ Liccardo said.”

“While no final decision has been made, the city could seize ownership of the property. The other downtown San Jose projects launched by Z & L Properties are all residential. The projects have encountered differing difficulties.”

“This news organization reported this week that an October 2018 default on an $8.8 million loan jolted the company’s Greyhound Station project. Z & L Properties was able to remedy the delinquency, which the developer said arose from a dispute with the property’s seller. In February, a Z & L affiliate obtained a $19.5 million loan from Shanghai Commercial Bank to provide funding until the Greyhound project construction begins, as well as cash for other activities.”

“The 188 West St. James towers became the focal point of a federal investigation that determined 22 people who worked on construction of the development were forced to work without pay and held in captivity until they were freed in August 2017.”

“Project developer Z & L expressed dismay when it learned of the violations. The probe eventually led to a federal jury conviction in March of Job Torres Hernandez, Hayward-based owner of several construction companies, on multiple charges arising from harboring and extracting labor from immigrant workers.”

“At the North San Pedro site, Z & L hopes to work things out with the city. Z & L became involved with the site when it bought the property for $10 million in April 2017. A timetable to begin construction at the North San Pedro housing site, though, wasn’t immediately clear. The city document noted that construction should have begun by the end of 2017 — which didn’t occur.”

“‘I have no desire to excuse that non-performance in light of the worker abuse committed by a subcontractor on another of its projects,’ Liccardo said, referring to the 188 West St. James complex being developed by Z & L Properties.”

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This Post Has 35 Comments

  1. ‘the focal point of a federal investigation that determined 22 people who worked on construction of the development were forced to work without pay and held in captivity until they were freed in August 2017’

    And what’s their excuse? Constructions costs are too high. So even with slave labor you can’t make it pencil out?

    1. I guess we can just toss a coin now, whether it’s the realtors or the builders who are the bigger liars.

    2. There’s gotta be an interesting angle to it being a Chinese company that did that. I’m suspecting that it was Chinese workers on questionable visas who were being held hostage. I doubt it was illegals from south of the border, but if it was, that would be a whole different dynamic.

      On a side note, I liked some of the new stuff in that area back when I was in San Jose. But I’m not surprised if they over-reached and get caught with their pants down in a bubble popping situation. To me it seemed like a sketchy part of town that was being rapidly gentrified.

    3. And they’re building absolute garbage with this slave labor. The bottom line is the land is too fawking expensive.

      1. Which raises the question why the land is too fawking expensive? Possibly too many dollars chasing too few square feet of dirt. Meanwhile, luxury is dropping like a rock.

        I simply don’t understand this. If the high-rise already exists, suddenly there’s no shortage and airbox prices drop like a rock. If it’s land for a new high-rise, suddenly there’s a shortage and land prices are too high to support affordable housing. I guess people only want to live in freshly-built crap?

  3. Example number 10,000:

    ‘As space dwindles, developable land will come at more of a premium. That’s changing the types of apartment and condo buildings that will be built in the future. Adams anticipates more five-story or higher Class A buildings, veering away from the sprawling, garden-style communities. It mirrors a national trend’

    ‘In order to make the numbers work because construction costs continue to rise, they’re going to have to be upscale, 4-star developments’

    1. So what happens when they keep on continuing to build upscale, 4-star developments that fewer and fewer can afford?

      “I’m catering to the high end, luxury market — someone else can take on the affordable housing demand.” What happens when all of them think that?

        1. “If you put the federal government in charge of the Sahara desert, in 5 years there’d be a shortage of sand.” – Milton Friedman

          – Yup! Just substitute “housing” and “affordable houses” and perfect!

    2. developable land will come at more of a premium

      I just spent a month on a road/camping tour between Western NY and S Carolina. Thousands of miles of road with no development in sight and here and there a development that looked like inverted egg cartons, ugly as can be.

      1. Blue, do you have any locations or towns for these inverted egg cartons? Maybe I can googlemap them.

    3. “‘As space dwindles, developable land will come at more of a premium.”

      With a globe full of land where 95% of it goes undeveloped, there is no shortage. Land is essentially worthless dirt.

      If you paid more than $500-$1000 and acre, you paid too much.

    4. How is that going to work with 2 star incomes, 5k in credit card debt, a FiCO score of 580, and $300 in savings?

    5. I can see where this is headed already. When all these luxury developments can’t be sold to US citizens/residents, they will start lobbying to hand out green cards to any foreigners who buy overpriced oversupplied 4 star condos.

        1. February 8, 2017

          “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

          1. So wait, the sole reason the Chinese gov is keeping its money in their country is to protect Chinese millionaires from overspending on airboxes in NYC and Miami? How nice of them to do that. They must be learning from the Japan disaster of the 1980s.

            Again I’m just glad that most Chinese aren’t using the millions to buy entire towns in American flyover.

          2. the sole reason the Chinese gov is keeping its money in their country

            They are in a debt crisis.

  7. “The apartment’s owners didn’t want the world to know they were desperate enough to accept about $600,000 less than they initially sought, Eiden said, and that motivated their decision to keep it off the portals that publicly post such details.”

    I’ve noticed that lots of used homes for sale in my area have zero pricing history before 2016. It’s almost like a houses built in the 1970s magically time-traveled to 2016 and were sold for the first time!

    Or the past decade of high inflation, when displayed on an easy to read chart, becomes so apparent only a fool would think current asking prices are market-clearing.

    1. Pretty clear that the MLS is manipulated for the benefit of realtors and owners, and not for buyers — although every so often you see older data manage to find its way in there, sometimes back to the 90s.

      1. There is definitely more that we don’t see than what we see in the MLS histories. It doesn’t benefit most of the sheeple out there to show how dramatically prices have shot up. FBs don’t want to know that they are paying 2-3x what someone else paid 8 years ago, sellers don’t want to show that they are making these ridiculous profits, and the realtors especially don’t want either side to know because of the over paid commissions they get the higher the value. For me, if I didn’t live through the last bubble and pay attention to what inflated up this bubble, I would probably have been in the front of the line with all the other FBs.

        1. Non sense. Showing them the price purchased and sold demonstrate to the potential buyers the POWER of the wealth generation in real estate.

          https://www.usatoday.com/story/money/2019/04/05/u-s-housing-market-less-expensive-homes-rose-more-sharply-price/3356733002/

          According to a new study from unbiased Owners.com, buying a house in 2012 is the best financial decision one can make EVER. E…V…E…R!

          “When Todd and Marisa Bluth bought a $188,000 starter house in Commerce City, Colorado in 2012, they figured it would take at least a decade to build enough equity and savings to trade up to their dream home.

          Yet just four years later, they sold the 1,600-square foot unit for $284,000, allowing them to take their nearly $100,000 profit and buy a five-bedroom nearly three times the size for what seemed like a steal — $375,000 — in a more upscale neighborhood.”

          Instant riches awaits those that buy in 2012! $100,000 in just 4 years! You absolutely cannot find me a better investment!

          1. *Putting the other hat on

            So true!!! If it went up that fast from 2012, then 2019 forward will be like a snowball of wealth right!

  10. Lied Institute to hold housing seminar April 12

    https://www.reviewjournal.com/homes/advertising-features/lied-institute-to-hold-housing-seminar-april-12-1634545/

    Behind paywall but some preview

    “Vivek Sah, director of the Lied Institute for Real Estate Studies at UNLV.

    “It’s not a bubble, but there is likely going to be a correction because prices have appreciated so much,” Sah said. “I believe we’ve become a little bit unaffordable now, especially at the entry level, where there’s a big mismatch between median income and the price of an entry home.”

    What is this mismatch?

    “I think the biggest concern right now in Southern Nevada is that we’re progressing from a city that was affordable to one that’s less so very quickly, within the last two years. Income is around $60,000, but the median new home price is close to $500,000. ”

    No bubble here. Just a minor correction should easily fix this.

    “Over the next few months I think we’ll see a modest increase in home prices, but there is no concern right now about a housing bubble. A housing bubble is controlled not only by demand, but also supply, and currently supply is very, very low. Homebuilders have been able to slow down the process of delivering in the market because they saw what happened when they flooded the market with a lot of supply back in 2007.”

    Question: Should you buy a home now?

    “The decision to buy a home is a long-term and emotional process; therefore there is no right time or wrong time to buy. Housing markets move in cycles and, overall, they are very difficult to predict. If the choice of the neighborhood and home is based on strong fundamentals, then timing of purchase least impacts your decision.
    …
    No matter where you live, it is recommended to buy as soon as households have financial resources to do so.”

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