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The Downward Trend Stems From Inventory Growth Which Has Exceeded Net Demand

A report from the Dallas Morning News in Texas. “A lender that provided more than $388 million to finance one of Plano’s biggest real estate developments has filed to foreclose on the project. Beal Bank put up the debt for the redevelopment of the Campus at Legacy West in Plano. For more than three years, developers Silos Harvesting Partners and Dreien Opportunity Partners have been working to convert the former J.C. Penney headquarters campus on Legacy Drive into a more than $1 billion mixed-use development.”

“The Campus at Legacy West foreclosure filing is the largest of this economic cycle in North Texas. It’s bigger than last year’s $130 million filing on Frisco’s failed Wade Park development.”

From Crain’s New York. “The residential sales market was the worst it’s been in a decade—despite a strong economy. What happens to the market if we hit a recession this year? Pam Liebman CEO, Corcoran: Why isn’t the market stronger with all these positive indicators? It has to do with pricing and value. We have been in such a run-up, and then the SALT tax changes hit and had such a negative impact—it really was a killer. Plus, there was the mansion tax and additional transfer taxes, which scared the market. But I have talked to a lot of people, and December was a huge month for sales. I don’t hear talk about a recession. People are feeling good about jobs and wages. But there are so many really expensive apartments for sale, and that’s an issue.”

“What happens to all those ultra-expensive units? It depends on the developer’s financing. Some might try to rent to own or chop up big apartments into smaller units. Some will negotiate heavily, and some will try to ride it out. The most overheated sector of the market is the trophy apartment. There just aren’t enough buyers. I think it will hang over the high-end sector for quite a while, but I don’t think it will trickle down to the rest of the market. If I need to buy a car, I don’t care about who’s buying a Bugatti.”

The News Gazette in Illinois. “Even with several large apartment buildings constructed in the past few years and more on the way near campus, smaller landlords say they’re still able to attract renters. ‘There’s so much more building going on,’ said Carolyn Shlens, who runs Shlens Apartments, which has four buildings in Urbana. ‘I have no idea exactly what the occupancy rate on campus is, but it’s just getting much tougher to rent. You have to show them a bit more now. You have to keep them up.'”

The Spartan News Room on Michigan. “The increase in off-campus apartments could affect on-campus housing at Michigan State. Kat Cooper, chief communications officer of Residential and Hospitality Services, sees the influx as a complicated situation. Cooper says she thinks the off-campus market is becoming oversaturated and creates pressure for students to find housing too early in the school year. ‘I think it’s going to create market pressure and we’re going to have smaller complexes or older complexes really feel the pressure to update, to drop prices, to go after students harder.'”

From McKnight Senior Living. “For the year, net absorption totaled 15,643 units for senior housing, the most units demanded on a net basis for a full year since the National Investment Center for Seniors Housing & Care began reporting the data in 2006. Inventory growth decelerated from 21,479 units in 2018 to 16,750 units in 2019 but nevertheless was stronger than net demand, NIC said. ‘Demand was strong, but simply not strong enough to offset the growth in inventory,’ NIC Chief Economist Beth Burnham Mace said.”

From Senior Housing News. “It’s a common belief that many baby boomers will sell their homes and move into senior housing in the coming decade — but what happens if nobody buys those boomers’ houses? Baby boomers may have difficulty selling their homes in the future, a recent Zillow report found. The idea is that younger generations — particularly millennials — may have trouble affording these homes, or may simply find them unattractive, leading to a housing glut in some major metro markets over the next 20 years.”

“The Zillow numbers are not the only indication of this looming problem. A March 2019 Wall Street Journal story also focused on the issue, highlighting that more expensive homes in particular are already sitting on the market for long periods of time, and often selling for steep discounts. Warning that the problem likely will become more widespread in the next decade, the WSJ article noted that two of out five U.S. homes are owned by baby boomers today.”

“This trend could spell trouble for some senior living providers, as many older adults use their home equity to fund a move into senior housing. Some nonprofit life plan communities have already started to adjust pricing accordingly. Even senior living providers with rental fee structures should take heed of this burgeoning trend, according to National Investment Center for Seniors Housing & Care (NIC) Senior Principal Lana Peck.”

“‘Many seniors housing residents will rely on the proceeds from the sale of a home to fund a senior living lifestyle,’ Peck told SHN. ‘Affordability of seniors housing comes into play even more, as boomers who may have difficulty selling homes will wait longer to move, similar to what we saw in the Great Recession.'”

From Bisnow Washington DC. “The senior housing market has been one of the fastest-growing sectors in D.C. real estate, with developers bringing thousands of new units to the area hoping to capitalize on a demand bump from baby boomers. But recent market data shows demand hasn’t kept up with supply, leading to a decrease in occupancy levels. The occupancy rate for D.C.-area senior housing properties was 87.4% in Q3, down from 88.5% one year earlier and well below the peak of 93.5% in Q1 2016, according to the National Investment Center for Seniors Housing & Care, or NIC.”

“‘The downward trend in the occupancy rate in D.C. stems from the inventory growth which has exceeded net demand,’ NIC Chief Economist Beth Mace said. ‘Demand has not kept up.'”

“Since the start of 2016, developers have completed 26 senior housing projects totaling 3,362 units in the D.C. area, according to NIC. Another 18 developments are currently under construction that will add 2,069 units, and more are being planned that could grow the pipeline in future years. ‘It’s fair to say that when projects were underwritten, it’s likely they were underwritten to occupancy rates that are higher than what currently exists in the market,’ Mace said. ‘They’ll either have to modify their business plans to adjust to that, or it’s going to take them longer to lease up than what was in their business plans.'”

The Longmont Times-Call in Colorado. “For the second year in a row, rents throughout Boulder County remained relatively stable in 2019, suggesting the area’s housing supply has finally begun to catch up to demand. ‘With so many apartment starts coming to market in the last couple year years, and especially last year, it gives renters more options than they’ve ever had before,’ said Sam Radbil, a senior content and communications manager for Abodo, a national real estate research firm. ‘If you look at any major skyline, things are going up at a very high rate.'”

From Curbed San Francisco in California. “Palo Alto City Councilmember Eric Filseth served as the city’s mayor in 2019, while Adrian Fine assumed the mayor’s role this year; both mayors agree that the cost of housing in Palo Alto has strangled diversity in the community, and both agree that the city has underinvested in critical infrastructure like housing and transit. But when it comes to the roots of and solutions to the problem, the two mayors agree on little at all.”

“Adrian Fine: ‘Even with what they call ‘luxury housing,’ these new condos sell for $2 million, a single-family home for $3 million, but over time these units age and their prices come down, that’s absolutely true. If you want to see how today’s luxury home becomes tomorrow’s more affordable home, just go to Daly City.'”

From The Epoch Times. “Boston Fed President Eric Rosengren hit an upbeat tone on the economy while noting downside risks, including threats to financial stability. Still, he warned of risks to the hopeful forecast, admitting policymakers were navigating in largely uncharted waters in today’s low interest rate environment. ‘As a practical matter, central bankers do not have much historical experience with extended periods where interest rates are running below the estimated equilibrium level while unemployment rates are, simultaneously, historically low.'”

“Rosengren said loose monetary policy could lead consumers and businesses to take on riskier investments, or ‘reach for yield.’ Bubbles in asset prices might ensue, posing a danger to financial stability. ‘It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior—a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign forecast,’ he said.”

This Post Has 95 Comments
  1. ‘As a practical matter, central bankers do not have much historical experience with extended periods’

    Party on Garth…

    ‘It’s fair to say that when projects were underwritten, it’s likely they were underwritten to occupancy rates that are higher than what currently exists in the market…They’ll either have to modify their business plans to adjust to that, or it’s going to take them longer to lease up than what was in their business plans’

    Longer to lease up? These people are checking out pretty regular. And that’s like the student stuff. How many years are they there? The overall student numbers are in a multi-year decline with no end in sight, just as inventory explodes.

    1. ‘Rosengren said loose monetary policy could lead consumers and businesses to take on riskier investments, or ‘reach for yield.’ Bubbles in asset prices might ensue, posing a danger to financial stability. ‘It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior—a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem’

      We’ve already seen billion$ vanish, I’ve read that the Federal Reserve has hundreds of economists. Maybe someone should send them a link to this blog?

  2. ‘It has to do with pricing and value. We have been in such a run-up’

    As someone who reads a lot of media on real estate, I’m always amused when these people throw out a casual mention like this. Without irony. So you clowns built canyons of empty airboxes almost no one can afford, and you borrowed many billions if not trillions to do it. For years you spun tales of a world of billionaires looking for safe deposit boxes in the sky. And Pam here calls it a “run up”.

    1. 80218 is a great neighborhood to score fentanyl and meth in. Imagine overpaying for a used house there. Many older millennials did just that, and now they’re trapped there, underwater.

      Denver, just don’t. You’ll be happier that you didn’t.

  3. “It’s a common belief that many baby boomers will sell their homes and move into senior housing in the coming decade — but what happens if nobody buys those boomers’ houses? Baby boomers may have difficulty selling their homes in the future, a recent Zillow report found. The idea is that younger generations — particularly millennials — may have trouble affording these homes, or may simply find them unattractive, leading to a housing glut in some major metro markets over the next 20 years.”

    I think that both of these brushes are overly broad — not every homeowner in the Boomer bracket is going to be able to afford exorbitantly priced “senior living”, nor is every millennial going to turn their nose up at a well maintained/updated and correctly priced home just because it’s not in a tony zip code or walkable downtown. I still think that the traditional real estate macros are going to govern the outcome.

    1. Supply and demand are on the margin. The price of housing in NY-SF-etc hasn’t soared to the moon because EVERYONE wants to live there, but rather because the demand for such places exceeds the supply.

        1. to the moon

          Greed causes a positive feedback loop. Fear, a negative feedback loop. There’s a lot of air below.

      1. The demand for the privilege of tiptoeing around used syringes and feces, because they’re Bohemian and don’t want to own a car? They can have it.

        The wheels are coming off of that cart, as far as I’m concerned.

    2. LOL@ Boomers their only future will be eating cat food and cutting their pills in half as they draw down their assets to qualify for Medicaid funded assisted living.

      Medicaid funded assisted living will not be a pleasant place to die, btw 🙁

    3. The problem is the assumption that seniors all want to sell their homes to move into senior housing — what if the majority of them simply choose to age in place?

      You can put all of the stock photos you want of happy old folks on billboards out front, but the fact remains that their is a perception that these are nothing more than overpriced nursing homes, where they check in and never check out. That’s a significant relinquishing of independence that I’m willing to bet a lot of them are not willing to concede.

      I’ve lived through this with one of my parents.

      1. And, from what else I see, the objectivity and ulterior motives of that publication ought to be called into question.

      2. The marketing I believe is aimed primarily at the children of seniors. The idea is that they can continue “livin the dream” and stuff grandma in a happy place rather than caring for their parents themselves.

      3. Agreed. My mother did well as a 91yo independent! Right up to listing value on her reverse mortgage when she died. And coming up on 17 months later, the bank has _still_ not foreclosed. Maybe they are waiting until ice comes cascading down the steps, thinking that gives curb appeal.

    4. traditional real estate macros

      One thing that might distort normal “macros” is the decades long creep of house size.

  4. Well, there you have it. Remember, Millennials are paid 25 percent less, on average, than Baby Boomers at a comparable point in their lives, despite higher educational attainment. They will be facing higher taxes, worse public services, and diminished senior benefits.

    Can they afford the lifestyle of the party hardy on the credit card generations? No.

    So what do they ditch? How about all that excess square footage in post-1980 McMansions located in places where multi-job families require one motor vehicle per adult to do ANYTHING? That and the last five years of their lives.

    So of those suburbs will reboot. Allow mixed-use, with jobs and services nearby, and conversions to multifamily. The rest?

    And what is going to happen to those private developments when the infrastructure comes do for replacement? Check it out before buying in.

  5. https://www.cnn.com/2020/01/13/economy/global-debt-record/index.html

    The world’s already huge debt load smashed the record for the highest debt-to-GDP ratio before 2019 was even over.

    In fact, it broke that record in the first nine months of last year. Global debt, which comprises borrowings from households, governments and companies, grew by $9 trillion to nearly $253 trillion during that period, according to the Institute of International Finance.

    That puts the global debt-to-GDP ratio at 322%, narrowly surpassing 2016 as the highest level on record.

    So, when you see the neighbors bring home that shiny new $50K SUV, take the kids on a pricey vacation in Orlando, sell the house and trade up to a bigger one, etc., you know how it’s being paid for.

    1. I have no debt. ZERO.

      Yet in order to manipulate the hamster wheel credit score, I buy a single banana at King Soopers three times every month on three different credit cards then pay them off the day of the statement.

      Progressive Insurance actually punishes me on my auto insurance rates for not having a mortgage.

      The balance transfer / cash advance checks that I don’t need or want keep coming in the mail as fast as I can shred them.

      Such are the woes of the rich renter 🙁

        1. Because you’re playing the game, too, even if you’re not paying interest. They still generate fees off the transactions, etc. Don’t give these bloodsuckers a dollar.

          1. fees off the transactions

            Which I suspect is partly behind the push to eliminating physical currency.

          2. If I stop using cards it doesn’t mean stores won’t increase costs for cash purchases to make up the difference in fees.

            I live in the system, can’t change it, and may as well get some money back.

          3. the difference in fees

            I believe the stores themselves pay the fees, so if anything they might discount the price for cash payment.

          4. @BlueSkye: There’s a Chinese market I shop at sometimes that gives a 3% discount if you pay in cash. They probably aren’t paying taxes on cash payments though xD.

          5. a Chinese market

            My marina says the credit company charges them 3%. I think they are paying their taxes when I give them a check.

          6. The argument between credit vs cash has been going on for sometime. Some argue that when you use cash, you tend to spend less. With credit card, you spend more because you have more limits. This isn’t a problem with the card but a lack of willpower or control problem. Even if I have $30,000 in cash in my pockets, I will not spend anymore than if I had a credit card with a 30,000 limit. I have a shopping list and buy what I need from that list. PERIOD. Credit cards are great for people who paid the balance every month and you get rewards points. Now a day, I do 90% of my shopping online so credit card is best. Plus, I can dispute any purchases I want. Can’t do that with cash. I think ultimately it’s a preference. People will choose to use what they want.

          7. @BlueSkye: Of course when you pay with check a business has to pay sales taxes. You need a bank institution to clear the payment (not really any different from Amex or Visa…)

            Cash payments are easy to hide, however.

      1. “I have no debt. ZERO.”

        Uh, the billionaires and their government stooges have plans to include your “imputed income” in their reset scheme.

    1. So, $1.3 trillion check without congress? Pocahontas shouldn’t write checks with her mouth that she can’t cash with her ash.

      1. The degree of idiocy it takes to fall for this sort of demagoguery is breathtaking.

        Did any one of these students loan money to someone and never get paid back? How did that make them feel?

        1. One of the problems with printing money willy-nilly is that it breaks the connection between taxpayers and government spending. So people really do think government money is free money. Even Republican congressmen who used to care about deficits.

  6. it’s been in a decade—despite a strong economy.

    Not so sure. I was down in Pacific Beach recently for the first time in years. A few more empty store fronts than I expected. Went to a food court yesterday near my old job and three out.of the nine places were closed. The woman behind the counter told me two of the places have been empty for over two years.

    1. I wonder how much is the rent a storefront in PB? Probably high enough that you won’t cover it selling T-shirts and burritos to seasonal tourists.

  7. Legacy West is where Toyota Connected (not the TMNA HQ), LIberty Mutual, and Boeing are located. The complex has an super fancy combine Japanese and American Renaissance Hotel, expensive restaurants including a Del Frisco steak restaurant and an awesome Spanish tapas restaurant. [FYI it was so expensive that i had to get pre approval on expenses to take my customer execs out for dinner at Del Frisco]

    And everything was jammed.

    So this was absolute greed – they wanted to expand too much, too fast.
    —————-
    “A lender that provided more than $388 million to finance one of Plano’s biggest real estate developments has filed to foreclose on the project. Beal Bank put up the debt for the redevelopment of the Campus at Legacy West in Plano. For more than three years, developers Silos Harvesting Partners and Dreien Opportunity Partners have been working to convert the former J.C. Penney headquarters campus on Legacy Drive into a more than $1 billion mixed-use development.”

    1. and Boeing are located

      Boeing had more cancellations last year than new orders. Unless they can get the 737 MAX back into the air, without it crashing, they are in for a world of hurt.

      1. They are the largest company on the DOW, and vital to our military. Soooo………TOO BIG TO FAIL.

        1. I read today that Airbus is now the top airliner manufacturer.

          I’m beginning to wonder if the Max will ever fly again. If Boeing has to go back to the drawing board and design an all new replacement it will take years, effectively handing over the narrow body segment to Airbus. Plus it will have to write off hundreds of airplanes. It sure is sounding like a bail out is coming.

          1. “I’m beginning to wonder if the Max will ever fly again.”

            Start a franchise, “The 737 Max Café.” Boeing will remove the engines and wings, and there’s your signature building!

          2. “Or house the homeless…”

            Close quarters requires discipline, i.e., rules to follow that the incorrigible cannot follow. That is why they’re on the street. They’ve burned their bridges, been shunned by their own families. The do-gooders don’t seem to understand that it costs more to elevate these homeless to domestic standards than what a responsible two-income household earns. That’s why there’s still no solution.

  8. ““Rosengren said loose monetary policy could lead consumers and businesses to take on riskier investments, or ‘reach for yield.’ Bubbles in asset prices might ensue, posing a danger to financial stability. ‘It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior—a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign forecast,’ he said.””

    …an undergraduate economics student could have told them that for cheaper.

    1. a share

      Ironic that a stock which has never paid a dividend, and promises to never pay one in the future, is worth anything.

      1. As long as they can keep borrowing money to cover their losses, Tesla is the company of tomorrow.

        1. With this latest share price run-up, they’re going to be able to borrow A LOT more since their market cap has more than doubled. That’s what Musk was so concerned about before, and why he was trying to Tweet his stock price up – the lower the price, the less chance of borrowing and the higher chance of bankruptcy. This is precisely everything that’s wrong with business and the stock market today.

      1. “Then why did she sell 30,000+ shares yesterday?”

        Hehe…the economic version of the Female praying mantis.

    2. And just look at all the fanboi comments on any article about Tesla. It’s a Musk aszlicking party.

          1. A 45 dollar t-shirt.

            “This new t-shirt, which is available from the Tesla official merch shop, retails for $45 and features what looks like the actual photographic recreation of the shatter pattern from the front window, the first to be shattered in the onstage gaffe.”

    3. You can add Tesla and crypto to the long list of things I have been completely wrong about insofar as “investments” are concerned. Here I thought balance sheets mattered, as well as market share, etc. when it came to Tesla. And crypto…..well…whatever that is…

      So, I get to listen to my friends yammer on about how well all of their speculative gambling….er….investing is going, and I will just pay higher prices for groceries and stuff while I sit out this entire speculative orgy.

        1. I have so much popcorn I have nowhere else to put it. Seems I was stocking up a bit early. This everything bubble is so long in the tooth I’m starting to wonder if it’s some new paradigm that I didn’t see and it’s going to stick.

          1. I was the same way with Facebook. I still can’t understand why it’s considered a business rather than a fad.

  9. “Rosengren said loose monetary policy could lead consumers and businesses to take on riskier investments, or ‘reach for yield.’ Bubbles in asset prices might ensue, posing a danger to financial stability. ‘It is important to see and understand the risk that sustained low interest rates could place more pressure on real estate asset prices through reach-for-yield behavior—a scenario that preceded the 1990 and 2007 recessions. In certain scenarios, financial stability risks could potentially emerge as a problem for the otherwise benign forecast,’ he said.”

    Rosengren – you are so fawking behind the times one might wonder if you’ve been holed up inside your airbox, mainlining smack. We have already seen everything you just mentioned in spades. You are an idiot of the highest order, and should not be in charge of anything more than keeping the water cooler full. Now fawk off!

  10. REALTOR, I have so much money left after “throwing money away on rent” every month that I don’t know where to throw it.

    I threw some away on plane ticket to Florida next week, will try to gather some boots on the ground anecdotes and pics of construction sites in downtown St. Petersburg, which some family recently told me is all new “luxury” apartment towers going up now.

    1. Imagine if that kind of economic meltdown of 2008 came while rates are already this low. I’m not sure I want to know the kind of preferred banker bonuses and bailouts that will create.

  11. “over time these units age and their prices come down”

    No, that’s how capitalism works. Whatever system we have now means everything used goes up in price, from a used house to a used car to a used designer handbag. Somehow depreciating consumables are all “investments” now.

    1. ‘Being creative when submitting offers – they can look to their realtor for that – sometimes people might write a letter and include sometimes pictures of their family,” reasoned Lamb. “Those can sometimes pull on the heart strings of sellers.’

      1. A couple of uniformed police explaining the eviction in rational terms isn’t good enough for ghetto peeps, and you just know that some ambulance-chasing San Francisco joo law firm is carefully reviewing the eviction video footage for a possible class action lawsuit. This is 100% California!

  12. Aluminum Maker Rings in China’s First Dollar Default of 2020

    S&P downgrades state-owned company after missed interest payment, saying it lacks resources to repay debt

    ‘On Wednesday, the $300 million bond, which is due in July 2021, was quoted at 40 cents on the dollar, according to Refinitiv data. Other bonds due in February 2020 and March 2021 were quoted at 50 cents and 46 cents, Refinitiv prices showed.’

    ‘S&P said the missed payment counted as an event of default for the two other bonds, which have a total face value of $550 million. That means if a certain amount of consensus is reached among bondholders, they could demand their principal and unpaid interest be paid immediately.’

    ‘The company’s financial troubles add to evidence that Chinese authorities are letting state-backed companies renege on their debts. Last month, commodity trader Tewoo Group Co., which is owned by the municipal government of the northern city of Tianjin, became the first state-owned enterprise to inflict losses on dollar bondholders in two decades, S&P said.’

    ‘Qinghai is controlled by its namesake province’s state-asset administrator. S&P said it didn’t expect the provincial government to help repay bondholders. Calls to the company weren’t answered.’

    ‘China’s economic growth has fallen to multidecade lows, and many local governments have restricted finances, giving them less capacity to bail out troubled companies in both the public and private sectors.’

    ‘Qinghai had also been late in making dollar interest payments last February and August.’

    ‘Offshore-bond defaults by Chinese borrowers are likely to rise this year, S&P said. It estimated that $51 billion of offshore Chinese bonds, either with riskier junk ratings or no credit rating at all, are maturing this year.’

    https://www.wsj.com/articles/aluminum-maker-rings-in-chinas-first-dollar-default-of-2020-11579085141

    1. junk ratings or no credit rating at all

      It was only a few years ago that the “economic growth” of the whole world boiled down to the growth in China, which was based on tens of trillions of $ in credit expansion.

      Adan used to tell us not to worry, because they owed it all to themselves.

      1. Gosh, I’m starting to think the Keynesian monetary dogma of endless credit-fueled expansion and malinvestment with conjured-out-of-thin-air fiat currency might be fatally flawed.

        1. conjured-out-of-thin-air fiat currency might be fatally flawed

          But until things get fatal, party on…

    2. These Chinese defaults are starting to come faster and bigger, and the bag holder assumption that the Chinese government wouldn’t allow such failures to occur has proven to be a fallacy.

      I fear an “Oh dear” moment is looming….

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