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With Any Rush In Supply, There Will Be Growing Pains

A report from Buffalo News in New York. “DHD Ventures, the Rochester-based developer that built the Monarch 716 student-housing complex near SUNY Buffalo State, has lost possession of its sprawling 15-month-old property on Forest Avenue. A state Supreme Court justice in Buffalo last week approved a request by the lenders on the project to foreclose on $38.8 million in mortgage debt, authorizing a court-appointed referee to start the process of selling the property at auction.”

“In her brief ruling, Justice Deborah Chimes dismissed the arguments of DHD principals Thomas Masaschi and Jason Teller, who had sought more time to secure alternate financing that would pay off the three insurance companies who had provided two loans.”

“DHD, through its Buffalo State Ventures subsidiary, had developed the 10-building student-housing project. Officials touted it as a luxury-style complex with a host of benefits and amenities that would be unique and attractive for students.”

“DHD and its first property management company, King Residential Group, sought to fill the complex quickly with discounts and other incentives, while also taking in nonstudent tenants, so they could show better occupancy and financial results to Acres. But tenant complaints mounted, criminal activity spread, and about 100 occupants were evicted for not paying the rent, dragging down the revenues. DHD put the property up for sale, initially seeking as much as $60 million, though it never found a buyer.”

“Meanwhile, contractors and vendors on the project – including general contractor Kulback’s Construction – filed more than $3.5 million in liens against DHD for failing to fully pay bills from the construction. Finally, Acres – which had extended mortgages totaling $36.3 million on behalf of its three clients – initiated the foreclosure in May after DHD defaulted.”

“Meanwhile, contractors and vendors on the project filed more than $3.5 million in liens against DHD for failing to fully pay bills from the construction.”

From Statesboro Herald in Georgia. “A $50 million private development recently greenlighted by Statesboro City Council will replace the old University Plaza near the Chandler Road-Georgia Avenue intersection with a ground floor of retail businesses and four upper floors of student apartments.”

“The project required a zoning change from commercial to planned unit development, or PUD, plus three variances. After hearing from people opposed as well as those in favor during meetings Oct. 16 and Nov. 6, the council unanimously approved the change and all variances.”

“Most of the opposing statements came from representatives of existing apartment complexes, who pointed out that Statesboro is overbuilt with student housing as it is. As currently approved, the project will add 464 beds in 116 units in an area where the Statesboro Apartment Association’s president said there are almost 3,000 vacant units now.”

“Statesboro, where according to the city’s estimates almost 80 percent of residents are renters, has student apartments in abundance. ‘I don’t think that anybody in this room would argue that the plaza is an eyesore and it does need a rebirth,’ Statesboro Area Apartment Association President Margie Williamson told City Council. ‘I think that’s an awesome idea. However, I don’t think student housing is the right fit for that. I don’t think anybody on this council realizes how saturated that housing market already is.'”

“She gave an estimate of almost 3,000 empty beds within a five-mile radius of campus. When Councilman John Riggs asked for specifics, Williamson said it was based on Georgia Southern having approximately 20,500 students and there being 23,170 apartment beds within five miles, not including individually owned homes and duplexes available for rent.”

“‘Of the 20 properties represented by the Apartment Association, only five properties actually filled up this year over 90 percent, and that was after giving away concessions of anywhere from a hundred dollars to a thousand dollars per student, just to try to get a lease,’ Williamson said.”

“Representatives of at least nine apartment complexes attended the Oct. 16 meeting, and several spoke. When new apartment complexes are built, students flock to these, leaving even slightly older complexes with an increased number of vacancies, the apartment managers said.”

“Then the older complexes reduce their rents. Nonstudents take advantage of the lower rents, which some apartment managers said results in criminals entering the mix with students.”

“At the Nov. 6 meeting, Williamson followed up with a three-year chart of occupancy rates, rents and incentives at 19 apartment complexes. As of Sept. 1, occupancy rates ranged from 66.7 to 100 percent. Her chart stated a collective ‘vacancy loss’ of more than $8.8 million for this year.”

“‘We have plenty of competition, so that is nothing new for us, that doesn’t scare us at all,’ she said. ‘The issue here is the crime, and you guys aren’t understanding the ripple effect that this is going to bring.'”

The Colorado Real Estate Journal. “With 10,200 apartment units either under construction or in planning in downtown Denver (according to Apartment Insights’ third-quarter data), many are speculating that the market is overbuilt. Ten thousand is a big number – enough to increase downtown Denver’s current apartment stock by up to 49 percent – so it’s easy to be skeptical.”

“However, if you dig into the numbers and look at a common economic measure of the balance between apartment supply and demand, what you find may surprise you. In fact, our analysis revealed that downtown Denver is underserved and additional supply is needed.”

“Of course, with any rush in supply, there will be growing pains. A closer look at the performance of Denver’s multifamily sector provides a clear perspective on the impact this rapid downtown supply expansion has had on apartment fundamentals in that submarket.”

“As new properties enter the market during the lease-up phase, competition among property managers offering prospective renters free-rent concessions dampens overall rent growth. For context, developers added 7,325 new units to downtown Denver – a 55.3 percent growth in the inventory – over the past four years, according to third-quarter data from Apartment Insights.”

“If that seems like a lot, consider that there are another 4,457 units currently in lease-up (and not yet considered a part of the inventory) and 4,989 downtown units still under construction.”

“How is it that downtown fundamentals continue to hang on? Because there has been a massive pool of potential renters on the sideline waiting for developers to give them what they want: more supply.”

This Post Has 33 Comments
    1. Can anyone who thinks they understand please explain why a drop in homebuilder confidence could lead to tech stock losses?

        1. When the Fed removes the punch bowl, we might expect all risk assets to concurrently take a hit. But the MSM suggestion that a drop in homebuilder sentiment is “causing” the tech stocks to cave seems misguided.

          1. Interesting footnote:

            The Fed has just barely begun the rate normalization process, and has even begun to hint that it may back off on the rate of normalization. However, the mere awareness that the party is ending has sent risk traders into a state of panic.

          2. Here’s one explanation: lagging homebuilder confidence indicates lagging economic performance overall. Lagging economic performance incentivizes lowering portfolio exposure to the US economy. So people start selling their SP 500 replicating portfolios which have a lot of exposure to tech stocks.

            Or the powers that be are dumping tech stocks for unrelated reasons and are using the home builders number as cover in the press.

      1. The market in the last 6 weeks took some big hits and sold off a little. If you look on a weekly chart dow is showing higher lows and trending upward. As long as it stays above 20 sma a long should still be in place. Excluding soft sectors, hb stocks, oil etc.

  1. Looks like things are starting to come unglued a bit here…I fully expected this downturn, but the pace of acceleration has really surprised me.

    1. Something I’ve learned from programming and then watching simulations that have a lot of factors like the ones we are looking at – thousands of AI actors pushing to all get ahead, a simulate economy with limits, finite resources, currency valuations, etc….

      …is that systems can hum along in a happy state of growth and expansion for a good while, and have some resiliency. but when they reach their internal tipping point, they can break down and unravel with frightening speed.

      1. And while they may be a best a pale simplification of the real world, I think the inherent nature of economic systems is well reflected.

  2. Saturday, I went to the local Home Depot to buy 2 wooden boards for a project.

    I guess I’m behind the times, because I was shocked to find that a 12″ x 1″ x 6′ pine board was nearly $17. And I had to spend about 20 minutes going through the stack to find two that weren’t excessively warped, Etc.

    1. Want lumber? Go to a lumber yard. Want mechanical or electrical? Go to a supply house….. And pay half the cost.

    2. try your local craigslist.com

      Great place to find lumber of all types.

      Sometimes, its free, owner just wants to get rid of the odd’s and end’s and the recycle bin won’t take it.

      Biggest advantage is that boards offered are usually old, which means they are much more dimensionally stable that the overpriced green junk you find at the big box stores.

      Downside is that you have to be patient and know exactly what you are looking for.

    3. Forgot to add

      Nextdoor.com

      Fairly new site that allows your neighbors to post random information in you local zip code(s).

      About once a week, I get a feed of “free stuff”. Often neighbors in my area clean out their garage and offer what-have-you for free. Very often lumber of all dimensions is available.

      Just amazing what people throw out.

      Another tip: Trash areas behind industrial buildings. Once found a solid 3″ think laminated oak bench top approx 5’x5′. Must of weighed over 100 pounds. If you actually had to buy something like that, it would cost a fortune.

  3. Investing
    Real Time Analysis
    Bitcoin Keeps Falling and No One Knows Why
    By Ben Walsh
    Nov. 19, 2018 11:02 a.m. ET

    Bitcoin is plummeting, again.

    The leading cryptocurrency has fallen 8% in the last day. And since the market began to drop last Wednesday, it’s down 20%.

    And in the context of Bitcoin’s all-time high of $19,783.06 in mid-December of last year things obviously look even worse: Bitcoin is down 75% from its top-tick price.

    Kevin Davitt of Cboe Global Markets points out that twice during the last eight years, “the leading crypto has lost 94% of its value,” although he notes that, “in fairness, those precipitous falls occurred when Bitcoin was trading $0.17 and $1.99, respectively.”

    Cryptocurrency buyers and sellers looking for something to explain the decline have plenty of options to choose from.

    https://www.barrons.com/articles/bitcoins-price-keeps-falling-1542643365

      1. I read earlier in the year that it costs about $4,500 to conjure up one of those nothing coins. If that’s remotely true, someone’s party is just about over.

        1. Isn’t it interesting how even though cryptocurrency claims to be an alternative monetary system that eliminates the need for central bank issued fiat money, the continued existence of Bitcoin and other cryptocoinage seems heavily reliant upon a steady influx of fiat money, both to fund “investments” and to pay for the costs of running the platform.

          Most curious!

          1. All Ponzi schemes require a constant infusion of new money from new marks. When the new money stops coming in, the Ponzi collapses.

            Bitcoin is a classic Ponzi, and the fools who “invested” in it are going to get their heads handed to them as they cling to their delusions of future greatness.

  4. Watch out once the rental bubble pops. The recent (last 5 years) speculative RE bubble has largely been fueled by dramatic rent increases. The reverse holds true as well. Overbuilding in the rental space is now showing signs on rents. Combine that with cap rate expectations with rising interest rates, and you have the beginning of the perfect storm. All completely predictable and expected. Fear from those old enough to remember the last big downturn will complete the loss of confidence. News articles revealing the new trend completes the equation. I believe there is a long way to go and we are in early stage. I am making adjustments to my business model to get ready for down trend services to the industry. Saw it all back during the last go around. Many new opportunities arise when trend shift upward or downward. Hope I am right.

    Regards

      1. Several diversified services to real estate. Market value appraisals, feasibility analysis, insurance replacement cost estimates and other assorted services. One thing particularly prominent in the last downturn was that few, if any, insurance agents contacted thier policy holders when construction costs dropped. Most HO and dwelling policies have automatic replacement cost increase assumptions but I have yet to see one which drops if indexed to costs. This, of course, would reduce policy premiums. Insurance policies have a lot of dials which, if you know how to customize, can result in substantially lowered premiums. I got mine lowered from $3,300 to about $1,750. Of couse, you take on more risk, but I eliminated very low likelihood coverages.

        When forclosures mount, there is a whole array of services that reo holders need. Learned back during the last downturn about all these services. Like I said, lots of opportunities in a down turned market.

        Regards.

    1. “…All completely predictable and expected..”

      Yes it is / was.

      Fascinating how just plain stupid / greedy some lenders are.

      “…I believe there is a long way to go and we are in early stage…”

      Yep. Grab your ten gallon hat an enjoy the show..

  5. How is it that downtown fundamentals continue to hang on? Because there has been a massive pool of potential renters on the sideline waiting for developers to give them what they want: more supply

    Hmm… Where are these renters “on the sidelines” currently living?

  6. Economics
    Cryptos Are ‘Evil Spawn’ of the Crisis for ECB’s Coeure
    By Alessandro Speciale and Catherine Bosley
    November 15, 2018, 5:40 AM PST
    European Central Bank Executive Board member Benoit Coeure
    Photographer: Jason Alden/Bloomberg

    Benoit Coeure has a bone to pick with Bitcoin.

    “Bitcoin was an extremely clever idea. Sadly, not every clever idea is a good idea,” the European Central Bank Executive Board member said at the Bank for International Settlements in Basel.

    Coeure traced cryptocurrencies’ faults to their origins, noting that Satoshi Nakamoto — the supposed creator of Bitcoin — mined the first block months after Lehman Brothers collapsed.

    “Few remember that Satoshi embedded the genesis block with a Times headline from January 2009 about U.K. banks’ bailout. In more ways than one, Bitcoin is the evil spawn of the financial crisis.”

    He also reminded his audience that BIS head Agustin Carstens is in a similar camp, after previously saying Bitcoin is “a combination of a bubble, a Ponzi scheme and an environmental disaster.”

    https://www.bloomberg.com/news/articles/2018-11-15/cryptocurrencies-are-evil-spawn-of-the-crisis-for-ecb-s-coeure

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