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It Appears From These High Prices, They Haven’t Overbuilt Yet

A report from the Tampa Bay Times in Florida. “Construction began on nearly 3,000 homes in the Tampa Bay area in the third quarter of this year but the new-home market shows definite signs of a slowdown. Moreover, ‘truly affordable housing (is becoming) an impossibility in this market,’ a new report warns.”

“According to Metrostudy, which tracks housing starts in the bay area, 2,946 single-family homes came out of the ground in the three months ended in September, 5.1 percent more than in the third quarter of 2017. However, the increase was largely due to a near halt in construction following Hurricane Irma a year ago September.”

“‘A case can be made that the market was slower in the third quarter 2018 than (in the) third quarter 2017,’ said Tony Polito, regional director of Metrostudy’s Tampa market.”

“Despite an overall gain this July, August and September, construction starts of homes over $450,000 plunged 6.8 percent compared to the same period a year earlier. ‘A telltale sign of a slowing market is contraction starting in the upper end,’ Polito said.”

From MiBiz in Michigan. “With several large-scale projects currently under construction around the region, many wonder what comes next for the area. Given the pressures from rising interest rates, increased construction costs and a higher regulatory burden, many insiders expect a slowdown for the industry at some point in the foreseeable future. That’s according to a panel of executives convened by MiBiz for a roundtable discussion on the commercial real estate industry.”

“Ryan Schmidt, vice president of real estate development and management for Inner City Christian Federation (ICCF), a Grand Rapids nonprofit real estate developer: I think Bond is also an indicator of where multifamily development has been going on the market-rate side in terms of the size of the development. If we look back at like 2012 to ’17, there were a lot of deals that were smaller than 50 units. Now, a lot of the new product that’s coming into the market is Bond at 202 units, 234 Market has 235 units. The Brix at Midtown has 200 and some units. The Hendrik on the West Side has 116 units. Three of the four grouped there are out of market money. These are very large developments.”

“Why do you think we’re now attracting these larger projects?”

“Chris Beckering, executive vice president of Pioneer Construction, a Grand Rapids-based general contractor: To some extent, that’s been a self-fulfilling prophecy because there’s this magic number of 100 units for financing. You’re getting into a whole other tier of financing options when you’re over 100 units … so developers like to build them because they can finance them. When they’re done and stabilized, there’s a huge market for selling them.”

The Arizona Daily Star. “An eye-popping sale of a Tucson student housing complex for nearly $112 million is indicative of how hot that market is and why investor interest is so high in these projects, industry experts say. New York-based Blackstone Real Estate Income Trust Inc. paid $536,780 per unit to acquire The District on 5th, a 208-unit complex at 550 N. Fifth Ave.”

“The purchase was part of a $1.2 billion buy that Blackstone made of EdR Student Housing Portfolio in a joint venture with Greystar Real Estate Partners. The total purchase was for 10,500 beds in 20 student-housing projects across the country.”

“‘When EdR purchased it, we all sat back and said, ‘Wow. That’s a whole bunch of money,’ said Mike Chapman, multifamily specialist with NAI Horizon, who closely monitors student housing. ‘It appears, from these high prices, they haven’t overbuilt yet.'”

“‘The price may seem exorbitant, but there’s not enough in that pipeline,’ said Thomas Brophy, director of research for ABI Multifamily. ‘All of the big investment players are circling Tucson because we have both jobs and population rising.'”

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This Post Has 27 Comments

  1. ‘Why do you think we’re now attracting these larger projects?’

    ‘there’s this magic number of 100 units for financing. You’re getting into a whole other tier of financing options when you’re over 100 units … so developers like to build them because they can finance them’

    Ahem…

    ‘When they’re done and stabilized, there’s a huge market for selling them’

    Expanding on signs of a bubble: when the motivation is to flip rather than actually hold these apartments as rentals. And the QE money is still chasing yield, so on it goes:

    ‘Wow. That’s a whole bunch of money…It appears, from these high prices, they haven’t overbuilt yet’

    Tucson is losing population and the student market has been overbuilt for years. All they are doing is scavenging tenants from the single family market around the university that was the traditional market for students. And even at that the returns are minuscule for Blackstone.

    1. Blackstone Real Estate Income Trust Inc. paid $536,780 per unit to acquire The District on 5th

      How can that ever make sense for student housing? In Tuscon? It’s probably only a few blocks from that corner lot where the Mexican day laborers queue up to see if they will get picked to work today.

      The tiny bedrooms in “The District” go for about $800/month with shared kitchen and living room. Two, three or four beds per unit.

  2. ‘truly affordable housing (is becoming) an impossibility in this market’

    Another sign of a bubble: new paradigms. When in history have we not been able to build shacks and airboxes that people could afford?

    Oh yeah, a few years ago one of the Toll brothers was telling us we’d live with our parents for 40 years to save up a down payment. How did that pan out?

      1. Only due to interference from the Fed. If they wait much longer this cycle they may lose control and then you’ll get your wish. As long as you don’t need a job there.

  4. I got this in an email this morning:

    “$1,000,000 Price Reduction!”

    “2460 SUNSET PLAZA DR , SUNSET STRIP, CA | $6,250,000”

    “$450k Price Reduction”

    “2375 SUNSET PLAZA DR , SUNSET STRIP, CA | $1,800,000”

    1. https://www.zillow.com/homedetails/2460-Sunset-Plaza-Dr-Los-Angeles-CA-90069/120554924_zpid/

      Date Event Price $/sqft
      10/26/2018 Price change $6,250,000 -13.2% $3,296
      9/19/2018 Price change $7,198,000 -5.3% $3,796
      7/11/2018 Price change $7,600,000 -2.6% $4,008
      5/21/2018 Price change $7,800,000 -6% $4,114
      5/2/2018 Listed for sale $8,300,000 -21% $4,378
      12/6/2017 Listing removed $10,500,000 — $5,538
      12/6/2017 Price change $10,500,000 +16.7% $5,538
      11/10/2017 Price change $9,000,000 -14.3% $4,747
      8/24/2017 Listed for sale $10,500,000 — $5,538

      Oh dear…

      1. My gut tells me that prices are declining faster than interest rates are going up.

        If further analysis proves that gut feeling true, wave goodbye to all those “fake money” prices, ie. those properties who pricing was just pulled out of the sky.

        Seems especially true at the higher end.

  6. Builders are starting to make big cuts here in OR.

    9/7/2018 Price change $580,000 Lennar Sales Corp
    8/8/2018 Price change $628,000 Lennar Sales Corp
    8/7/2018 Listed for sale $618,000 –Lennar Sales Corp
    6/15/2018 Listing removed $648,000 –Lennar Sales Corp
    5/7/2018 Listed for sale $648,000 –Lennar Sales Corp

  9. ok ,the top is in etc. now old news
    so what do you see next
    slow decline?
    whoosh?

    interest rates are going no where

    1. Boomers selling as they downsize is the impetus for the next leg down. 10 year time horizon. There is a huge mismatch between size and location for housing stock. Lots of aging units that are too old and in the wrong location. At current prices, it doesn’t make sense to rehab them.

      Interestingly enough, if builders do build under $200k, that will probably create downward pressure on the existing housing stock because a lot of the buying on the low end these past few years is panic buying.

      I don’t see the overbuilding of multi-family as the biggest problem. Absorption will be slow and some Johnny-come-lately’s will lose their property because they can’t make everything pencil. But the stock in urban centers is necessary to avoid ridiculous overbuilding in nowherelands (e.g. drive ’till you quality).

      As always, I maintain that new car tech is the key to bursting the bubble. New transportation (electrification, self-driving, shared pools, etc.) into working centers will make the bubbly urban centers less desirable because getting to good jobs becomes more feasible without a super commute, and millennials still like the suburbs, just like their parents.

      1. new car tech

        …is expensive. Simple and efficient ways to reduce the cost of getting to work are already available.

    2. so what do you see next

      The inevitable course of the “top being in” is an unraveling of myriad layers of unsustainable debt. It’s global and it’s unimaginably huge. Cascading defaults, unless the Firehouse has a fleet of new super pumpers.

  10. If builders do build under $200k, that will probably create downward pressure on the existing housing stock because a lot of the buying on the low end these past few years is panic buying.

    To clarify, lots of buyers bought what was available, even though it was not what they would have wanted because what they wanted wasn’t available. What they want is new at an affordable price, which is increasingly a luxury good in the stupid borrower era.

    If builders can build new at an affordable price, new home buyers will shift to that. This shift will leave a lot of used $300k, $400k, and $500k sellers out in the cold because the market will disappear for what they have. Interest rates going up will further cause the hunkering down effect as home sales continue to slide.

    1. This is what I experienced as a seller in an Austin suburb, selling a 2008 property recently. Builders brought so much quality inventory, that it took months to sell my house, took a big hit.

      Here in San Jose I’m starting to see something similar. Ads for new properties show that on a per-sq-foot basis new quality homes are offered at low $400, whereas old homes often ask in the mid $400 to $600 range in comparable neighborhoods. A house across the street, in a working class neighborhood, built in 1958 asking $700K for 1100 sq feet, which is ridiculous.

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