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What Happens When An Operator Obtains Money That Never Should Have Been Forked Over?

A weekend topic starting with Multi-Housing News. “Thanks to the lengthy economic expansion, record-low interest rates and solid fundamentals, multifamily has gained wider acceptance on the debt side, and a host of newcomers have flooded the space. Despite a lack of track records in some cases, these non-bank lenders have stepped in to fill the gap left by banks, which have tightened their credit standards in line with stricter regulation.”

“In this milieu, multifamily bridge lenders have seen a surge in demand for their non-recourse, short-term loan products—an ideal fit for borrowers looking to execute unique investment plans faster, using financing with more innovative structures and less stringent terms. While agency lenders still capture the majority of multifamily debt, bridge loan originators have proven adept at providing quick and flexible solutions throughout the capital stack.”

“Bridge lenders don’t require the cash flow and occupancy thresholds that permanent lenders do. Additionally, the non-recourse component of a typical bridge loan makes it easier for the borrower to carry the unstabilized asset through the capital improvement process.”

“As the cycle wears on and competition for well-qualified borrowers intensifies, underwriting standards will become even more important for bridge lenders to ensure credit quality and facilitate favorable exit strategies. Jonathan Daniel, principal of Greenwich, Conn.-based Knighthead Funding cautioned: ‘Over the next 12 to 18 months, if interest rates go up by 50 basis points and concessions continue to rise—(compressing) cash flows—then that’s not a very good outcome for getting refinanced out of a bridge loan.'”

From Globe St.. “Investors are chasing rent growth in secondary or emerging markets, but where affordability issues haven’t become a burden on residents. Richard Boynton, SVP of acquisitions at Fairfield Residential, said that secondary markets are typically more cyclical, using Dallas as an example. The market has seen substantial growth and has nearly 40,000 apartment units under construction.”

“‘The question is if we go into a recession, what is going to happen to their 40,000 units,’ he asked. ‘I wouldn’t want to be in that market.'”

The Dallas Morning News in Texas. “The newest apartment tower on the way in Dallas’ Victory Park project won’t open until 2021. That’s probably a good thing.”

“The Dallas area has seen a flood of new high-rise, high-priced rental projects in the last few years and more are on the way. Developer Hines’ 39-story Victor tower in Victory Park will be one of the biggest. The builders are betting that with a 32-month construction schedule, most of their competitors will be out of the market by the time The Victor opens.”

“Dallas leads the country in apartment building with almost 35,000 units in the construction pipeline. So far, the local market has gobbled up almost everything developers can throw at it. ‘We are well aware of the supply Dallas has built unlike anywhere else in the country other than New York,’ said Hines’ Corbin Eckel. ‘Luxury residential has seen a large influx of new units at the same price point.'”

“With so many more new super-luxury, super-price apartments on the way, don’t be surprised if there are more bargains offered for renters. A month of free rent is already common in the market.”

From West Seattle Blog in Washington. “3600 CALIFORNIA SW: Listed as ‘California Court Apartments and Redevelopment Site,’ the 90-year-old 9-unit brick complex at 3600 California SW is on the market for just under $3 million. The marketing flyer (PDF) elaborates: ‘The current owner has intentionally kept 7 rent-ready units vacant upon turnover to allow the future purchaser the opportunity to quickly boost Net Operating Income with new tenants on market rate leases. 2 units remain occupied by tenants on a month-to-month basis at rates well below comparable units in the neighborhood.'”

From The Real Deal on New York. “Thanks to a glut of inventory, don’t expect to see big shifts in Manhattan’s rental market anytime soon. The size of concession was 3 months of free rent or equivalent, up from 1.2. Coming out of peak season, rampant concessions are here to stay, said Hal Gavzie, executive manager of leasing at Douglas Elliman. ‘I don’t see that changing any time soon,’ he said. ‘The entire market is still fueled by the amount of inventory.'”

From The Coloradoan. “Fort Collins’ tight rental market appears to be easing, but more supply isn’t bringing prices down. June’s 4.1 percent vacancy rate in Fort Collins is the highest it’s been in five years. Lisa Winchester, president of the Northern Colorado Apartment Association and manager of The Crowne at Timberline, said there has been a slowdown in the number of potential tenants touring her units. ‘We just don’t have as many people walking through the doors.'”

“Despite the increase in units, rents haven’t dropped and likely won’t drop, said Ron Throupe, a professor at the University of Denver who researches and co-authors the survey with Von Stroh. ‘New units tend to come in at higher than average rents because most new units are Class A,’ he wrote. ‘Thus rent averages tend to go up with new unit completion.'”

“Rent decreases come when inventory is overbuilt. Fort Collins isn’t there yet. ‘Pricing adjustments, if they even happen, tend to be less than 5 percent’ over two years, he said.”

From McKnights Senior Living. “I am all-too-well aware of the fact that nobody likes a party pooper. Yet it’s time to point out a possible scenario few among us will want to acknowledge: A senior living bubble may be about to burst.”

“A reckless, fearmongering prediction on my part? Perhaps, but I don’t think so. And before you get back to the dance floor, please consider the following three observations.”

“Observation One: There is an awful lot of low-cost, low-hurdle capital for the taking right now. Rare is the operator who cannot find funding for remodeling, renovations, a new wing or something a bit more ambitious. That’s not a bad thing per se. But history has shown that too much of a good thing is rarely a good thing in senior living.”

“It was not long ago that the National Investment Center for Seniors Housing & Care Fall Conference limited participation to 1,500 attendees. This year, there were more than 3,100. Happy-to-be-here newbies accounted for much of the increase. Many of these exuberant deal-seekers have yet to experience the ugly side of senior living investing. Believe me, it’s not pleasant for anyone involved. Except maybe bankruptcy attorneys.”

“Observation Two: There are not a whole lot of good deals to be had right now. When lenders compete, you win. That’s a phrase Lending Tree is making famous. But what happens when an operator obtains money that never should have been forked over? Well, it was about 11 years ago that we saw that scenario play out in the housing market. As for how that story ended, anyone remember the Great Recession?”

“Observation Three: A lot of players seem to be hedging their bets. Take a look at our update from yesterday: Brookdale continues to trim its portfolio, National Health Investors has restructured its Holiday lease agreements and LTC Properties is trying to figure out why occupancy is down. Not exactly warm and fuzzy developments, are they? Again folks, those are stories from a single day.”

“Each of these observations is a bit troubling on its own merits. Collectively, they make a strong case for trouble on the horizon. Hardly want to sound like I’m crying wolf here. But don’t say you weren’t warned.”

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This Post Has 42 Comments

  1. I said this thing was a bubble in 2014. Why?

    ‘There is an awful lot of low-cost, low-hurdle capital for the taking right now. Rare is the operator who cannot find funding’

    And the guys in the business reacted how you think they might: going nuts building everything they can, without regard for the market. Isn’t that how we got 100% luxury apartment construction – in Detroit?

    The senior side is a disaster – and I was able to show that here long ago.

        1. $4 sq/ft/month

          For a while I think there will be a huge aversion to actually reducing the rent on the lease contract. That would be admitting the downturn is not a temporary thing, and probably put the complex ‘underwater’ – either not able to fully cover ongoing costs or not enough ROI to make it saleable.

          So for now, any number of gimmicks and giveaways as long as they don’t have to say “we lowered the rent”

          But when that line is finally crossed, I expect there will be a flood of rent reductions to follow.

          1. They can only continue the shenanigans for so long. Massive defaults are coming, and these complexes will go back to the lenders and come back online with much cheaper rents.

  3. ‘Bridge lenders don’t require the cash flow and occupancy thresholds that permanent lenders do. Additionally, the non-recourse component of a typical bridge loan makes it easier for the borrower to carry the unstabilized asset through the capital improvement process’

    ‘Over the next 12 to 18 months, if interest rates go up by 50 basis points and concessions continue to rise—(compressing) cash flows—then that’s not a very good outcome for getting refinanced out of a bridge loan’

    This is like watching those Roadrunner cartoons.

    2. ‘Over the next 12 to 18 months, if interest rates go up by 50 basis points…’

      Up, up and away…

      10-year Treasury yield edges up to four-week high as investors await midterm results
      By Mark DeCambre and Sunny Oh
      Published: Nov 6, 2018 3:48 p.m. ET

      U.S. Treasurys edged higher on Tuesday as investors awaited the outcome of midterm elections and braced for a fresh policy statement from the Federal Reserve on Thursday. Both events could provide a near-term spark for trade in government paper.

      The 10-year Treasury note yield rose 1.5 basis points to 3.214%, its highest since Oct. 10. The 2-year note yield rose 2 basis points to 2.932%, its highest levels since June 2008. The 30-year bond yield meanwhile, slipped 0.4 basis point to 3.426%, off its highest levels in more than four years.
      …

  4. ‘on the market for just under $3 million. The marketing flyer (PDF) elaborates: ‘The current owner has intentionally kept 7 rent-ready units vacant upon turnover to allow the future purchaser the opportunity to quickly boost Net Operating Income with new tenants on market rate leases’

    Why would someone do this? Apartments are valued by NOI, not comps. So you buy this thing, actually rent the apartments, and boom, refinance for a couple millions extra! Sure, it’s sounds like some shady business, but hey, the funding is there. What can go wrong?

  6. ‘multifamily bridge lenders have seen a surge in demand for their non-recourse, short-term loan products—an ideal fit for borrowers looking to execute unique investment plans faster, using financing with more innovative structures and less stringent terms. While agency lenders still capture the majority of multifamily debt…’

    Agency lenders means Fannie Mae and Freddie Mac. Yep, the guberment is subsidizing the biggest luxury apartment boom in modern history.

  7. I got a notice about this via email:

    8345 Merilee Ln
    Flagstaff, AZ 86004
    Mobile/Manufactured
    Built in 2001
    2.63 acres lot size
    1,344 sqft
    $180/sqft

    Price History
    Date
    Price
    Event
    11/08/2018
    $241,620
    Listed for sale
    05/12/2017
    $241,503
    Posting removed
    08/31/2001
    $100,524
    Sold

    https://www.trulia.com/p/az/flagstaff/8345-merilee-ln-flagstaff-az-86004–2075876479

    Christmas lights and swamp cooler at no extra charge. Yes, this beauty can be yours for only $180/square foot. Better own a four wheel drive though.

    1. Do you notice how collapsing bubbles in this new era we have entered never reach the stage of soul-crushing, life-altering despair that collapsed bubbles of yore eventually reached? There are just too many too-clever-by-half dips-buyers who understand that bubbles in anything and everything always reflate, in the long run.

      1. It would have happened 10 years ago if the Fed hadn’t stepped in on behalf of the banks. Which means if they can’t catch it this time it will be even worse than you describe because of all the leftover mess from back then.

  10. “One of the biggest buyers has been The Blackstone Group. As of June, the New York investment giant had acquired at least nine local apartment complexes, including Solis at Flamingo, since last year for $616 million total, property records show.”

    “Blackstone and partners bought Solis this spring for $72 million — more than $20 million above what the seller paid just three years earlier.”

    “A popular business plan, buyers and brokers say, is to acquire a property, upgrade it and boost the rents.”

    “That’s absolutely our strategy,” Tower 16 co-founder Tyler Pruett said, adding that his group typically upgrades common areas and spruces up apartments with new paint, carpeting and appliances.”

    https://www.reviewjournal.com/business/housing/las-vegas-apartment-prices-stretching-affordability-1524283/

    1. Is Blackstone too-big-to-fail, meaning that they have no risk of going hog wild with an unlimited number of massively-stupid real estate gambles, as they can rest assured that the Fed will ride to their rescue again if global finance suddenly, simultaneously, and ubiquitously implodes?

  11. Seattle property suffers from sell-off
    Financial Times-Nov 9, 2018
    A funny thing happened when Brent Robertson put his one-bedroom Seattle condominium on the market in May for $630,000. He expected to field offers and …

  14. Ever notice how oil crashes every time AlbuquerqueDan stops posting here? I wonder how he makes that happen?

    Oil just did something it hasn’t done in more than 30 years (hint: it isn’t good)
    By Mark DeCambre
    Published: Nov 10, 2018 12:42 p.m. ET
    Oil is on track for its 10th consecutive loss

    A jolt lower for oil since peaking in October has helped crude futures to carve out a bearish record. That is even after U.S. benchmark oil on Thursday fell into bear-market territory, defined as a drop of at least 20% from a recent peak.

    West Texas Intermediate crude for December delivery on the New York Mercantile Exchange (CLZ8, -1.32%) settled lower on Friday, marking its 10th consecutive decline and matching the longest skid for the contract since a similar stretch from July 18-July 31 1984, according to Dow Jones Market Data.
    …

  15. Health
    ‘Remarkable’ decline in fertility rates
    By James Gallagher Health and science correspondent, BBC News
    9 November 2018

    There has been a remarkable global decline in the number of children women are having, say researchers.

    Their report found fertility rate falls meant nearly half of countries were now facing a “baby bust” – meaning there are insufficient children to maintain their population size.

    The researchers said the findings were a “huge surprise”.

    And there would be profound consequences for societies with “more grandparents than grandchildren”.

    How big has the fall been?
    …

    1. Isn’t this in part caused by the historically unprecedented delay in the age at which women are having children?

      I think we’re seeing a combo of multiple effects adding up to the delay in first births. In my parent’s time, it was the arrival of the pill and modern birth control options. in my generation it was equal rights movements and unprecedented shift of women into the workforce. In my children’s generation, economic conditions of reduced job prospects and starting out with debt combined with the astronomical rise in the monetary cost to have and raise a child.

      During the last 1.5 generations, divorce has devastated so many men, that some of their their sons are learning about and even avoiding the risks of marriage.

      I’m sure I missed several other factors.

      1. Missed factors: High student debt burdens, dismal prospects for career-track jobs, and unaffordable housing costs all greatly dampen the human nesting instinct.

        1. Sorry…I should have read your post more carefully before commenting. We are agreed on many of the reasons that it is much harder for Housing Bubble era young adults to form households than it was a quarter century ago.

          1. No worries.

            Higher housing prices relative to income is indeed an additional factor. It’s risen in excess of inflation and incomes for decades. Same with medical care, and education.

            Not having offspring, or having fewer and/or later is a normal and common reaction among animals to a change to less favorable living conditions – usually climate/food supply/safety. Why should we be shocked when humans behave that (very rational) way as well?

          2. behave that (very rational) way

            When you say “rational”, it sounds to me like you don’t appreciate that housing and the debt orgy that blew it up was born of greed and corruption. People with average income can comfortably feed and keep safe a couple of children. Instead, they buy houses 5 x the necessary size and 10 x the affordable price (money they do not actually have) and forego the children. For profit. Nothing to be excused as rational.

    2. I used to have this back-and-forth with MortgageWatch about the decline in the US fertility rate. It is now pretty well recognized that the decline in the US fertility rate will lead to a secular decline in housing. Freddie Mac and Fannie Mae have written reports on:

      “Departures of these older adults from the homeownership market (leaving for rentals, senior care facilities, or by reason of death) will accelerate as the large Baby Boom generation continues to age. With the oldest Boomers now advancing into their 70s, the beginning of a mass exodus looms on the horizon, spurring fears of a bursting “generational housing bubble” in which homeownership demand from younger generations is insufficient to fill the void left by multitudes of departing older owners.”

      http://www.fanniemae.com/resources/file/research/pdf/housing-insights-homeowner-exodus-071118.pdf

        2. Leaders like Germany’s Merkel have openly said that their plan is keep importing more people to keep to keep the perpetual expansion and growth going. What they never acknowledge is that comes at the expense of all their citizens who are not in ‘the elite’.

      1. Just stick to water. No need to do flavored water or diet sodas, or any sodas. Add some lemon juice or lime juice if needed. All the research about non-nutritive sweeteners is that it basically messes up the body’s hormone response and hijacks the insulin response, not to mention the gut’s microbiome. Even if there is no calories, it can cause weight gain.

      1. Lower housing prices will be needed to attract American buyers with American jobs who just need a place to live in.

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