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Realty Experts Say The Residential Bubble Is Starting To Burst

A report from Forbes. “The Federal Deposit Insurance Corporation (FDIC) warned of potential credit and market risks that market participants should definitely heed. In particular, the FDIC’s 2019 Risk Review Report released yesterday highlighted concerns in the agricultural, commercial real estate, energy, housing, and leveraged lending sectors. Additionally, the risk review report covered the significant rise in bank loans to non-banks.”

“The report warned that ‘overbuilding in some multifamily and industrial segments and oversupply of outdated retail properties may weigh on commercial real estate (CRE) fundamentals going forward.’ It is important to remember that during the 2007-2008 crisis, ‘banks considered to be CRE lending specialists failed more than twice as often as the average community bank.'”

“All banks should be focusing on the housing sector, because it is slowing down. According to the FDIC ‘Signs of a slowdown in sales are emerging in the housing market even as house prices continue to rise across most of the nation. Affordability is a growing concern as income growth lags the rise in house prices and mortgage payments.”

From Fox 17 Nashville in Tennessee. “Sun, swimming and a safe place to live are top on Grace Garret’s list when she looked for a rentals in Germantown. Finding a place wasn’t hard. She had plenty of options around town to choose from, not just because of the price but because of an overflow of vacant units. That’s because realty experts say the residential bubble in middle Tennessee is starting to burst, meaning there are more vacant units than people renting them as supply goes up.”

“Rental costs are going down, giving renters like Garrett the advantage. The average two-bedroom is $1,800 and declining. Also, Metro Codes is seeing a sharp decline in the number of permits for new apartment construction. That’s no surprise to realtor John Pegram. ‘That snatch and grab market is long gone,’ said Pegram.”

“He says he saw the residential bubble burst coming three years ago. He says developers clamored to build apartment buildings after seeing the influx of new people moving to town — but says the area is now over-saturated with available units. ‘Three years ago there was that pull and now it’s caught up because it took that long to get those apartments built,’ added Pegram.”

From Bisnow on California. “Bay Area commercial real estate developers and financiers anticipate a multifamily slowdown coming to the region in three years. Explanations could include worries about flattening home prices, a surge of inventory coming online in the next several years and the looming possibility of rent control, according to the team.”

“The incoming stock of Bay Area housing includes tens of thousands of units in the pipeline to house both longtime residents and the flood of new ones. As of June, developers had nearly 30,000 units under construction in the San Francisco, Oakland and San Jose metropolitan statistical areas, according to CoStar Bay Area Director of Market Analytics Jesse Gundersheim.”

“‘My pessimism comes from hard costs continuing to go up,’ said BayRock Multifamily CEO Stuart Gruendl. ‘Projects in the pipeline are coming to a halt because deals just don’t pencil.'”

The Muskogee Phoenix in Oklahoma. “Urban designers and planners with Oklahoma University’s Institute for Quality Communities have been working the past few weeks with a steering committee made up of city officials and community representatives to examine the market. More recently they have engaged in discussions with focus groups to determine what obstacles have stalled development. IQC Director Shane Hampton said the vacancy rate of just more than 17 percent in Muskogee ‘is quite high even compared to peer cities.’ But he said it is not uncommon ‘to have a high vacancy rate and a high need for housing.'”

“Shawn Schaefer, director at OU’s Urban Design Studio, pointed to data gleaned from the U.S. Census Bureau. Among the 2,900-plus vacancies, he said 1,855 units lacked complete plumbing. ‘If you take those out of the mix, then your vacancy rate is much lower and you are getting down to an efficient market,’ Schaefer said. ‘That could explain why some of the Realtors have been telling us things are kind of tight, especially in certain segments.'”

From Multi-Housing News on Colorado. “In an interview with Multi-Housing News, David Jaudes, vice president of multifamily development for McWhinney, shares his views on Denver’s multifamily market. What does Denver have to offer in terms of investment/development opportunities going forward?”

“Jaudes: Tougher, as the low-hanging fruit has all been activated. Any site that is zoned by right and in a decent location is priced as such, making returns harder to achieve. We’ve taken on more risk on the pursuit side, jointly working with cities where both parties are looking to rezone certain sections of their city for high-density residential. We aren’t in the acquisition space, but I’m told the value-add B and C product is very crowded, with some sales approaching replacement cost for new class A projects.”

From Hotel Business. “This September, alternative lodging service WhyHotel is set to launch a new pop-up in a luxury apartment building in Seattle’s Belltown neighborhood. WhyHotel partnered with AvalonBay Communities Inc., which will operate this project for eight to 12 months. WhyHotel will occupy 50 fully furnished apartments in the 24- story, 275-unit residential high-rise.”

“‘The pop-up model doesn’t permanently displace any of the long-term housing stock in a given residential building, but rather we only activate the vacant units for short-term stays, and as the building leases up with long-term residents, WhyHotel winds down our footprint in the building until we eventually leave altogether,’ said Jason Fudin, CEO of WhyHotel.”

The Real Deal on New York. “A senior lender who moved to foreclose on 125 Greenwich, the under-construction residential tower in the Financial District, has sold the debt to a real estate development firm. United Overseas Bank, which provided a $195 million loan to the luxury project’s sponsors, sold the senior debt to real estate development firm BH3 Capital Partners at cost, a person close to the deal told The Real Deal.”

“The move spells further uncertainty for the Rafael Vinoly-designed tower, which topped out at 88 floors earlier this year. The project’s sponsors — Howard Lorber’s New Valley, Davide Bizzi’s Bizzi & Partners, the Carlton Group and China Cindat — have defaulted on loan repayments as they have struggled to meet condo sale thresholds. The developers are now facing two foreclosure proceedings.”

“The new lender, BH3, is a Miami-based real estate development firm and, given its history of developing projects, it is possible the firm could complete the project itself. Unlike UOB, BH3 is not constrained by the needs of a bank to offload non-performing loans, and the new firm has multiple options for the project’s future, including proceeding with a foreclosure started by UOB this month. In that event, more than $100 million equity in the building and USIF’s $194 million mezzanine loan would be wiped out.”

This Post Has 71 Comments
  1. ‘In that event, more than $100 million equity in the building and USIF’s $194 million mezzanine loan would be wiped out’

    $300 millions off to money heaven.

    1. Let’s all please observe a moment of silence for those dear departed Yellen Bux, and the trillions more that will be wiped away as true price discovery reasserts itself.

      1. If we get true price discovery, we’d better be stocked up on potable water and storable food. Preferably with independent sources of water and electricity. And know how to hunt and fish and be able to grow some of your own food. We’re passed the point where price discovery can just be an inconvenience or a moderate disruption.

        1. Don’t forget guns and ammo. The Gimme Dats will not react well when their EBT cards don’t work and the local Wal-Mart has been cleaned out.

    2. i did not know what it was –
      So it probably being carried on the books at full price …

      ———-
      Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in the company in case of default, generally, after venture capital companies and other senior lenders are paid.

  2. ‘I’m told the value-add B and C product is very crowded, with some sales approaching replacement cost for new class A projects’

    These guys are fooked.

    1. I’ve definitely seen class B multifamily sell for $250k+ per door, where you’d need to spend another $50k+ per door to get it up to class A. Their proformas must be very optimistic to justify that kind of spend on crappy buildings from the 1970s.

      1. It’s late stage greater foolism. Rents and NOI don’t enter into it. For example:

        ‘As of June, developers had nearly 30,000 units under construction…‘Projects in the pipeline are coming to a halt because deals just don’t pencil’

        They didn’t “pencil” two or three years ago Jesse, but you guys planned on flipping them. Do you really expect us to believe you didn’t know 30 THOUSAND units were approved? Do you not take into account additional supply when applying your little pencil?

        No no, you waved it off and snuck off to powder your nose.

          1. I’m not suggesting Californians do drugs (cough), but just pointing out something kept him from seeing the obvious. It’s been months since the Chronicle reported the Related guy saying every single residential project underway in downtown SF was for sale. The market was completely doomed at that point. Did he not know that?

        1. Does this mean that even Class A isn’t profitable to operate? At the end of day, someone is going to be operating these units, and rent them out to… who? Actually, maybe nobody. Aren’t there empty flagship storefronts in lower Manhattan because it’s cheaper to borrow money than it is to actually rent out the storefront. So of course the units will be empty while people — people like us — live on the street. Like those famous pictures of Rio where empty luxury towers sit right next to teeming shanty slums.

        2. Cheap credit + easy $ = massive moral hazard + malinvestment. The Fed is the pusher of financial heroin.

          I’m not opposed to the death penalty in this case; maybe life sentence in a Turkish prison, but nothing less.

          Why does history keep repeating itself? Are people really that (uninformed)?

          1. “Why does history keep repeating itself? Are people really that (uninformed)?”

            Uninformed people = My bread and my butter.

  3. ‘The report warned that ‘overbuilding in some multifamily and industrial segments and oversupply of outdated retail properties may weigh on commercial real estate (CRE) fundamentals going forward.’ It is important to remember that during the 2007-2008 crisis, ‘banks considered to be CRE lending specialists failed more than twice as often as the average community bank’

    So the HBB is 5 years ahead of the FDIC.

  4. ‘The incoming stock of Bay Area housing includes tens of thousands of units in the pipeline to house both longtime residents and the flood of new ones. As of June, developers had nearly 30,000 units under construction in the San Francisco, Oakland and San Jose metropolitan statistical areas’

    Wa happened to my shortage bay aryans?

    1. “…As of June, developers had nearly 30,000 units under construction in the San Francisco, Oakland and San Jose…”

      Precarious situation indeed.

      No doubt, Black Swans everywhere are fluffing their feathers.

      Now, all it would take is for a major tech company to announce that they [via employee surveys who are fed up with SF/SJ/Oakland high cost of living] have a change of heart and announce they are going to build an Amazon style HQ2 somewhere out of SF/SJ/Oakland area, most likely in another state.

      Such an event would give new meaning to “cold feet” for all those REIC types waiting to cash in.

  5. ‘Urban designers and planners with Oklahoma University’s Institute for Quality Communities have been working the past few weeks with a steering committee made up of city officials and community representatives to examine the market. More recently they have engaged in discussions with focus groups to determine what obstacles have stalled development’

    Jeebus…

  6. Did I hear the media use the B word in Nashville?

    I think we are just about at the inflection point…

  7. What’s a normal MFH vacancy rate? 5%

    I saw apartments in Austin yesterday that had 13% vacancy rates.

  8. Gold is calling BS on the Fed’s supposed “hawkishness.” Markets, after a hopium-fueled rush to over 250 points, are now swooning. Oh dear….

    1. Trump is threatening new tariffs on China. Only at 10 percent level for the around $300 billion dollars on exports not tariffed if no agreement is reached by Sept. 1st. I think it is a good move. Of course, if you are the Koch Brothers, you would disagree. Their operations in China will be less profitable.

      1. “I think it is a good move.”

        Koch billionaire bro$ aren’t $uffering down @ Wichita, Kan$a$ farm country, but their overall wearing cousin$ are knot gonna bee having a tailgate party in the $outh acreage.

        Dollar $trong, China don’t need any expen$ive American $oybean$ iffin’ 1/3 – 1/2 of their $wines have been tilled into their native motherland $oil.

        another $wing & another mi$$! $trike x7

        1. I don’t know… It looks like the CCP will be desperate for any source of protein before too long. And, if Google can be trusted, soybeans are 1/3 protein (the same or higher than steak).

    2. There was lotsa crater to go around today. Good time to HODL or long-term Treasury bonds.

        1. Hillary’$ emails!!! … “Lock her up!” … “Send her back!” … Oh wait, where is our paycheck$?

          Coal miners in Trump country block train in bitter fight

          Miners blocked the tracks of a coal train in Kentucky on multiple days as part of a standoff between a coal company that filed for bankruptcy and left nearly 400 workers without work and pay for a month. CNN’s Alexandra Fields reports

          https://www.cnn.com/videos/us/2019/08/01/coal-miners-block-train-in-protest-field-pkg-vpx.cnn

          1. Yer check$ are in the mail, we promi$e!

            Trump’$ Pick For United Nations Amba$$ador Is Married To An Ex-Billionaire With A Coal Fortune Worth Million$

            Michela Tindera Forbes Staff

            Senate Foreign Relations Committee Confirmation Hearing For Kelly Craft, President Trump’s Nominee For U.S. Ambassador To Canada

            When Kelly Craft, President Trump’s nominee to replace Nikki Haley as U.S. ambassador to the United Nations, sat before the Senate Committee on Foreign Relations Wednesday morning, she was the latest in a long line of Trump appointees to face scrutiny over her personal finances.

            That’s because her husband, Joseph Craft III, is the longtime CEO of publicly traded coal giant Alliance Resource Partners—potentially putting her in an awkward position on international discussions surrounding climate change and the environment. During Haley’s tenure, the Trump administration pulled out of the Paris Agreement, the international pact that aims to lower greenhouse gas emissions, in 2017. It voted to oppose a resolution on a global pact for the environment the next year.

            Alliance noted the impact of such decisions in its 2018 annual report, filed in February. The report mentions the Paris Agreement multiple times, stating that countries’ pledges to reduce carbon dioxide emissions could “further reduce demand and prices for our coal.”

            Craft pledged, in an ethics agreement submitted to the State Department last month, to not participate “personally and substantially in any particular matter that to my knowledge has a direct and predictable effect on the financial on the financial interests of these entities or subsidiaries of these entities”—without first getting a written waiver. She also wrote that her husband has agreed not to communicate directly with the department while she serves as UN ambassador. The ethics agreement does not outline any plans to divest from Alliance—or any of the couple’s other energy holdings.

            The son of a lawyer and raised in coal country, Kelly’s husband Joseph Craft joined The Forbes 400 list of the wealthiest Americans in 2010, with a fortune of $1.4 billion. A lawyer, he had been given a big stake in the company that would become Alliance for leading its leveraged buyout and conversion into a tax-efficient public master limited partnership in 1996. He didn’t stay on the list for long. A massive $500 million divorce settlement in 2011 forced him to split his shareholdings with his ex-wife Kathy, though he was able to retain voting rights. Forbes revised his net worth to $625 million in 2012. Today, Joseph Craft still serves as CEO of the Tulsa, Oklahoma, company, which touts itself as the second-largest coal producer in the eastern United States. Last year it produced some 40 tons from its mines in Kentucky, Illinois and West Virginia and reported revenues of $2 billion.

            Joseph Kraft married Kelly in 2016, a year before she became Trump’s ambassador to Canada. In that role, Kelly Craft had to file financial disclosure forms, which list various holdings in Alliance worth greater than $1 million. But a form her husband filed with the Securities & Exchange Commission on May 15 indicates that he directly owns some 19.3 million shares, worth about $330 million. Alliance Resource Partners’ stock is down some 30% since Trump’s election. Revenues are down 13% from 2014

  9. What does it mean to “lack complete plumbing…”?

    When I read that I thought of those bogus Aussie condos meant for Chinese investors to buy sight unseen. Sure, you had to sit sideways on the toilet but at least it flushed. But this is in Oklahoma! (I guess the units are unfinished.)

    1. What does it mean to “lack complete plumbing…”?

      Are we still talking about housing?

  10. Kind of wonder if FDIC attention may foreshadow some random audits, and what the outcome of some of these might be.

    Worked for a disposition contractor during the S&l bailout days when the RTC was spun out of the FDIC for liquidation purposes. Largely forgotten now but was massive beyond comprehension. Failed banks and S&Ls. May be heading there again. Time to put some new services under my company umbrella.

    1. Largely forgotten now but was massive beyond comprehension. Failed banks and S&Ls ??

      I remember it well…Talk about corrupt lenders…

  11. what the hell happened to all my free monies today! bleeding plant burger and flying car stawk all down… did trump tweeters again?

    1. bleeding plant burger

      $BYND is barfing because of their scammy secondary offering.

      flying car

      $UBER is laying off 1/3 of their global marketing team.

          1. I tried one in Carl’s jnr because I had a coupon and thought it was a new style of beef burger. Didn’t know it wasn’t meat until I bit into it. It wasn’t bad. I actually liked it but ridiculously over priced for mashed up beans smashed into the shape of a burger.

      1. With all due respect PB, these stocks’ problems are wholey unrelated to Trump’s tweets.

  12. This is 5 blocks from me. They were absolutely going to do full luxury rentals across the building when they started the project. The pop-up of 50 short-term rentals (out of 275) meant that many months ago – they changed to 2 separate ground floor lobbies. It has also looked wierd to me.

    So they knew – many months ago that they would have trouble filling the luxury rental apts in Belltown

    https://www.hotelbusiness.com/whyhotel-pops-up-in-seattle/

    1. Lol luxury rentals… why does everyone always want to live in luxury? What ever happened to conserving and living simply?

      Little do they know that jars of urine are hidden just inches away between the sh***y drywall partitions lol

    1. First unknown: Will it even affect mortgage rates? Just because they cut their rate it doesn’t mean mortgage rates will fall.

    2. The yield curve got even more inverted out to 10 years after yesterday’s rate cut. So I guess it depends on how many clueless marks can get lured into making a purchase at the point when prices have only just begun to drop and the economy is staring into the gunbarrel of a looming recession.

      1. It’s quite possible that interest rates may skyrocket after 1-2 years of recession, as megainflation kicks in, and the central banks find out that QE doesn’t work anymore

  13. I got a new Samsung phone today to replace my previous phone with a cracked screen. The “realtor.com” app was installed on the phone when I bought it, and one of the first things I deleted…

    1. That’s a very close call. It was probably full of malware. I’d be checking my bank accounts and credit card statements closely.

  14. ‘Signs of a slowdown in sales are emerging in the housing market even as house prices continue to rise across most of the nation. Affordability is a growing concern as income growth lags the rise in house prices and mortgage payments.’

    Barn door left open
    All of the horses have fled
    Hurry, shut the door!

    1. +1

      Barn door left open
      All of the horses have fled
      Barn burnt down to the ground
      Hurry, shut the door!

  15. “Rental costs are going down, giving renters like Garrett the advantage. The average two-bedroom is $1,800 and declining.”

    Unpossible. Rents always go up. Or so I have been told..m

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