Record Apartment Building-Boom Meets Reality: First CRE Decline Since The Great Recession

By Wolf Richter of WolfStreet

Even the Fed put commercial real estate on its financial-stability worry list.

No, the crane counters were not wrong. In 2017, the ongoing apartment building-boom in the US will set a new record: 346,000 new rental apartments in buildings with 50+ units are expected to hit the market.

How superlative is this? Deliveries in 2017 will be 21% above the prior record set in 2016, based on data going back to 1997, by Yardi Matrix, via Rent Café. And even 2015 had set a record. Between 1997 and 2006, so pre-Financial-Crisis, annual completions averaged 212,740 units; 2017 will be 63% higher!

These numbers do not include condos, though many condos are purchased by investors and show up on the rental market. And they do not include apartments in buildings with fewer than 50 units. This chart shows just how phenomenal the building boom of large apartment developments has been over the past few years:

The largest metros are experiencing the largest additions to the rental stock. The chart below shows the number of rental apartments to be delivered in those metros in 2017. But caution in over-interpreting the chart – the population sizes of the metros differ enormously.

The New York City metro includes Northern New Jersey, Central New Jersey, and White Plains and is by far the largest metro in the US. So the nearly 27,000 apartments it is adding this year cannot be compared to the 5,400 apartments for San Francisco (near the bottom of the list). The city of San Francisco is small (about 1/10th the size of New York City itself), and is relatively small even when part of the Bay Area is included.

Other metros on this list are vast, such as the Dallas-Fort Worth metro which includes the surrounding cities such as Plano. Driving through the area on I-35 East gives you a feel for just how vast the metro is. However, I walk across San Francisco in less than two hours:

Special note: Chicago is adding 7,800 apartments even though the population has begun to shrink. So this isn’t necessarily going to work out.

This building boom of large apartment buildings is starting to have an impact on rents. In nearly all of the 12 most expensive rental markets, median asking rents have fallen from their peaks, and in several markets by the double digits, including Chicago (-19%!), Honolulu, San Francisco, and New York City.

And it has an impact on the prices of these buildings. Apartments are a big part of commercial real estate. They’re highly leveraged. Government Sponsored Enterprises such as Fanny Mae guarantee commercial mortgages on apartment buildings and package them in Commercial Mortgage-Backed Securities. So taxpayers are on the hook. Banks are on the hook too.

This is big business. And it is now doing something it hasn’t done since the Great Recession. The Commercial Property Price Index (CPPI) by Green Street, which tracks the “prices at which commercial real estate transactions are currently being negotiated and contracted,” plateaued briefly in December through February and then started to decline. By June, it was below where it had been in June 2016 – the first year-over-year decline since the Great Recession:

Some segments in the CPPI were up, notably industrial, which rose 9% year over year, benefiting from the shift to ecommerce, which entails a massive need for warehouses by Amazon [Is Amazon Eating UPS’s Lunch?] and other companies delivering goods to consumers.

But prices of mall properties fell 5%, prices of strip retail fell 4%, and prices of apartment buildings fell 3% year-over-year.

So for renters, there is some relief on the horizon, or already at hand – depending on the market. There’s nothing like an apartment glut to bring down rents. See what the oil glut in the US has done to the price of oil.

Investors in apartment buildings, lenders, and taxpayers (via Fannie Mae et al. that guarantee commercial mortgage-backed securities), however, face a treacherous road. Commercial real estate goes in cycles as the above chart shows. Those cycles are not benign. Plateaus don’t last long. And declines can be just as sharp, or sharper, than the surges, and the surges were breath-taking.

Even the Fed has put commercial real estate on its financial-stability worry list and has been tightening monetary policy in part to tamp down on the multi-year price surge. The Fed is worried about the banks, particularly the smaller banks that are heavily exposed to CRE loans and dropping collateral values.

But the new supply of apartment units hitting the market in 2018 and 2019 will even be larger. In Seattle, for example, there are 67,507 new apartment units in the pipeline.


evoila Life of Illusion Sun, 07/23/2017 - 11:18 Permalink

A lot of this is just concentration of jobs in urban centers. The next best investment is going to be homes in those suburbs since one can only live in a soulless city center for so long as the faux culture the developers try to create with a Starbucks, exercise bike studio, Whole Foods, and fresh juicers will wear people out in a few short years and they'll want nothing more than to get out of the city.

In reply to by Life of Illusion

MalteseFalcon evoila Sun, 07/23/2017 - 12:36 Permalink

"Stack and Pack" apartments are being thrown up all over my city.The rents are too high and they remain half empty.Still more are being built.For now only foreign born "knowledge workers" who just arrived in town are willing to live in them.They will wise up quickly and move on.If the flow of foreign workers slows or the economy turns, the "investors" who built these will be looking to Section 8 to bail them out.I know what Obama would do.What say you, President Trump?

In reply to by evoila

Why Bother MalteseFalcon Sun, 07/23/2017 - 14:24 Permalink

That's how it is too in Irvine, where I work. There are dozens of new luxury apartment complex projects of at least 200 units each popping up where I work in Irvine. It's a culture clash though. Mostly East Asians - and I know how that goes, the smell of sharp spices permeates the hallways of buildings they mostly occupy. I had next door neighbors - a couple, who probably did not speak English, and did not understand "Hello," with a smile. They always just stared, as if I've inconvenienced them.Now I live in a place with a mix of mostly whites and second largest are hispanics and a few asians, it's much better. The hispanics speak spanish but they are cool as neighbors. And my place is probably $1,000 less per month rent than the luxury apartments in Irvine. I guess the people living in them don't like to drive 8 miles to far less expensive places. East Asians tend not to be night club types, and there are enough bars at the Irvine Spectrum.My curren management did not bother to renew my lease. I think that is a sign that they see a glut too. Frankly I prefer my place to Irvine because it's in a hilly part of Orange County in the shadows of Saddleback Mountain. It's more scenic and only 8 miles from my office. 

In reply to by MalteseFalcon

Why Bother evoila Sun, 07/23/2017 - 14:34 Permalink

I lived in very small towns when I was younger. I am done with them. I guess you must live in a city. Here is what happens in a small town. If you do not have the same culture as your community, you are outcast and people look at you as if you are from a different planet. If you do fit in, everyone knows your business.When my dad got old he would tell me the problem with living out in the boonies is that you will have some accident and you have to wait for help or cross your fingers.Tell me what type of culture you find in small towns? Toby Keith? Oh you refer to RE development culture in cities, if that is a culture - LOL.You have maybe a ma and pop grocery store that sells slim jims, candy, chips and beer in the boonies. You regard that as superior to Whole Foods?You don't need juicers to get super nutrition. You don't have to go to Whole Foods to get organic - Krogers has organic sections and they are in large cities too. Eat at least 8 servings of vegetables of a variety of colors a day and you have super antioxidants and fiber. And I get that in the city.Not to forget - the better paying jobs. My state is high tax but if I move back to my low tax state in the large city, the same job would be paying me so much less that I am better off in my high tax state. I did the math.  

In reply to by evoila

wisebastard Sun, 07/23/2017 - 09:41 Permalink

let me guess they were built with QE and the rest will be scraped like the Fracking industry were the clean up was passed on to the tax payer........

GodHelpAmerica (not verified) Sun, 07/23/2017 - 09:53 Permalink

Austin has too many buildings relative to inhabitants. Huge overbuilding there. It's a joke--almost a microcosm (but certainly less extreme example) of China's ghost cities.

My uncle and his father have owned apartment real estate in NYC since the 1960's. On Christmas 2016, they noted apartment buildings were selling well above what any investor should expect to see as a return. The decline in this market is real; and only just beginning.

Handful of Dust GodHelpAmerica (not verified) Sun, 07/23/2017 - 09:54 Permalink

Austin is a disaster ever since realtors and land developers took control of their city council and pretty much overdeveloped everything. Throw in katrina felons who flooded the city also did not help. I lived there for a while when it was a nice college town with clean air and zero violent crime.Now, turn on the radio in the morning and you hear the homicide crime news, traffic congestion and air pollution alert.Even that UT campus there has seen some horrific murders in the past few years---brutal rape murders and stabbing deaths by libtard fanatics.

In reply to by GodHelpAmerica (not verified)

my new username GodHelpAmerica (not verified) Sun, 07/23/2017 - 12:05 Permalink

You can buy a 1bed 1bath in downtown Austin for less than a million, so that must be great, right? Fitted cupboards to store your collection of yoga mats, and you can securely park your $700-a month leased Porsche Cayenne.
No Texan accents to confuse you, Whole Foods is close buy so that you can over-pay for your organic tofu burger with chai latte foam frappachino.

Downtown Austin is a microcosm of Downtown Metrosexual America - Mexicans doing the construction whilst 30 year old teenagers live a fluffy lifestyle, barely able to string together two coherent sentences. These are the 60% of Americans who matter.
When that next dip hits, even more Americans will be forced out of their houses of The American Dream, and into American Apartment Apocalypse. Then there will be 51% of Americans who count, and 49% who do not exist: too poor to matter, not poor enough to matter.

In reply to by GodHelpAmerica (not verified)

Never One Roach my new username Sun, 07/23/2017 - 13:17 Permalink

That there Austin Statesman news rag researched who owns the downtown condos in Austin and over 80% were Californians. Last time I was there I saw a 68 year old looking woman who had $100,000 plastic sugrery to look like a 20 year old wearing a fur vest and thigh high leather boots carrying her Pomeranian as she walked out of one of those condos in July. Had to be from LA but certainly NOT a native Texan.

In reply to by my new username

John Law Lives Sun, 07/23/2017 - 09:53 Permalink

I can attest that there are many new apartment buildings being developed in the DFW area of Texas.On a completely separate note, the city of Dallas recently chose an African-American woman from Detroit to be its new Police Chief.  This is what she had to say recently:“We do know that, historically, law enforcement is predominantly male, but so were so many other professions years ago,” said Hall, who encouraged young women to pursue a career in law enforcement. She added that women can bring a different approach to the job than men, offering “that special something to law enforcement that truly, truly calms the savage beast.” “We kind of do it a little different, a little better. We’re a little bit more nurturing by nature,” Hall said._________________________________________________________________________________I wonder how the men on the beat in Dallas will feel about their new boss basically saying women make better cops than men.As a side note, Dallas has a Democrat Mayor (caucasian male), an African-American City Manager (male), an incoming Police Chief (African-American female), a District Attorney (African-American female), and a Dallas County Sheriff (openly gay Hispanic female).  The Mayor of Dallas recently hinted that he would be okay with the removal of certain Confederate monuments to other locations.  As another aside, Dallas County reportedly voted 61% (+) for Clinton in the 2016 POTUS election.  What a surprise...

Consuelo Haus-Targaryen Sun, 07/23/2017 - 10:47 Permalink

I've been posting about this for long about 22 years+ Why is it that Black people are labeled with this geographic-cum-ethnic 'qualifier', whilst people of other 'colors' are labeled differently - or in the case of 'White' people, not labled with any qualifier at all, save for the non-color (?) of 'Whites'...?Always got a kick out of the term 'Hispanic' too - or 'Latino'.   Which of course, are both code for: MEXICANS...   Funny, people of Mexican descent laugh at this - they can't figure out why the liberal Gringo's tie themselves in knots trying not to 'offend', when there is nothing offensive to them at all about being called 'Mexicans'.   They're from Mexico after all...Black people I know (that are not 'college educated'), have heartburn with being labeled anything but just straight up 'American'.   They could care less about 'Africa', just as much as I don't give 2 shits about what goes on in Sweden...    

In reply to by Haus-Targaryen

austinmilbarge John Law Lives Sun, 07/23/2017 - 12:04 Permalink

Certainly not much crime at in that 30A area. But plenty of nosy HOAs. It's cool down there, but expensive (Seaside, Seagrove Beach, etc.)

Don't overlook a little further South along the panhandle a place called Cape San Blas and another barrier island called St. George Island. It's old Florida "ish". Apalachicola is right in there too. Not as expensive and not as crowded as the 30A area.

To each his own of course. Good luck in your move!

In reply to by John Law Lives

ThrowAwayYourTV Sun, 07/23/2017 - 10:01 Permalink

More Slums coming to a city nearest you. Now starring, Single moms without jobs. Crackhead dads without jobs. High Skool drop outs without jobs. Troubled teenagers with criminal records without jobs. Young prostitutes and Old perverts without jobs.Ticket window opens at 9pm. HURRY! limited seats available!