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We’re Seeing A Lot Of Rental Markets Peaking And Coming Down

A weekend topic starting with Kiplinger. “Debt pricing looms as the largest multifamily market mover in the coming year. Inexpensive debt capital and plenty of equity seeking placement in the multifamily market have supported rising property values in recent years. But when the cost of borrowing goes up, cap rates must move correspondingly as investments don’t make financial sense until sale prices come down. It’s a pricing fundamental that has always existed, but one that sellers never want to concede. In fact, the seller’s market has run so long that owners now faced with downward pricing adjustments don’t want to budge.”

“The bottom line, with that inherent price pressure in mind, 2019 is looking more like a buyer’s market. Attractive multifamily acquisitions will be captured by buyers who secure assets that are ‘right priced’ to account for rising interest rates.”

“Rising rents paired with high occupancies produced income growth that generally outpaced operating expense increases. But new supply in many markets has now caught up with or surpassed demand.”

“The potential multifamily supply and demand imbalance is still playing out across the country. ‘We’re seeing a lot of rental markets peaking and coming down,’ says Neil Schimmel, President and CEO of Investors Management Group.”

From McKnights Senior Living. “For years, the investment returns on senior housing have been a bright spot in the real estate market. Understandably, that has attracted more capital, particularly from private equity and institutional investors. In turn, capital has become plentiful and relatively easy-to-acquire, attracting owner/operators who see this as an opportunity to build new, state-of-the-art specialized facilities.”

“A growing danger exists, however. Construction rates seemingly are surpassing occupancy and absorption rates, creating a risky environment for owner/operators.”

“We don’t think senior housing is in a bubble. But the industry must be diligent not to allow the sector to become overbuilt, and it must be realistic about the risks inherent in the senior housing market. Owner / operators should seek out lenders with a deep expertise that can serve as true advisers in the development and success of new senior living communities.”

“The current economic expansion is the second longest on record, and in another year, it will become the longest. It’s unlikely to end before hitting that milestone, but it will end someday— a fact that some lenders as well as owner/operator seem at risk of forgetting.”

The Dallas Morning News. “Texas’ largest nursing home provider, Senior Care Centers, has filed for bankruptcy in a serious setback for the Dallas-based company. Senior Care Centers, which operates more than 100 facilities in Texas, filed for reorganization in U.S. bankruptcy court for the Northern District of Texas on Tuesday, reporting more than $100 million in debt. It’s at least the second troubled nursing care giant in the Dallas area to file for bankruptcy since late last year.”

“In a news release, Senior Care Centers said high rents and ‘burdensome’ debts dragged it down. The company pledged that patient care will not suffer due to its financial woes, and that it will ‘continue providing comprehensive care and support to its nearly 10,000 patients and residents.'”

“Senior Care Centers said in its bankruptcy filing that revenue was going down — from fewer clients and reduced insurance reimbursements — while expenses were rising.”

“The company said it tried various strategies to improve its financial situation, including selling assets and asking landlords to reduce rents. The efforts failed, forcing the company to restructure by filing for bankruptcy.”

The Journal Sentinel in Wisconsin. “With all the apartments, hotels, office buildings and other new developments built throughout downtown Milwaukee, you could almost forget that its northern edge was long marred by a string of empty lots until just a few years ago.”

“While demand has remained strong for apartments throughout downtown and the east side, there are also a lot of new units under construction. That has some developers and investors wondering if the high-end apartment market is becoming overbuilt.”

“A spokesman for Kirkland, Washington-based Weidner Apartment Homes, which now operates The Avenir, said the firm doesn’t have plans to build the block’s other parcels.”

The Real Deal on Florida. “When Miami broker David Landau opened a letter at his Brickell on the River North condo late last month, it had an alarming message to residents. A new construction project would be rising fast, and their view of the water would soon be gone.”

“Landau, who has lived in the complex at 31 Southeast 5th Street for more than eight years, was angry. He knew Related had development plans there, but had heard they were far in the future. The letter, he believes, was an attempt by the One Sotheby’s agent to win business by trying to get some of the hundreds of residents to enter into a ‘panic sale,’ convincing them to unload their condos quickly in order to get the fast commission.”

“Condo developers in Miami have struggled to attract buyers as South American currencies have weakened and a recent report showed the greater downtown area has a six-plus year supply of luxury condo inventory. Some developers are holding off plans to build until the next market cycle or are self-financing projects.”

“That environment can sometimes prompt aggressive tactics, like what appears to be the case with the Brickell flier, said Josh Migdal, a partner with the Miami law firm Mark Migdal & Hayden. Those moves, he said, ‘are the symptom of a housing market that has significantly slowed down and shows how Realtors are trying to obtain new listings at reduced prices.'”

“Sarah Elles Boggs, a real estate agent with Douglas Elliman, said people may see more of these aggressive tactics given the condo market slowdown in Miami. ‘It makes sense that this would start happening because people get desperate when they get hungry,’ she said.”

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This Post Has 41 Comments

  2. ‘when the cost of borrowing goes up, cap rates must move correspondingly as investments don’t make financial sense until sale prices come down. It’s a pricing fundamental that has always existed, but one that sellers never want to concede. In fact, the seller’s market has run so long that owners now faced with downward pricing adjustments don’t want to budge’

    This decade long (or longer) interest rare suppression has set these guys up for a big fall. Everybody got complacent and the cap rate trap is set. They built too much, paid too much, borrowed too much and refinanced with abandon. Largely, they aren’t in a position to budge. Just walk away.

    1. I was just looking at mortgage rates for single family, and they are still less than 4.5%, yet everybody’s crowing about high rates. What a JOKE.

      1. Right! They actually dropped recently in an effort to capture more of the potential FBs “sitting on the sidelines”. I have a hard time understanding how someone willing to spend 1m+ on a shack would be effected on a couple hundred dollars more a month. There’s more to the slowdown than a minuscule raise in interest rates. This is just the media’s way of covering up the bigger picture.

        1. a minuscule raise

          It’s a mania, and the further out on that Persimmon branch the possum climbs the more fragile it gets.

      2. Your initial mortgage payment is almost all interest. So mortgage goes from 3% to 4.5% your monthly goes up almost 50%.. Did salaries go up 50% in the same period? Did rents go up 50% in the same period? Nope and nope.

          2. The problem is that at higher rates, the same monthly payment buys less house. For instance, for the same monthly payment amount, the amount of loan principle you can afford to borrow goes down by about 16.8% when the interest rate increases from 3% to 4.5%. And this is before considering the effect of Trump tax law changes on loan interest and property tax deductibility, which further reduces a Californian’s home purchase budget constraint.

        2. “So mortgage goes from 3% to 4.5% your monthly goes up almost 50%.”

          Right idea, but the effect is not all that dramatic, since interest is a declining share of the loan payment through time. And it’s not so much that payments increase, but rather that potential offers are reduced, as home purchase budgets decrease when rates increase. Hence there is a perception among sellers of a sudden disappearance of buyers willing to pay last year’s prices.

    2. “…the cap rate trap is set.”

      Who knew the Fed’s liquidity trap would morph into a cap rate trap?

  4. ‘the greater downtown area has a six-plus year supply of luxury condo inventory’

    Last I heard it was 20 years inventory for $3 million and up.

  5. Anecdotal yes, but in the market I track closely there was a dearth of rentals this summer on craigslist. Almost no single family house listings. Now as I type this there are a lot of available rentals at what seem to be not -so-unreasonable prices. Long way to go but an interesting change for me to witness.

    On the valuations side, I couldn’t be more excited to see what happens this spring, if inventory spikes and sales volume levels stay this low, the RE market is toast. That is the million $ question to me, is if this spring has an explosion of inventory or not.

    This blog and its followers are definitely ahead of the curve for sure.

  7. Senior Care Centers said high rents and ‘burdensome’ debts dragged it down

    Looks like they went on a buying spree with borrowed money. How “burdensome”.

    1. What do they do with the olds when a senior care facility goes bankrupt – auction them off to the lowest bidder?

      1. The children are working overtime to pay the mortgage, the car payments and the furniture loans, plus their last three vacations. No time for taking care of the old parents.

        1. A major challenge is that families are much more dispersed for jobs than in previous generations.

          1. The biggest challenge is that most adult children just don’t care. I saw it in my own family and it’s despicable.

  8. In fact, the seller’s market has run so long that owners now faced with downward pricing adjustments don’t want to budge.”

    That’s okay, sellers. We buyers have all the time in the world. You don’t.

  9. The letter, he believes, was an attempt by the One Sotheby’s agent to win business by trying to get some of the hundreds of residents to enter into a ‘panic sale,’ convincing them to unload their condos quickly in order to get the fast commission.”

    Unscrupulous realtors (redundant, I realize) exploited FOMO to push the weak-minded into signing on the dotted line for overpriced shacks, and now they’re going to ruthlessly exploit FB fears of a bursting housing bubble to get them to panic and unload their shacks for steep losses on the way down. It’s a living, but I don’t know how they sleep at night.

  11. Interesting to read about Senior Care Centers. My father invested with a builder in assisted living, which is different from a skilled nursing facility, and they sold this summer. This is in Utah, along the I-15 corridor. The demand for senior medical care centers is still brisk, though I can definitely see signs that maybe too much is in the pipeline. As a RN and a property manager, I have a unique perspective here. I think the real trend will be towards more home health companies with mobile nursing staff and nurse aides who can take care of people in their homes. This is way more affordable, plus many people want to stay in their homes. Of course, there will always be a subset of the population who really need onsite medical care, especially for memory care units that deal with dementia and Alzheimer’s, or even for skilled nursing facilities or rehab facilities. Lots going on here in this space and the uncertainty over the Affordable Care Act isn’t helping. Plus, the fact that GE basically was delisted from the DOW because of it’s bad bets on nursing home insurance is revealing the stark reality that US medical care is very costly, especially when provided by for-profit healthcare behemoths.

    1. When we get old, we should have the option of opting for a nice big dose of heroin or fentanyl to send us off to the next life, rather than being a burden on our children and society.

      1. And an IMAX movie of Spring snow melting, animals running in the wild, etc., all bathed in your favorite color theme.

    2. GE basically was delisted from the DOW because of it’s bad bets on nursing home insurance

      They were a technology company. Not ride/face sharing/shopping technology, real technology. Poof.

  12. CAP rate applies to residential single family properties and for same reason. If interest rate rise then not only does reduce your net, but it also increases cap rate expecting for a buyer. This is a double whammy. If rents come down, then net is reduced further. Prices then have to come down a bunch for a buyer to capture a cap rate that is superior to bond yields or other income instruments. It can downspiral quickley.

    If you look at the amount of single family purchased for rental purposes, you can see how this could impact the economy.

    Stagnation now in the lux market in my woods. Dropping price is the only way that sales will increase. New trend is in the bag that I can see.

  13. CAP rate applies to residential single family properties and for the same reason. If interest rate rises then not only does this reduce your net, but it also increases cap rate expectations for a buyer. This is a double whammy. If rents come down, then net is reduced further. Prices then have to come down a bunch for a buyer to capture a cap rate that is superior to bond yields or other income instruments. It can downspiral quickley.

    If you look at the amount of single family purchased for rental purposes, you can see how this could impact the economy.

    Stagnation now in the lux market in my woods. Dropping price is the only way that sales will increase. New trend is in the bag that I can see.

      1. Would you agree that ZIRP policies in part pushed more ‘investor types’ into owning rentals in their quest for returns, thus helping drive prices up? or doth I read too much into thy things?

        1. Without question. As well due to young people would could not afford to buy and had no choice to rent, or preferred to.

  15. “The current economic expansion is the second longest on record, and in another year, it will become the longest. It’s unlikely to end before hitting that milestone, but it will end someday…”

    Mr Market is doing his best to anticipate the timing of this sad eventuality and capture it in current risk asset valuations.

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