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Maybe We Should Have Been Paying More Attention To The Numbers

A report from the Commercial Observer in New York. “Asking and taking rents at Manhattan’s high street retail districts continue to drop. ‘It’s a little bit bloody out there,’ said Jared Epstein, a principal at Aurora Capital Associates.”

The New York Daily Record. “The mortgage holder on Monarch 716, a repossessed student apartment community in Buffalo, is demanding that developers Thomas Masaschi and Jason Teller repay the balance of $26.4 million that was not recovered at an April foreclosure auction.”

The Ventura County Star in California. “The long-struggling Simi Valley Town Center shopping center has defaulted on payments and could be headed toward foreclosure, according to documents filed with Ventura County. A notice of default says the owners of the Simi Valley Town Center must pay $42,675,387.80 to stop a foreclosure.”

“The shopping center’s owners had plans to remake the mall into a mixed-use development with a residential component, but those plans fell apart last year. ‘They had a vision of doing away with approximately half the retail space and building apartment buildings,’ said Simi Valley Mayor Keith Mashburn. ‘There are numerous large companies that wanted to come in who were turned away because of the desire to tear down buildings and build apartments.'”

The Tampa Bay Times in Florida. “Despite rising construction costs and a ‘hint of conservatism’ in lending, Tampa Bay’s extraordinary building boom could continue for several more years. And despite concerns about an oversupply of apartments and storage units, any gluts are apt to be temporary and limited to certain geographic areas. Those were among the points stressed by speakers at a ‘Capital Markets Update.'”

“‘There’s a hint of conservatism in the air,’ said Al Rogers, executive lending officer of Valley Bank. ‘We are dialing back a slight amount on leverage. We’re just concerned that with so much expansion and development and such, we are prone to overbuild.'”

From The Advocate in Louisiana. “The 2019 forecast for the Baton Rouge real estate market is mixed, local experts said. A glut of construction in markets such as the LSU student housing sector has caused apartment vacancy rates to rise and rents to drop.”

“Craig Davenport with Cook, Moore, Davenport & Associates said in the past year, rental rates have dropped 2%. That’s the second year in a row the rates have fallen. At the same time vacancy rates are up to 9.3%. For some LSU properties, where thousands of units have been built over recent years, Davenport said the rates are 19%.”

“According to a report by Shelley Simmons with C.J. Brown, Jennifer Waguespack with Level Homes and Keller-Williams Realty and Becky Walker of the Design Studio, the ‘hotness’ index for Baton Rouge has dropped to 26. That’s a 45 percent plunge in the past year. Rising inventory is causing this cool down.”

From On The Edge News in Wisconsin. “Edgewood College’s residence halls have a gross maximum capacity of 680 people; but they are only currently housing 473. And that means that the college is losing a large sum of money by not filling up to their maximum capacity.”

“Being 30 percent below capacity calls into question some of the rules in the housing contracts that were designed for years when Edgewood was regularly filling up the residence halls to the max. ‘I don’t want to say we overbuilt, but maybe we should have been paying more attention to the numbers,’ said Claire Mand, director of residence life at Edgewood College.”

From Bisnow on Texas. “Houston is grappling with a hotel supply glut. Hospitality inventory has increased from about 72,000 rooms in 2010 to 92,000 rooms, a 28% leap, according to Houston-based hotel consulting firm DPC Hospitality. The construction pipeline is still packed with more than 4,500 units expected to be delivered this year, JLL reports. Houston is ranked as the fifth U.S. market for most hotel product under construction.”  

“As a result of market saturation, lowered occupancy rates and depressed rental prices, assets in Houston are becoming increasingly distressed, CBRE Senior Vice President Rahul Bijlani said. ‘Everyone is competing for the same business,’ Marcus & Millichap National Hospitality Group Director Andrew Frosch said. ‘The oversupply and competition are putting a big strain on the hotel owners to make a profit.'”

“A growing number of the underperforming properties are expected to change hands, Frosch said. A stumbling block there is a price gap between the buyers’ and sellers’ expectations. Many sellers value their hotels higher than what buyers are willing to pay. ‘Hotel values in Houston are depreciating,’ he said. ‘There is a good chance the values are less than they were built for.'”

“CBRE’s Hotel Group is set to market a troubled property in the coming weeks. The recently constructed Marriott-brand hotel was built for about $11M, but the asking price will be about $8M, Bijlani said. ‘That represents a tragic turn of events for the ownership,’ he said. ‘But, it gives you an indication of the oversupply in the market.'”

The Denver Channel in Colorado. “The number of homes for sale in the Denver metro area was up significantly in April, according to the Denver Metro Association of Realtors. April ended with 7,012 active listings, an increase of more than 11 percent from March and a nearly 36-percent increase compared to April 2018.”

“The biggest increase in inventory was in the condo market, which has seen a 62-percent increase in active listings year-over-year.”

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  2. ‘The recently constructed Marriott-brand hotel was built for about $11M, but the asking price will be about $8M, Bijlani said. ‘That represents a tragic turn of events for the ownership,’ he said. ‘But, it gives you an indication of the oversupply in the market’

    And 4,500 more units on the way. I posted about the hotel bubble long ago:

    3 May 2017
    Which US hotel markets are on the bubble?
    ‘As the hotel industry continues on the path toward a downturn, it’s time to begin looking at warning signs for which markets are poised to experience a large drop.’

    ‘At a recent gathering, I was involved in a group conversation with hotel property investors who agreed that they have been “choking on the numbers” in certain U.S. hotel markets. Stated differently, their spreadsheet models explode once either acquisition prices or development costs are entered to evaluate hotel opportunities, especially in red-hot markets.’

    ‘They asked, “Should we pay such high prices now, given that the boom may turn into a bust?” As a college professor, I offered the standard response: “It depends, what do you think?” As a hotel market forecaster, I promised to think and write about hotel property market bubbles with regard to their questions, and likely those of others, about current pricing in local markets.’

    ‘Boom and bust experiences over the past few decades—with tech stock prices and housing prices, for example—have generated an avalanche of books and articles about short-term, extraordinary asset pricing volatility. A summary of these writings appears as follows.’

    ‘The grand debate centers on whether asset price bubbles either emerge from rational responses to fundamental stimulants by market participants or from irrational behaviors, such as sentiment and over-optimism, not directly related to fundamentals (see surveys by Glasser and Nathanson, 2014; and Mayer, 2011).’

    ‘The other grand debate involves measurement. The time-honored definition of a bubble is when asset prices markedly depart from fundamental values. The analysis machinery becomes clogged when trying to deal with the term “markedly depart” and further challenged with attempting to compute “fundamental values.” Hence, no firm conclusions have been reached about how to detect bubbles ex ante. Ex post detection is far easier, in some cases like a slam dunk into a five-foot-high basket!’

    ‘Credit excesses have been found to be instrumental in the creation of many, but not all, asset market bubble cases (see Levitan and Wachter, 2013). Non-credit causes come in many different flavors. Examples of housing market bubbles from non-credit related causes include supply-side constraints and demand factors such as income instability, and social interaction issues (see Jorda, Schularick and Taylor, 2016).’

    ‘All of the research on real estate bubbles focuses on housing markets except Levitan and Wachter (2013), who laid the blame on mortgage credit excesses in pricing of commercial real estate during the last cyclical peak. To my knowledge, no publications have addressed hotel market bubbles.’

    ‘An analog for market bubble investigation is that the focus ought to be on timely identification and warning signals instead of whether they originate from rational or irrational behaviors as in much of the academic work on the subject. As a practical matter, it is more important to know when a bubble has formed than how it was formed. Also because of the macroeconomic policy implications, studies predominately examine national market booms and busts. Localized bubbles are not often referenced, but to participants in markets for fixed-location assets such as hotel properties, extraordinary pricing at the city level has important return implications (see Bourassa, Hoesli and Oikarinen, 2016).’

    ‘Here is the complication: Values are not prices! A price is an observable fact and a value is an estimate from a model designed to predict what a price should be. The two components of values (V) presented in Exhibit 1 are NOI and capitalization rate, where V = 1/R (NOI). If the values mostly come from NOI expansion, then they have a decidedly fundamental origin. If multiple expansion is the main determinant of value, then the pricing (normal or extraordinary) of incomes takes center stage.’

    https://www.hospitalitynet.org/opinion/4082501.html

    1. 2017: ‘As the hotel industry continues on the path toward a downturn, it’s time to begin looking at warning signs for which markets are poised to experience a large drop.’
      …
      2019: ‘That represents a tragic turn of events for the ownership,’

      Behold the transformation from predictable to tragic stupidity that nobody could have foreseen within the span of two short years!

    2. “V = 1/R (NOI)”

      What happens to V if central bankers collectively decide to force R down to historically low levels for a protracted period of time?

  3. ‘in the past year, rental rates have dropped 2%. That’s the second year in a row the rates have fallen. At the same time vacancy rates are up to 9.3%. For some LSU properties, where thousands of units have been built over recent years, Davenport said the rates are 19%’

    Thousands. With falling rents and a 19% vacancy rate, these guys are done for.

    ‘That represents a tragic turn of events for the ownership’

    1. Office folk in n va seen to think 15% is a- ok.
      Reits being pitched on t.v. as a new invention

        1. Who lost the most when Realogy’s stock took another nosedive?
          The Real Deal-19 hours ago
          Realogy’s stock has been in a downward spiral for more than a year, amid a U.S. housing market slowdown that’s coincided with aggressive competition among …

          Beazer Homes USA, Inc.
          FollowFollowing
          NYSE: BZH
          12.51 USD −1.73 (12.15%)
          Closed: May 3, 4:57 PM EDT

  4. ‘The biggest increase in inventory was in the condo market, which has seen a 62-percent increase in active listings year-over-year’

    Wa happened to my shortage Denver?

    1. One of my sisters is on the receiving end of the hammering underway in the Denver condo market.

      1. “Dope will get you through times of no money better than money will get you through times of no dope.” —Freewheelin’ Franklin

  5. “Mashburn was critical of the plan to add a residential component to the mall and argued that it went against the property’s role as the city’s main retail hub.

    “’They had a vision of doing away with approximately half the retail space and building apartment buildings,’ Mashburn said. ‘There are numerous large companies that wanted to come in who were turned away because of the desire to tear down buildings and build apartments.'”

    LOL

    1. The malls in my area are really struggling with the advent of Amazon and online shopping. The ones that have succeeded have incorporated residential living and office complexes. It seems to be working as it creates a certain traffic anchor. Mashburn might be critical here, but I don’t think the overall strategy is wrong. People show where they live, and many malls are adding non-traditional tenants to the mix to draw in “experiential shoppers”.

        1. *People shop where they live.

          It is ironic that this was the basic concept a couple of generations ago, and still so in some places. In the village where I live, I can buy just about anything I would need within a 10 minute walk, and have it delivered for free if it doesn’t fit in my pocket. It’s not a mall however.

      2. ‘with the advent of Amazon and online shopping’

        The US has 300% or more retail square footage per capita than Europe.

        1. So a glut for sure. Even more reason why some of this retail should be converted to housing in my opinion.

        2. 300%!
          Ha, get rid of Dave & Buster$, replace.the.$pace with innovative farm$ … (Mall$ must $uck as a retail inve$tment given the handheld digital con$umers new convenience behaviour$) …

          A Strategic Investment In Peach County
          Located in the heart of Peach County, Pure Flavor® broke ground in September 2017 on a state of the art, high tech 75 acre greenhouse complex to grow tomatoes and cucumbers year-round.
          http://www.georgiagrownflavor.com

          1. I’m down with this idea. Or put in Trader Joe’s as an anchor store instead of Nordstrom’s.

    2. “’They had a vision of doing away with approximately half the retail space and building apartment buildings,’ Mashburn said.

      This will surely be a crushing disappointment for the vast numbers of consumers who had lifelong dreams of living next door to a shopping mall.

      1. Two upper tiers of tiny apartments, a few ground floor stores in a former mall: The Arcade in Providence, RI
        youtube.com/watch?v=HmL2l-bcuUQ
        To each his own. To me it looks a little prison-like only the guards are on a break and all the doors don’t open at once.

        1. I actually love this idea. This is pretty much all I need. I don’t spend hardly any place in my home. I’d much rather be out and about exploring nature. I can sleep in a tiny place if the bed is comfortable, the room is dark, and the temperature is right. I don’t need a yard, just access to good parks for my son.

  6. ‘Tampa Bay’s extraordinary building boom could continue for several more years. And despite concerns about an oversupply of apartments and storage units, any gluts are apt to be temporary and limited to certain geographic areas’

    This is exactly how these guys end up bankrupt. They see it coming, but are so busy stuffing their pockets with loot they choose to ignore it.

    1. There’s a whole lot of crime going on. Sketchy construction invoicing every month, winks and nods on the financing side, horrific levels of misrepresentation on the retail end. Two decades worth.

      This is bad.

      1. “The biz cycle used to be 5-6 year$
        Now folks are expecting 12?”

        “QE Infinity Begin$” … Aka: “Remnant$.of.the.near.recent.pa$t!”

        Mortgage-Backed $ecurities (MB$)

        The residential MBS that the Fed still holds were issued and guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. All holders of MBS, including the Fed, receive pass-through principal payments as the underlying mortgages are paid down on a monthly basis with each mortgage payment, or are paid off when the house is sold or the mortgage is refinanced. The remaining principal is paid off at maturity.

        These pass-through principal payments are unpredictable and can cause the MBS balance in the Fed’s portfolio to decline erratically. To keep the balance steady after QE had ended, the New York Fed’s Open Market Operations continued purchasing MBS in the market, but the settlement lag of two to three months (the Fed books these trades at settlement) caused the zigzag moves in the MBS balance in the chart below.

        In April, the balance of MBS fell by $17 billion to $1,575 billion, the lowest since March 2014. Since the QE unwind began, the Fed has shed $196 billion in MBS. But the runoff is nearly all due to pass-through principal payments because 95% ($1,503 billion) of the MBS on the Fed’s balance sheet mature in over 10 years:

        In October, a new regime kicks in that is intended to keep the balance sheet level, but replace MBS with shorter-dated Treasury securities with the goal of getting rid of those pesky MBS entirely by even selling them outright if the runoff is too slow.

        In addition, according to Fed Chair Jerome Powell during the FOMC meeting press conference, the Fed is going to decide later in the year on the details of a huge component in this new plan:

        How to addre$$ the maturity-$inkhole that the Fed has been $lipping into.

        Of those $2,124 billion in Treasury securities, $605 billion are bonds maturing in over 10 years! This amount has not moved much since the QE unwind started:

        Nice chart$ & funny comment$ as well:?

        https://wolfstreet.com/2019/05/03/fed-balance-sheet-drops-46-bn-in-april-qe-unwind-reaches-580-bn/

  7. ‘The rental market doesn’t look especially tight. Following the housing bubble and the Great Recession, it’s now puttering along at about the same rate as in 1990.’

    ‘This isn’t directly related to rents, but it does suggest that young families are renting and owning at roughly the same rate as they did in the mid-90s. Homeownership rates are a little lower than they were in 1994, but not a lot.’

    ‘All of this, of course, is nationwide data. What you really want to know is what rents look like in big cities. There’s no question that rent has gone up substantially in some cities. And this data is for MSAs, which usually include the surrounding suburbs. If you want to live in Manhattan or downtown Seattle, rent inflation has probably been higher than this chart shows. Still, there are only six MSAs where rents have gone up more than 15 percent relative to the rise in incomes. And that probably overstates the problem since median incomes are higher in cities.’

    ‘The bottom line is that there isn’t any kind of nationwide rental or housing crisis. There’s a problem in six areas: Denver, San Francisco, Seattle, Miami, New York, and San Diego. And there’s probably a crisis in several downtown city areas—assuming that you consider it a crisis to be unable to live downtown even though you’d like to.’

    https://www.motherjones.com/kevin-drum/2019/04/we-have-an-income-crisis-not-a-housing-crisis/

    1. Saying “we have an income crisis, not a housing crisis” seems like an odd thing to say. They are basically two sides of the same coin. Higher rents/mortgage payments can be serviced with higher income. Or, lower income can support lower rent/mortgage payment.

      The author might as well have said that real rents hadn’t fallen relative to where real, inflation-adjusted, wages had. It’s basically semantics though. The better metric is rent or mortgage payment as a percentage of income. Decreasing the numerator or increasing the denominator to get something that is below 30% is the goal when it comes to affordable housing.

      1. increasing the denominator

        I’m in the club now that won’t see an increasing denominator. It would be fine if the rest of you would stop waging war on us.

        1. Who is waging war on you? It’s not me. If anyone, its the Fed’s war on savers and DJT who is pushing easy money just like we had during the last administration.

  9. Never in history have so many Yellen bucks rushed to money heaven:

    Uber Wants to Be the Uber of Everything—But Can It Make a Profit?

    ‘The ride-hailing company, headed for its IPO next week, aims to dominate the world of transportation, from food delivery to freight. It’s still not making any money.’

    “We’re not going to have predictable profitability,” Mr. Khosrowshahi said. “If they want a predictably profitable company–go buy a bank,” he added with a shrug.’

    ‘And a decade in, some observers are still skeptical even the basic business makes sense.’

    “The problem with Uber is, they cannot make money,” said Aswath Damodaran, an NYU corporate finance professor who has been skeptical of Uber’s valuation for years. “Nobody is making money [in ride-hailing]—so it can’t just be a company-specific problem. It is a business model that is not working.”

    ‘The bleeding continued in the first quarter. Uber’s operational loss more than doubled to over $1 billion from a year ago, and its total adjusted revenue has remained virtually flat for three straight quarters.’

    https://www.wsj.com/articles/uber-wants-to-be-the-uber-of-everything-11556909866

    1. Uber’s operational loss more than doubled to over $1 billion

      And their IPO is like any minute? Get ready to be rich, I guess.

  10. The way I see it, Uber has basically two paths to profitability:

    1) Raise prices on rides (but if it does, does it lose riders?)
    2) Get to self-driving and cut out the humans

    1. ‘The episode is also known for the nonsensical business plan that the gnomes of the title devise (whose three steps consist of “Collect underpants”, “?”, “Profit”), which later became a commonly-used reference when mocking poorly-thought-out business and political strategies.’

      https://en.wikipedia.org/wiki/Gnomes_(South_Park)

      1. We have a cab company here in backwater. They own the cars and employ the drivers. $5 to anywhere within town limits. They are profitable.

        Not everyone is living in fantasy.

        2. I don’t use Uber. I mean, I think we used it twice when I went out to Boston to run the marathon, but we mostly just used the metro. I am not the target audience for Uber, but if they pushed the price low enough I would consider using it in an urban environment.

          My grandmother was in town and she lives in a tiny town where the population is aging. People can barely get to the grocery store and the doctor’s office at the larger city nearby. Many have lost the ability to drive. Transportation for the aging is a serious issue and a business opportunity if done right. Especially where there is not a good public transit system.

  11. The Firefox browser sh!t the bed in epic fashion. I lost all my add-ons last night, including adblock and coinblock, so now my computer browsing experience resembles something out of a twisted nightmare, with pop-ups and videos sucking my computer dry and making it unbearable.

    Mozilla assures us that they are working hard on this issue, as it has affected everyone, but I can’t help but wonder how many millions of people they will lose because of this historic failure.

    https://twitter.com/mozamo

    1. Curious, do you login to Mozilla such that your browser’s extensions, settings and shortcuts are synchronized on their servers?

          1. Your Firefox add-ons are still working? Which ones do you use, if you don’t mind sharing? Also curious what edition of Firefox you’re running. They still haven’t fixed this and it’s going on like 18 hours I think. It was a massive failure of a system. It gets into antivirus security and things.

          2. I don’t run any add ons. I don’t even know what they are. I have no idea what edition either. I try and keeps things as simple as possible.

          3. “…I upgrade about every year or so.”

            These days the browsers auto-update upon startup.

          4. Then why is it always nagging me to update? And when I do it takes 15 minutes and everything looks different?

        2. Twitter:
          Firefox 🔥
          @firefox
          We’re rolling out a fix for the issues with add-ons right now! It will automatically be applied, so you don’t need to take any steps to make add-ons work again & all your data should be unaffected.

          Again, we’re really sorry. More to come soon.

          https://mzl.la/2Y5WZkc

          7:08 AM – 4 May 2019

        3. “No, all of the preferences are saved on each person’s computer.”

          Actually, each individual user’s profile on the computer has the browser’s preferences. See environment variable: %APPDATA%. If you login to browser company’s cloud the sync will save your browser’s environment settings, but not your cached data.

          https://support.google.com/chrome/answer/165139

    2. I lost all my add-ons last night
      Me, too. Every one of them. Major pita.
      Thanks to drumminj for providing Joshua Tree on Chrome, switched over.

  12. “The mortgage holder on Monarch 716, a repossessed student apartment community in Buffalo, is demanding that developers Thomas Masaschi and Jason Teller repay the balance of $26.4 million that was not recovered at an April foreclosure auction.”

    My forthcoming book, “Stamp Your Little Feet!”, offers proven negotiating strategies for mortgage holders and lenders facing huge deltas between what they’re owed and what they can reasonably collect.

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