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An Era Of Deep Discounts And Incentives

A report from Community Impact on Texas. “An oversupply of apartment units could be in the Katy area’s future. There are about 19,000 apartment units in the Katy area, with another 2,000 or so under construction from five luxury complexes and one senior living community, according to Apartment Data Services. This is about twice as many additional units than the existing apartment market can handle, said Bruce McClenny, president of ADS.”

“Adding to the potential oversupply is the massive exodus of homeowners leaving apartment complexes because home repairs from Hurricane Harvey are completed, said McClenny and Jerone Bogar, the property manager of Grand Reserve Apartments, a luxury apartment community in Katy.”

“A year ago, Grand Reserve and its competitors were at capacity because Hurricane Harvey displaced so many people, Bogar said. That is not the case anymore. ‘People are now leaving in droves [because their home repairs are finished,]’ he said.”

From The Missoulian in Montana. “Several large projects have made a significant dent in Missoula’s housing shortage and the rental vacancy rate has increased significantly as a result, leading to lower prices on some types of units, according to Claire Matten with Sterling Commercial Real Estate Advisors in Missoula.”

“She recently compiled a survey and analysis that showed Missoula’s current overall apartment vacancy rate at 8.24 percent. That’s much higher than the average vacancy rate of 3 percent in 2017, according to the Missoula Organization of Realtors. A wave of new apartment construction hitting the market in the summer of 2018 started to lure renters away from their old digs, leaving many of those vacant. That’s called ‘decreased absorption rates’ in industry parlance.”

“Matten said there are indications of more concessions offered by landlords to get new tenants in the door, such as discounts on the first month’s rent and lowered prices. However, she said developers are now starting to look to avoid building more apartments in Missoula.”

“‘Higher borrowing costs and increasing vacancy rates should lead to a cooling off of the apartment boom,’ she said.”

From Bisnow on California. “Multifamily has had a strong run in San Diego, and demand is still high — but so are the costs of development, while rental growth has lost some steam. That has made new development more difficult and investment a trickier proposition than only a few years ago, according to the speakers at Bisnow’s State of San Diego Multifamily.”

“Properties Chief Investment Officer Paul Kaseburg, whose company has been buying value-add and stabilized product, said rent growth is slowing. ‘We tend to have more workforce housing-oriented [properties] rather than new product, so we’ve been a little less impacted by slowing rent growth than owners of new product, but the trend is real,’ Kaseburg said.”

“Meridian Capital Group Managing Director Seth Grossman, whose company is a commercial mortgage broker, agreed that rent growth has slowed while interest rates have risen, so everything points to the market slowing. ‘And yet we are busier than ever,’ he said. ‘People are complaining that they aren’t getting the rent growth, and that pricing is too expensive, yet they’re still doing deals regularly. Existing clients are refinancing more quickly than they used to, and purchases are up. This can’t last forever, but the last year has been a lot busier than I expected.'”

From The Real Deal on New York. “To combat a near-stagnant condo market, Extell Development is offering to pay between three and five years worth of common charges for any apartment purchased by the end of the year.”

“At a broker event, the Gary Barnett-led firm disclosed the portfolio-wide incentive meant to drum up business in what is decidedly a buyer’s market: The firm will pay for three years’ worth of common charges on one- and two-bedroom units put into contract by Dec. 31. It will pay common charges for five years on three- to five-bedroom units put into contract during that time.”

“‘They felt they wanted to find an incentive that helped the brokers but also motivated the buyers,’ said a source who attended the event, an unveiling of two model apartments at the Kent, Extell’s 83-unit condo on the Upper East Side. ‘They recognize it is a buyer’s market.'”

“But even in an era of deep discounts and incentives, the portfolio-wide offer is striking for one of the city’s most prolific developers, which has north of 1,000 condos for sale. Several of Extell’s buildings also offer tax abatements, meaning buyers would benefit from almost no carrying costs for several years.”

“As the housing market softened this year, new development sales in Manhattan have crawled. There were 360 closings in the third quarter, down 21.9 percent year over year, according to the appraisal firm Miller Samuel. The median price slid 8.8 percent to $2.55 million. Extell has billions of dollars worth of development underway.”

“Other developers, too, have dangled sweeteners to attract agents and their buyers over the past 18 months. Toll Brothers offered to cover the transfer and mansion taxes at certain buildings during a summer sales event. At the 99-unit 49 Chambers Street, the Chetrit Group was offering buyers’ agents 50 percent of their commission at the contract signing.”

“But not everyone agrees that sweeteners are the way to go. Donna Olshan of Olshan Realty said, ‘it’s just more sensible to take the price down.'”

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This Post Has 32 Comments

  1. How can things get so out of whack? This industry hasn’t been following supply and demand:

    ‘rent growth has slowed while interest rates have risen, so everything points to the market slowing. ‘And yet we are busier than ever’…‘People are complaining that they aren’t getting the rent growth, and that pricing is too expensive, yet they’re still doing deals regularly.

    The “deals” are driving it and have been for years.

    “Existing clients are refinancing more quickly than they used to”

    These apartment people refinance as fast as possible and take out as much cash as possible. It is the game plan.

    ‘and purchases are up. This can’t last forever’

    Even as they recognize it is unsustainable. Does that sound like a mania?

    1. A Q&A about the Denver multifamily market

      ‘In October, Newmark Knight Frank Multifamily Vice Chairman Shane Ozment emceed and presented at Colorado Real Estate Journal’s 2018 Fall Multifamily Conference. Ozment, specializing in the marketing and sale of institutional multifamily properties in the metro Denver market, has facilitated over $6 billion in transactions since joining Newmark Knight Frank Multifamily in 2002.’

      ‘How has the national investment community’s opinion of Denver changed over the last decade?’

      ‘Ozment: Ten years ago, many institutional investors across the country looked at Denver as a flyover city. That is not the case anymore. With the explosion of millennial in-migration and economic opportunities, investors now consider Denver to be a “Tier 1” city, with the likes of Portland, Seattle, San Francisco and Chicago. The surge in multifamily property values reflects this mindset change. In 2010, the average sale price of an apartment unit was $73,000; in 2017, the sale price was $216,000.’

      ‘Interest rates have been rising steadily since September 2017. Have you seen this rise in rates translate to an increase in capitalization rates?’

      ‘Ozment: So far, we have not seen an elevation in cap rates despite the rise in interest rates. I would attribute this to a surplus of capital chasing fewer deals on the market. Buyers are still very bullish on Denver and highly competitive bidding has kept cap rates suppressed. However, if rates continue to climb, it is inevitable that we will see cap rates increase as well – we are getting very close to that tipping point and could see cap rates start to creep up next year.’

      ‘a surplus of capital chasing fewer deals’

      So they keep building because of this surplus of capital, not anything to do with what’s needed. And that’s why they build all luxury, because otherwise they can’t sell and that’s all they want to do – flip them.

        1. I’ve thought about Tucson as a place to settle down. But I wonder if it’s too close to the border. I realize it’s 60+ miles, but it’s a straight shot up I-19.

          1. You’re worried that it’s unsafe? In my opinion it’s like a lot of cities, there are good and bad patches. Look up South Tucson. Otherwise it can be pretty quiet.

            I live in Phoenix now and it’s the same, very patchy. I’m just across a major street from “The Square”, a notoriously bad neighborhood. No worries though because houses are starting to go for $300k in our neighborhood. Gun shots, cars doing burnouts, petty crime, homelessness, and police helicopters at no additional cost!

            https://en.wikipedia.org/wiki/South_Tucson%2C_Arizona?wprov=sfla1

            http://wikimapia.org/684580/The-Square

          2. Unless you are an educated professional you’ll find the going wages for labor pitiful around Tucson. However it is a nice bicycle friendly city, and being at a higher elevation than Phoenix the summer heat is bearable.

    2. “…Existing clients are refinancing more quickly than they used to..”

      Gotta wonder about the lenders who do the refi.

      I don’t get it either..

      Perhaps all these folks are arithmetically challenged?

        1. “…Might that be you and me???…”

          I was afraid you might say that.

          You and I pick up the tab for loans gone bad, while the Tan Man and his clones (non bank lenders) get even richer.

          Quite a system, eh?

    3. “These apartment people refinance as fast as possible and take out as much cash as possible. It is the game plan.”

      But where is the equity to refinance coming from? Prices have to rise in order to make money.

      1. ‘where is the equity to refinance coming from?’

        Jul 24, 2017
        Is the real estate double bubble back?

        Average U.S. commercial real estate prices are now far over their 2007 bubble peak, about 22 percent higher than they were in the excesses of a decade ago, just before their last big crash. In inflation-adjusted terms, they are also well over their bubble peak, by about 6 percent.

        In the wake of the bubble, the Federal Reserve set out to create renewed asset-price inflation. It certainly succeeded with commercial real estate – a sector often at the center of financial booms and busts.

        Commercial real estate prices dropped like a rock after 2007, far more than did house prices, falling on average 40 percent to their trough in 2010. Since then, the asset price inflation has been dramatic: up more than 100 percent from the bottom. In inflation-adjusted terms, they are up 83 percent.

        This remarkable price history is shown in Graph 1

        https://www.rstreet.org/2017/07/24/is-the-real-estate-double-bubble-back/

          1. Yes, and you know it is by falling rents. CRE is valued by net operating income. When you read that New York City retail is 25% vacant, income is getting hammered and so are values. Same with apartments and concessions, vacancy and rent reductions. And with apartments, this new stuff was working from single digit returns if everything went according to plan. The rubber will hit the road when they go to sell or refinance.

  4. “Meridian Capital Group Managing Director Seth Grossman, whose company is a commercial mortgage broker, agreed that rent growth has slowed while interest rates have risen, so everything points to the market slowing. ‘And yet we are busier than ever,’ he said.”

    Sorry Seth but all good things must come to an end. Your mortgage company may have had a good run but looking at the other big players in the industry points to layoffs and a looming down cycle for the industry.

  8. ‘Other developers, too, have dangled sweeteners to attract agents and their buyers over the past 18 months’

    The reason the writer called this an “era” is this has been going on since 2016. One of the developers in the article is on his third price cut. How could you not have large numbers underwater who will eventually bail?

  9. “An oversupply of apartment units could be in the Katy area’s future. There are about 19,000 apartment units in the Katy area, with another 2,000 or so under construction from five luxury complexes and one senior living community, according to Apartment Data Services. This is about twice as many additional units than the existing apartment market can handle, said Bruce McClenny, president of ADS.”

    How do you overbuilt by 10,000 units? Didnt anyone research the demand?????

    1. 2,000 or so under construction…about twice as many additional units

      I’m reading that as overbuilt by 1,000.

      1. Katy is basically a suburb of Houston. Add that oversupply to the rest. Personal observation – I live in a Class B complex in West Harris County. Neighbors next door to me moved out in May. It’s still empty.

  10. “To combat a near-stagnant condo market, Extell Development is offering to pay between three and five years worth of common charges for any apartment purchased by the end of the year.”

    Or you could save really big money by waiting until condo developments go into foreclosure, then come out the other side with firesale pricing.

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