Market Conditions: Best Real Estate Quote of 2008
Crain’s reported today that luxury apartment building company AvalonBay Communities Inc. has pushed back its plans to build 1000 units in the South Loop at Clark and Polk due to economic conditions, including a glut of condo units that are being rented.
Construction was set to start in May 2009 on the first of two 500-unit towers. The start date has been pushed back by 12-months.
Is this the best real estate quote of 2008?
“You’re crazy if you’re developing right now,” said Walter Rebenson, vice-president of development in Chicago for the Alexandria, Va.-based company.
“The job losses are massive.”
Another developer, however, is going forward with construction plans in the South Loop.
As AvalonBay waits out the market, D2 Realty Services Inc. is moving forward with plan D for a site about a block south of AvalonBay’s. The Chicago developer originally had proposed building about 600 condos on the property at 1000 S. Clark St., later switching to apartments when the condo market tanked. Then D2 hired CB Richard Ellis Inc. to sell the 2.5-acre parcel, with an asking price of $20 million.
Unable to find a buyer, D2 has dropped that plan and now wants to develop the site in two phases. The first would include a 60,000-square-foot retail building with frontage on Clark Street. In phase two, D2 would build a condo or apartment tower on the west end of the property when the residential market recovers.
The $35-million retail development would sit just north of the emerging Roosevelt Road retail corridor, around the corner from the 400,000-square-foot Roosevelt Collection shopping mall that will open next year, and next to a Target store.
Economy changes plans for 2 South Loop projects [Crain’s Chicago Business, Dec 31, 2008]
Yeah lets create more retail space because clearly they made a killing in 2008.
““Home price growth in the vast affordable midsection of America will help raise the national median existing-home price slightly in 2008. I then expect price appreciation to return to more normal patterns in 2009, perhaps rising one or two percentage points above the rate of inflation,” Lawrence Yun, NAR chief economist, December 7, 2007
(Ok it’s not quite best quote of 2008 but being in Dec 2007, predicting 2008, I think it counts!)
http://www.realtor.org/press_room/news_releases/2007/ehs_dec07_trend_up_2008
” I then expect price appreciation to return to more normal patterns in 2009, perhaps rising one or two percentage points above the rate of inflation”
I like that he implied that “normal” is 1.0-2.0% above inflation rather than .5-1.0% above inflation.
” I then expect price appreciation to return to more normal patterns in 2009, perhaps rising one or two percentage points above the rate of inflation”
since we are in a deflationary spiral, does it mean negative price increases?
anon (tfo) — someone on this board convinced me that .5-1.0% above inflation isn’t “normal” either. The person’s slam dunk argument to me was something to the effect of, homes have cost, ON AVERAGE (ignore bubble years and depressions), about 1/3 of household income for the past century. That’s not compatible with the idea that homes cost 1% over inflation on average each year; if so, we’d be paying 50% more for our homes as a percentage of our incomes than people were in 1950, which is obviously not right.
The right way to look at it, I think, is that homes are a *de*preciating asset over time. Sure, some areas will increase more than that (like if you bought into Lincoln Park 25 years ago), but the *average* home location shouldn’t see that kind of appreciation.
If anyone has an argument about why this is wrong, I’d love to hear it. It stumped (and convinced) me.
listening to bbc report about housing bust in india.Empty codo towers with desperate developers. The are still at the incentives stage -cars and gold coins….with no buyers. This bust is global and if someone thinks US will decouple, they are smoking something….
KW:
Well, there is the fact that houses are ~75% larger than in the 50s. And that median household (rather than individual) income has gone up at a rate greater than inflation since the 50s. We’re paying for a lot more house and a lot more land (on average) and have ~75% more income per household, b/c of two earners becoming typical. That’s undoubtedly driven much/most of the above-inflation growth in home prices. Is that going to be replicated in the next 50 years? Doubtful (esp. if you use 2005 as the basis), but not impossible (and if you claim you KNOW otherwise, why aren’t you richer than Buffett + Gates?).
good points, anon (tfo). Thanks. (And I agree that what happens going forward is, as ever, the $64,000 question. Wish I had a crystal ball.)
(though your point about 75% higher incomes is better than your point about 75% more house. The latter point would cut against the 1%-above-inflation cost of housing, right? Wouldn’t it mean that in addition to having to pay for the basic 1% appreciation, we should also be paying for the increase in “house”? Meaning that as a proportion of our income, we should be paying even more, not less, relative to 50 years ago?)
” The latter point would cut against the 1%-above-inflation cost of housing, right?”
Haven’t seen any data on psf cost of housing; usually relies on the median or average cost of a house. If the exact median 1958 home was 1200 sf and cost $12,000; and the exact median 2008 home was 2100 sf and cost $200k, they get compared as if actually comparable by most analyses (C-S excepted), don’t they? I’m not really thinking this thru, so maybe I’m skipping a step.
Anyone starting on any commercial development this year has a financial death wish.
Depends. There’s commercial development (i.e., traditional retail, office and residential, all which are of course dead), and then there’s commercial development (e.g., health care, senior/assisted living, universities, etc., all of which will see healthy activity this year).
sartre.. even those smoking something don’t think it will decouple. I thought the story was supposed to be the rest of the world would decouple from the U.S. which is just as ridiculous (right now).
” (e.g., health care, senior/assisted living, universities, etc., all of which will see healthy activity this year).”
Any link to data? I believe these will not be “healthy” if by that you mean “no significant decrease from recent years.”
“Architecture Billings Index Drops to All Time Low for Second Straight Month
Commercial sector continues slide as institutional market follows suit”
http://www.aia.org/release_121708_abi
ze, looking at the cheerleaders on MSM you would think we have decoupled and taken of into stratosphere, of couse this is a bit sobering:
Manufacturing activity continued to decline at a rapid rate during the month of December,” said Norbert J. Ore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee. This index was at the lowest reading since June 1980 when it was 30.3 percent. In addition, Mr. Ore said, “New orders have contracted for 13 consecutive months, and are at the lowest level on record going back to January 1948.”
but that’s ok since we’re in a totally new paradigm.
http://www.msnbc.msn.com/id/28467755/
And here it comes the big story. Broke cities and broke states trying to get more money from broke people instead of lowering spending, cutting benefits, and getting rid of all those damn lazy ass public employees those of you in chi-town known of whom I speak. Anyone else see where this is going??
Sartre,
Get ready for more MSM, I think we get more up before some real nasty down. Turn off the MSM!!
Ze, agreed, s&p 630 seems about right target but only after a rally till the coronation…
G – Right now the only things you can get financed are Medical, Senior Housing and Renewable Energy (Non-Ethanol).
No data, just conversations with lenders.
As for the AIA, they are just like Realtors with more education.
When the cheeleaders say it is horrible it is most likely much, much worse.
“The only thing you can get financed” is a sign of “healthy activity?” No way.
I like Alan Abelson’s comment in today’s Barrons:
“We’ll happily abandon our nagging negativism on the stock market when everyone stops saying it’s time to buy because everyone’s bearish.”
G: “When the cheeleaders say it is horrible it is most likely much, much worse.”
“We’ll happily abandon our nagging negativism on the stock market when everyone stops saying it’s time to buy because everyone’s bearish.”
He is absolutely right.
Is this new commercial development funded by a TIF district, tax abatement, or some other tax-funded “gimme”?
Chances are it is. The prevalence of taxpayer-funded commercial development partially explains the redundant retail across the country.
We are going to be stuck with a lot of empty regional malls, Big Boxes, and power centers over the next few years. Crain’s Chicago Business last year reported that 4 Border’s Bookstore outlets, including the one in Uptown on Broadway; North & Clybourn, and Diversey & Clark, were to be closed as soon as the chain gets them sublet. You wonder how they ever made business sense to begin with. Just because you give them $40 million in tax breaks and other direct and indirect subsidies doesn’t mean they’ll stick around if conditions are too averse.
“…the great majority of buyers who hope to catch the market at its bottom will lose out…” JZ
http://yochicago.com/today/market-conditions/chicago-condo-values-show-little-decline_8208/#comments
“Buy now or be priced out forever.”
That was the quote of the year for 2003, ’04, ’05, ’06 & ’07 G
I could agree with that assessment of people not being able to catch the bottom. But that’s because people will buy too early, not too late. RE doesn’t jump 10% overnight.
“Crain’s Chicago Business last year reported that 4 Border’s Bookstore outlets … were to be closed as soon as the chain gets them sublet.”
That’s not what they reported. Go back and read the story again. Crain’s reported that the stores were on the sublease market, that Border’s said it was a normal practice (partially bs, of course) and speculated that this was an indication that all 4 might close. They might close w/ or w/o replacement tenants, but that’s true of TONS of retailers right now.
The big change to watch for in the near future is the disappearance of most of the WaMu locations–JPM’s deal with the Fed lets them putback the leases it doesn’t want and then the Fed terminates the leases.
Agreed investor. The only way you’ll be to LATE on the bottom is if you buy many, many years from now.
I may not time the bottom precisely but I WILL NOT buy to early.
Funny because it’s true, Investor.
Lawyer-shills are masters at doublespeak.
anon, I’ve seen plenty of those leases and they were all way above market rents to begin with. Those pro formas are absolute toast now and the hit to balance sheets will be enormous.
The CRE meltdown is underway. It won’t just be the Bennigan’s and Wickes NNN buyers that will find out their RE ‘value’ was dependent on the credit worthiness of the tenant and has nothing to do with market rents.
“RE ‘value’ was dependent on the credit worthiness of the tenant ”
Wait, are you saying that Midtown Manhattan office buildings don’t support sub-2% cap rates? Blaspheme!!!
They support below “-2% cap rates” just fine.