For months we've warned about the impending collapse of the luxury real estate markets in New York and San Francisco amid tepid demand and a supply glut that is getting ready to flood the market with new capacity (see here, here and here). Of course, one of the first signs of excess capacity comes in the form of rent concessions, which as we pointed out over the summer, have been relatively easy to find in the large metro markets.
“Listings that once rented in just two to three weeks can now take two to three months to rent,” explains Paul Hwang, principal broker at Skybox Realty, a San Francisco-based real estate agency.
At least four new apartment buildings have opened within a three-block radius of one another during the last 18 months in San Francisco’s thriving South of Market neighborhood, which is home to major tech companies like Airbnb, Pinterest and Yelp (YELP).
Those four buildings — Jasper, 340 Fremont, 399 Fremont and Solaire — frequently offer some sort of bargain for prospective renters. 340 Fremont is offering six weeks of free rent; Solaire is pitching four weeks of free rent, free on-site storage and $1,000 discounts to renters who work at tech companies like Apple (AAPL), Facebook (FB) and Yahoo (YHOO). Meanwhile, another building, 399 Fremont, even tried giving away free bikes one weekend.
But new buildings weren't the only ones offering incentives. Craigslist was also flooded with listings like the one below offering free rent and a $500 gift card to interested renters.
Unfortunately, as the Wall Street Journal points out, NYC and San Francisco aren't the only cities across the country that are about to get flooded with new luxury apartments. In 2017 alone, 378,000 new apartments are expected to be completed across the country, or roughly 35% more than the 20-year average.
Developers in New York are already offering up to three months of free rent on some projects. In Los Angeles, some landlords are offering six months of free parking, and some in Houston are waiving security deposits. Meanwhile, MPF Vice President Jay Parsons said he expects little or no rent growth in urban rental markets this year.
“This will be a very challenged leasing environment almost everywhere,” Mr. Parsons said.
The slowdown, he said, is being driven not by a pullback in demand but rather a flood of new apartments. Demand for urban properties jumped after the housing bust as young, high-earning professionals eschewed homeownership and flocked to big cities. Developers responded by focusing most of their efforts on high-end properties.
Now, though, the number of upscale apartments coming onto the market appear to be outpacing the number of renters able to move into them: More than 50,000 new units were rented by tenants in the fourth quarter in the U.S., six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.
That gap looks set to widen in 2017. More than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real estate tracker Axiometrics Inc.
And smaller cities like Dallas, Atlanta and Nashville are expecting some of the largest supply gluts.
The sluggishness is expected to spread across the U.S., hitting markets from Nashville, Tenn., and Dallas to Los Angeles and Atlanta.
Dallas is expected to see nearly 25,000 new apartments delivered, compared with the long-term average of roughly 9,000 new apartments a year, according to Axiometrics. Los Angeles is expected to get roughly 13,000 new apartments, nearly double the historical average.
Nashville could see some 8,500 new apartments, more than triple the typical 2,400 apartments completed annually.
John Tirrill, managing partner at SWH Partners, an Atlanta developer that has several projects under way in the Nashville area, is leasing a new five-story property with a fitness center, yoga and barre studio and swimming pool. He has lowered rents from $2.25 a square foot to $2.10 a square foot—a $150 discount on a 1,000-square-foot apartment—and is offering one to two months of free rent.
Meanwhile, as Wolf Street notes, rent concessions have become fairly pervasive across the country.
And, banks are starting to get just a little worried that they financed a few too many luxury skyscrapers.
Banks are pulling back on lending, which could help slow the pace of construction starting in late 2018.
“We’re just being really selective,” said John Cannon, a senior vice president at Pinnacle Financial Partners, a Nashville-based financial-services company that has increased its focus on multifamily lending in the last couple of years. “Multifamily has a large number of units on the ground that they really have to demonstrate some absorption.”
We vaguely recall seeing the single-family version of this movie a few years ago...