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There Is Concern Nationally That Multifamily Housing Has Been Overbuilt

A report from the Wall Street Journal on California. “Chinese companies have been pulling back on their real-estate investments from New York to London to San Francisco. A host of Chinese firms that bought significant development sites or projects in downtown Los Angeles say they are sticking around, though some have put their projects on hold for financial reasons.”

“These developers now face new challenges in the fast-growing downtown L.A. market. A growing glut of construction has caused some Chinese developers to put work on hold. That is especially true for apartments. In 2018, 11 projects with 3,295 apartment units opened, a record, according to the Downtown Center Business Improvement District. Some 7,000 units are under construction with another 35,000 in the planning stages.”

“‘There’s understandable caution about pulling the trigger,’ said Nick Griffin, executive director of the business improvement district.”

“Some Chinese developers paid steep prices, and their projects are coming under financial strain. A Chinese developer stopped construction on a three-tower complex known as Oceanwide Plaza early this year. A recent visit to the project across from Staples Center, showed half-finished buildings with gaps in the glass facade and idle construction cranes.”

“Shanghai-based Shenglong Group’s U.S. unit City Century LLC is building a 1,367-residential-unit development that has also stalled. City Century hasn’t set a date to restart construction, a company spokesman said.”

From Crain’s Detroit Business in Michigan. “Construction in Metro Detroit hit an apex last year in terms of project values, but many area builders and others are anticipating a mild slowdown in the years to come. It’s not a matter of if, but when.”

“A variety of factors are contributing to an anticipated slowdown, in spite of a bevy of large developments in the regional pipeline. ‘In a broad sense, the construction industry expansion has been in place for some time now,’ said Robert Murray, chief economist for Dodge Data. ‘Also what we are seeing is a more cautious lending stance toward the real estate development sector. There is concern nationally that multifamily housing has been overbuilt.'”

“Jeff Baxa, senior vice president of Southfield-based Barton Malow Co., said he is worried about what happens when the existing pipeline of large-scale projects begins to dry up. ‘I worry about the next 2-4 years, as these large projects start to wind down, what is out there to replace them? Is that work going to be backfilled?’ he said.”

The Santa Fe New Mexican. “With as many as 2,155 apartment units either proposed or under construction in Santa Fe, observers have different views on what role these large projects will play in Santa Fe’s housing crisis. ‘Bringing in these market-rate apartments will free up more affordable units,’ said Alexandra Ladd, the city of Santa Fe’s housing special projects manager. ‘Existing apartments will have to bring rents down a little bit.'”

“The Acequia Lofts project on originally would have been by far the largest multifamily housing project in Santa Fe at 450 units, but the city approval process over five years whittled that down to 399 units and ultimately 120 units.”

“‘Believe it or not, the Planning Commission said we did not demonstrate that there was a need for this much housing,’ said Eric Faust, who with his brother Kurt Faust are developing Acequia Lofts. ‘The City Council denied it because the neighbors came out against it.'”

“‘It’s market rate but affordable for working people,’ Kurt Faust said. ‘“We’re in the final stages of putting together our final budget. We lost our perfect window four years ago. We’re struggling to figure out how to make it all work.’ A construction start date hasn’t been determined, Eric Faust said.”

From The Real Deal. “Bank OZK is showing no signs of curbing its construction lending this year. Little Rock-based Bank OZK, formerly known as Bank of the Ozarks, reported first quarter earnings that beat analysts’ estimates, as it real estate lending division originated more than $1.86 billion in new loans. That’s an increase of 86 percent compared to the first quarter of 2018.”

“With just over $23 billion in assets, Bank OZK is one of the largest and most aggressive condo construction lenders in Miami, Los Angeles and New York City, lending at a time when other banks are pulling back.”

“Critics worry Bank OZK is being overly aggressive at a time when condo sales have slowed down in New York and Miami. Signaling this change in market conditions, the bank reported that it expects to see more repayments on its real estate loans due to ‘high levels of property sales, leasing and refinancing activity.'”

“In March, Bank OZK provided a $475 million construction loan for One Chicago Square, which is expected to be Chicago’s sixth tallest tower with 76 stories, totaling 1.5 million square feet. The bank also provided a $96 million loan to Anbau Enterprises for a two-building condominium project in New York City’s Flatiron District in April.”

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This Post Has 26 Comments

  1. ‘Some Chinese developers paid steep prices, and their projects are coming under financial strain. A Chinese developer stopped construction on a three-tower complex known as Oceanwide Plaza early this year. A recent visit to the project across from Staples Center, showed half-finished buildings with gaps in the glass facade and idle construction cranes’

    Hey WSJ, these guys are broke. Even with half-finished buildings with gaps in the glass facade and idle construction cranes in LA, Miami and New York, they won’t say the bubble has popped.

    2. I saw this last week when I was at a concert at Staples. I looked up and saw “Oceanwide Plaza” and recalled earlier HBB posts. It’s an apt description.

      My favorite part was when I mentioned to my buddies that the Chinese company owning this was belly up, the foreign money has dried up and the real estate market is taking a turn. My $500,000 1921 1 bedroom Koreatown shack loan-owning friend’s eyes got REAL WIDE.

  2. They could be building to address the actual market demand instead of building for nonexistent millionaires.

    Cry me a river.

  4. “Multifamily Housing Has Been Overbuilt”

    In theory, shouldn’t this result in cheaper rents, helping to alleviate America’s housing affordability problem?

    1. This statement should raise eyebrows. This industry, overbuilding all across the country, at the same time, suggests something larger played a role. A classic mania that caused participants to behave irrationally. Like buying apartments that don’t cash flow.

      I started following the apartment market on a hunch in spring 2014. By the end of the year I had convinced myself it was a real phenomenon. By now I’ve spent thousands of hours studying it. It’s interesting the MSM has showed so little curiosity in a subject with such wide-ranging consequences.

      1. To make it worse, they are all building luxury complex. Read as overpriced with ugly granite counters and wood floors. Check out all the new places near Great Mall in Milpitas CA!

        1. All those Toll brothers complex’s you see along 680 / mission college exit have been unfinished open frames since January. I have not seen any progress on those, wonder if they are held up on permits or… the amount of building from milpitas up to fremont is absurd. i noticed so many new complex’s going up the 680/80 during a trip to tahoe this weekend too. build build build!

          1. My wife and I wonder if these complex will last 30 or even 20 years. It rains for like 2 weeks and all these were exposed to the elements. I live near the Great Mall and so many units are going up like at the same time! Maybe I can do a video and post it on youtube. It’s hard to find time as I’m stuck in traffic on the way home and got a 4 and 6 years old to take care of too!

          2. Soooo many of those! Who wants to live right up against the freeway looking out at traffic like that?

      2. I remember around 2005 listening to the radio and they were interviewing an RE developer on a financial news show and he was talking about how in 10-20 years the entire San Diego skyline would be a blocked out by luxury condo towers filled with retiring baby boomers. At that time, there were cranes on every block downtown. What is target market for the luxury urban condo market now that it turns out more than half of baby boomers will be living off SSI? How many urban hipsters are there who can buy one of these things and pay the condo fees?

        1. 12 years ago they showed plenty. Take the WSJ article above. It’s a puff piece about a few dingle-berry Chinese firms, glossing over the giant failed towers and mentioning there’s a glut.

  6. Pertaining to the coming economic storm, I have taken a bit of a breather from my Silver Eagle purchases as I read more and more about precious metals. Also, I am skeptical about the Fed’s ability to continue easing, or at least not raising rates, without causing a massive inflation problem.

    Anybody who needs to eat to survive, or who uses fuel, lives underneath a roof, etc., realizes that inflation is already very, very high. With the massive liquidity they continue to inject (see the stock market), it could be only a matter of time until they are forced to raise rates or risk a serious inflation problem.

    If they start raising again, I could see the price of silver getting cut in half or more. This $15 level isn’t exactly cheap, historically. I now have some exposure as I wanted, but I am not sure how much more I am comfortable with, especially considering the transaction price at the local coin shops. There needs to be a lot of price appreciation just to break even.

    Which brings me to my next point. If I buy up to 99 ounces of silver eagles, I pay the local coin shop $3.45 over spot per ounce. If I buy one ounce of gold, it is $60 over spot. At a current price of $1272/oz for gold and $14.85/oz for silver, if I bought $1272 worth of silver (85 ounces), that will cost me $295 in dealer markup, vs. the $60 for the ounce of gold. When I factor in the spread if I sold it at exactly the same price I had paid, I’d have paid $252.50 for the silver ($.50 over spot), and $60 for the gold (spot).

    The above math makes me want to buy gold eagles instead, but the price of gold has not fallen nearly as much as silver, so it seems to have potentially less upside given how out of whack the ratio is. Anyway, I find all this interesting and am by no means an expert.

      1. Considering supply and demand, in an economic downturn the demand for both silver and gold should decline tremendously insofar as industry is concerned. The question is whether or not speculative demand would increase to offset that, and what that current/future ratio is or will be. Lots of factors to consider.

        1. I have never owned precious metals. There was a period of time that I opened an account with Everbank (now TIAA bank) that allowed me to use USD to purchase foreign currencies. That was a very interesting experiment and I can’t say I did particularly well, but it was a fun chapter of life.

          My general thought is that I would be careful with anything that has a large transaction cost. $3.45 seems crazy to me. As a percentage that is out of control. You are talking about 23% of the value of your investment being lost in the transaction cost. I can’t fathom how you would ever make this up, let alone come out ahead.

          If you are worried about inflation, I would buy iBonds indexed to the CPI. We all know that the CPI probably under calculates inflation, but there is no transaction costs and the investment is very liquid.

    2. the Fed’s ability to continue easing…without causing a massive inflation problem.

      We’ve already had a massive inflation of the money supply. The next part of the cycle is debt default and deflation. When that gets going nobody can say, but it’s going to be quite a show.

    3. I think QE has been asset inflationary but has not done more damage because the reserves are still largely parked in banks. I respect the opinion of Dave Rosenberg (his whole interview is worth a read IMO) who suggests that all the deranged ideas of Bernanke have been implemented save one, i.e., helicopter money.
      Helicopter money, depending on quantity, will immediately hit the economy, as many people will not have the option to save. The inflationary potential is much higher than with another round of QE or NIRP. So, precious metals and TIPS seem like good ideas once serious talk of helicopter money emerges. While physical PM’s are nice, there are notable security risks (if you get a safe installed, whats the background of the installer? who will he tell about the safe? etc). Hence, I am looking for a good entry point for gold ETFs.

  7. Ya think?!?!

    I’ve been watching this stuff flying up into the skyline for a few years now, even into outer ring suburbs. All I kept thinking was “who the hell do they think is going to live in these?” They’re all billed as “luxury,” but there aren’t THAT many people who can afford “luxury” prices. Furthermore, I live in the midwest. This isn’t the type of housing that people around here want to live in. They will live in it obviously, in certain circumstances, and especially in younger years. But as people around here get older, the desire is overwhelmingly single family, even among millennials. I just don’t know what all these builders were think. Again I wonder, who do they think is going to live in them, much less pay top dollar? (There will be a lot of competition in pricing too because it’s so overbuilt.)

  10. Request withdrawn for apartment project
    CUYAHOGA FALLS [OH] — A development firm that wanted to construct a pair of apartment buildings with around 370 units on [that is, directly on top of] two parking decks has withdrawn its proposal to “refine project details,” according to a city news release.

    Both a school board resolution and a city council ordinance pertaining to the project were withdrawn by CF Development Group LLC… Even though CF Development Group LLC withdrew its request that the Cuyahoga Falls Board of Education approve a resolution for the project, the board on Wednesday still issued its opinion of the plan — a unanimous thumbs down.

    The proposal, had it been approved, would have included both a 15-year, 100 percent tax abatement and a 30-year, 100 percent Tax Increment Financing (TIF) agreement. Both the tax break and TIF needed to be approved by city council and the school board…On his Facebook page, Board member Anthony Gomez added, “we heard our community and we understand that 100 percent abatements are a non -starter for them and a nonstarter for us.”

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