Interest rates are too high for many projects to start. Some started projects are in trouble. Let’s discuss the ramifications.
Developers Sit on Empty Lots
The Wall Street Journal reports Developers Sit on Empty Lots After Historic Apartment Boom
During the biggest apartment construction boom in decades, a growing number of developers can’t make the numbers work to get started on their project, or can’t get the money to complete them. Higher interest rates, tighter lending conditions and flattening rents in parts of the country have left property companies from California to Florida waiting for financing that might not come soon.
The amount of time the average apartment project spends between construction authorization and when construction begins has risen to nearly 500 days, a 45% increase from 2019, according to property data firm Yardi Matrix.
“We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders. “Deals and financing have dried up.”
Some decline was inevitable. About half a million new apartments opened in 2023, the most in 40 years. Based on what is already under construction, analysts expect a similar number to be completed in 2024.
But banks have other issues that keep them from lending as much to apartment builders this year. Many regional banks are souring on the commercial real-estate loans already on their books.
“Their current portfolios are getting marked down and they don’t have that much to lend,” said David Frosh, chief executive of Fidelity Bancorp Funding, a California real-estate lender.
That means developers need to raise more cash from investors to build. But many investors are more cautious today, as rent growth flattens and new projects look less profitable at today’s higher interest rates and construction costs.
“The numbers don’t add up,” Frosh said.
Housing Starts vs Completions Looks Ominous for the Economy
On May 16, 2024, I commented Housing Starts vs Completions Looks Ominous for the Economy
Housing completions have surpassed housing starts. History suggests bad things follow. But what’s happening this time?
Starts Minus Completions
Whether it’s all completions or just multi-family that matters the most, it doesn’t look very good either way.
Economic Ramifications
- Slowdown in construction employment.
- Slowdown in loans.
- Writeoffs on struggling projects. The WSJ mentioned several. There will be many.
- Apartment construction loans will add to the misery of regional banks suffering on commercial real estate loans.
- Huge slowdown in durable goods needs coming up: Appliances, furniture, light fixtures, etc.
This is happening as a major slowdown in EVs is also underway.
ISM Manufacturing New Orders and Backlogs in Steep Contraction
Yesterday, I noted ISM Manufacturing New Orders and Backlogs in Steep Contraction
The Manufacturing ISM was in contraction for 16 months went positive for a month and is contracting again for two months with order backlogs falling for 20 months.
Order backlogs have plunged. New orders are sinking. This will impact employment.
The economy is now struggling on multiple fronts simultaneously.
Is the US in Recession Now?
On May 28, 2024, I asked Is the US in Recession Now? Two Prominent Competing Views
Danielle DiMartino Booth has been beating the drums for weeks that the US is in recession and has been since October. No so fast says Jim Bianco.
My follow-up post was Philadelphia Fed GDPplus Revised Significantly Lower, But No Recession Yet
I believe we are headed for recession this year, but we are not there yet in the first quarter.
Odds of a a recession in the second quarter are increasing.
It’s possible a recession started in the second quarter and few see it.
Starting to see some of these unfinished buildings mysteriously go up in flames around the state in recent months.
Apartments are overbuilt. Especially in sun belt states Florida and Texas. But I’m nevertheless buying the public apartment REITs because of Blackstone.
If apartments were overbuilt, you’d have lots and lots and lots of them empty, despite owners darned near giving them away.
Heck, for economic correctness: The true indicator of whether anything is truly overbuilt, is that aggregate demand from owners, for paying someone to take units off their hands, exceeds demand for buying more existing units at ANY cost.
After all; a good being oversupplied, only has meaning once each additional unit has negative marginal value. Hence is worth more erased from the face of the earth, than in remaining existence.
Fat chance that is even remotely close wrt. apartments on anything resembling any scale. It may be the case in highly localized areas in China, and I suppose perhaps Detroit. But in general, America is at least two or three apartments; and most likely more; per capita short of any such oversupply.
More generally: It is fiendishly rare to experience “over supply” of any actual good with service lives as long as apartments. Things are economic “goods” for a reason: The more of them you have, the better off you are. Short-valuable-existence goods do change from being “goods” to being have-to-pay-to-dispose “trash” after awhile. But apartments…?
Instead; whenever you hear about apartments being “over supplied”; you can be pretty much dead certain that the ones spouting off about it, is just another economic illiterate who; whether knowingly or just out of ignorance; wants some totalitarian government to restrict people who are more competent and productive and useful than him, from adding more; demanded, hence wanted and needed and economically beneficial; supply. Solely so that the illiterate’s units can continue to be rented at de facto government enforced, economically inefficient, usury; rather than market; rents.
Depends on how the purchase of apartments is funded, and how sustainable that funding is too
Its already rigged that Biden gets to the November election finish line before a recession annoucement, so we shall see how bad it gets after the election.
I suspect we’ll see many “adjustments” to economic stats after the election.
Rigged by God or the Devil?
Neither of those are sufficiently economically illiterate to care even one iota about something as utterly irrelevant as some illiterates arbitrarily “declaring” something “a reteximaression” or not.
If he wins, they will just start filling them with all the new arrivals they a have been flooding the country with…
The brutal inflationary depression is starting to cause confidence loss in the bloated investor class even with the fed still printing like mad.
This is excellent link to consciousnessofsheep.co.uk
Interesting reading. This guy is a very smart economist. Thanks for the tip. Added to my favorites list.
I was told by a tradie who owns a small painting business in Australia that fewer people are interested in building new homes because the raging inflation has driven the build costs through the roof. A mate of mine in Vancouver who owns to rental equipment businesses and deals with many tradies confirms this.
What is happening is people are pouring into the secondary market looking for more affordable prices. This is of course putting upwards pressure on the secondary market home prices in some areas.
Have a cousin — retired — he was looking to move closer to his kids… they had a lot purchased many years ago — build cost for a non flash small 3 bedroom was 1 million dollars…this is in northern Ontario… they found something acceptable on the secondary market for 700k (house and the land)
Of course the bulk build guys are putting sacrificing quality to put homes on the market that have competitive prices… but they fall to pieces in a few years.
And then there is this
link to msn.com
Where the hell in Northern Ontario does it cost 1 million to put up a small 3 bedroom house?
I grew up in Southern Ontario and still have lots of family and friends there and no way/no how does it cost 1 million to put up a small 3 bedroom house (after land already purchased)
Lively, near Sudbury.
Something big is about to happen…. historic…
This is a headline from the MSM in the UK (The Spectator)
Covid vaccines may have helped fuel rise in excess deathsExperts call for more research into side effects and possible links to mortality rates
Tesla is about to die.
The everything bubble is on the verge of exploding…
The central banks are pushing on a string… they cannot raise rates to stop raging inflation … they cannot reduce rates to keep the bubble growing.
Last time we had a moment like this … late 2019… we got Covid a few months later… and a massive deluge of $$$$ …
What will we get this time?
They do keep warning about Disease X … that will kill billions.
Anyone could have made the case were at the precipice a year ago (or two), and here we are. Total investor complacency and government pre-bailouts activated. Half the country feels nothing, as evidenced by their desire to continue on for four more years without even changing the ringleader.
How did civilization collapse?
“Two Ways. Gradually and Then Suddenly.”
How did Tesla go to Zero?
“Two Ways. Gradually and Then Suddenly.”
Disease X is nuclear war.
Lumber futures are speaking quite loudly now.
After the saving and loan crisis construction’s credit dried up. Over 60% of the banks were gone. Real home prices hit bottom in 1995. During the dot-com home price and construction loans rose. After the plunge houses were sold with teaser rates. Home construction doubled. Construction loans popped up until 2006. Between 2006 and 2011 nonaccrual took off and houses construction plunged to 80 years nadir.
I just took a flipper off market – since there is buyers strike
now on market as rental – I’ll just cash flow it
of course interest rates are pretty high – for BORROWERS
Everyone is having this same idea at the same time. No buyers, so let me rent it out (instead of dropping the price and cutting your losses). That’s why rents are crashing.
Yep, in my neck of the woods, I’m seeing price drops and “10 weeks free rent” specials.
Between 2008 and 2010 non-payment, when borrowers fell behind, the multi and office buildings rose from 1% to 4.5%. Construction loans nonaccrual rose from a higher level, from 5% to over 10%. In 2024 construction and multi nonaccrual is 0.5%. Office buildings rose to 1.5%. Most of that was held by the mega banks. For them it’s crumbs.
A homeowner put his Houston upper middle class house up for rent. The long line surprised him. The winner offered 15% above the price. The house was rented within days. In a good area, where usually nothing is available, transactions are rare. A small house, in a good area, in an upper middle class neighborhood is sold/rented fast.
At market bottom, when real prices are low, when carpenters, electricians and construction workers are begging for a job, and will do whatever they can to stay in the game, buy a small house in a good neighborhood, when homeowners can’t take anymore.
Perhaps for those new to construction there is a point in your post.
However anyone who has made a living from construction has gotten screwed over so many times by Fed that they plan for Fed failures and shore up personal finances when the going makes a few Bucks for them.
Skilled trades such as Carpenter, Plumber, Electrician, it is as much a lifestyle as it is a source of income. This because of the Time invested in learning that skilled trade. Same as the Farmer or Fisherman these are lifestyles with much commitment.
Sorry but the mutts at that Eccles building are not to be trusted so skilled tradespeople plan for the next financial disaster before it happens.
Fast Bear tells it like it is.
That’s right. They will do whatever they can to be in the game. They do it for self-respect. They don’t want to lose their skills, especially if the drought is long. I know a divorced woman whose boyfriend was a builder. During the prolonged drought he built two villas for her daughters. When done, the super sales woman dumped him.
I was developer in a previous life.
In 1990 the musical chairs ended when construction funding dried up, literally overnight.
There is only one Uber relevant point in the above:
“We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders. “Deals and financing have dried up.”
Started projects in 1990 terminated mid stream – investors like the ca. teachers union pulled out.
Construction loans are the bellwether – the first risk lending to go.
The mortgages, credit cards closed and credit lines chopped, home equity loans terminated, and then car loans.
All those out of work construction jobs go poof.
Then
Capital state projects go poof.
Restaurants start closing while Subway is mobbed.
Banks start failing hopefully not in a cascade.
Then housing values plunge and then you get your properties reassessed to lower your tax burden.
Then the states go crazy to pay their pension promises and then shake down small businesses without remorse.
I’ve seen it all before.
You can’t convince me otherwise.
A neon sign is flashing “Parties Over”
The party ain’t over, it just moves to another neighborhood, money never sleeps…
CNBC talking heads all talking about consumer staples now….the place where money runs to hide….
You actually watch CNBC?
Yes from 6:30 a.m. to 4 p.m. but I do rotate bloomberg TV & Schwab network in between depending on which CEO is being interviewed or the topics at hand.
It’s over here in a way not seen since the Great Depression.
As I pointed out, it’s a cascade of destruction.
Once construction collapses everything else will follow.
It won’t effect Russia much and China will handle a contraction better than the U.S. – as it’s a far better centrally managed economy.
The issue is the US is losing credibility due to the colonialist War Pigs agenda. The West is being made to look pretty awful when China builds modern housing communities for the Peruvian peasants in the Andes working in their mines.
Imagine that? Paved streets, electricity, stoves, schools, hot and cold running water, toilets and playgrounds instead of thatched roof stone hovels and outhouses?
High speed trains in Africa. Etc etc.
No the 900 year old scam is collapsing in every quadrant.
Look it up!
No it’s over Brics and benevolent China and family loving Putin vs a lying corrupt colonialist Euro American thieving cabal.
Inevitably this means our debt is becoming less desirable by the day. What happens when no one buys our debt in a severe global contraction?
The US is becoming a meth addict prostitute increasingly incapable of attracting john’s.
This is another sign the economy is going to continue to get worse every month until the election. People will be looking for change which is why Trump will win in a landslide.
I’ve been told this won’t happen. Something to do with a shadowy cabal or something.
Apartment vacancies are slowly creeping back toward the pre-Covid range, explaining a new construction slowdown. We already improved to 6.6 % vacancy but probably need to be between 7-7.5% before rent inflation really cools, or even declines slightly.
“ This will impact employment.”
A sample size of one, but one of the local lumber mills that produces 2x4s exclusively for the big retail outlets like Home Depot and Lowes has just shut down permanently due to lack of demand.
The company has other mills, but this specialty one is now kaput. Ironically, just a couple years ago they were running 10-hour shifts, balls to the wall, to keep up with demand.
Alternatives to this pickle exist.
link to fox10phoenix.com
The multi completions are rising. Turnovers are rising, but the waiting list is still long. The fake Rent CPI might drop or stall. That’s a good thing. The major banks have serious CRE problems, but CRE is a small portion of their portfolio. New “normal” rates benefit the banks. 80% of banks activity is done online. They cut branches and layed off low-end employees. Mgt benefits. The poor and the middle class suffer.
The Fed might cut rates after the Nov election. Those on 5.5% might switch to 2Y/5y
bc the front end of the yield curve will fall. Higher demand for the 2Y/5Y will drop their
rates. The long duration might rise, bc inflation is here to stay. The yield curve might normalized in 2025.
In a severe contraction all debt becomes toxic.
When conducting actual business (R&D, building, production, expansion, etc) with normalized rates becomes too difficult or impossible you know that:
It’s the great ponzi, Charlie Brown
Since there are signs of economic slowing in various US sectors such as multi family.
Everything has some inter-relationships.
Equities have not really gone risk off yet. There is some softening but everyone is posed to jump back in expecting fed to start reducing rates.
Currencies are showing something that would say there is an element of caution.
USD/JPY has been Topping and it is all not just because of intervention.
Unwinding carry trades is a sign of people exiting risk markets and opting for some safety back in home currency.
In Europe German employment continues to deteriorate which means Asia, primarily China is not looking to purchase high end European goods. China has a faltering economy.
The efforts by multiple Central Banks to quell inflationary pressures is biting into whatever resilience and momentum domestic economies may have had.
Since there is an whole generation which never encountered a Recession before all caution has been never learned.
As consequence will not take very much for softness to become a hard landing.
I’m lazy and my research skills suck, but I’d be willing to bet that the reason those apartments are empty is because rent prices are not feasible for most of the intended target renters. They can give zero deposit and 1 month free rent till the cows come home and it’s still too expensive.
We made a trip to Corona, CA this last weekend (not a coastal area) and rents start around $2200 for a small 1 bedroom and rose to $3200 for a small 2 bedroom (1300 sq ft). In Corona, CA.
These looked like nice apartments that were adjacent to a newish shopping district where 35% of the stores were empty – places that had a business previously, but are now vacant. Gosh, I wonder what happened to cause so much retail vacancy.
Yep, just like automakers took the false signals of Covid stimulus and built way too many luxury and luxury-trimmed vehicles, apartment developers overestimated the amount of people that could afford those rents.
“a growing number of developers can’t make the numbers work to get started on their project”…“The numbers don’t add up.”
The article points to the crux of the problem, the numbers don’t add up which begs a fundamental question: Interest rates are fairly “normal” right now so how did all these projects get completed in the past but now struggle? Does this mean the economy can’t operate unless borrowing is near zero percent?
I can’t make the numbers make sense either, it’s simply easier to put money in T-bills than do rental properties right now and that’s saying a lot.
Your last point is really on the mark–the hurdle rate has basically been pegged at zero for a long time; interest rates finally normalizing and sitting in near-zero-risk Tbills is an easy place to be at a time of so much uncertainty due to inflation and politics. When you see the housing market and stock near all-time highs and you are unclear on how they can stay levitated or which political whim may move them higher or lower, when inflation is the ultimate uncertainty and then you cast your eye at 5.2% T-bills, your easiest (laziest? smartest?) play is to just take that vig and wait for some certainty to appear.
This election will be decided by NON-ASSET-HOLDERS (Mish’s term=renters but it could be homeowners that got in late or people whose only asset is a house and, despite it possibly being elevated in value, they cannot move without jeopardizing their low-interest-rate mortgage).
The politics of enriching large numbers of folks with paper gains has reached quite the saturation point due to inflation; that is the non-asset-holders probably sitting around 40-45% are not likely to become asset holders due to inflation preventing their joining the asset-holder ranks, any asset.
There’s an anger in America, a bifurcated economy. Until and unless assets fall in value and more than hope is seen by that 40-45%, there is an underlying tension.
And to this post’s point, the investors, builders and lenders are digesting past credit extensions, commerical real estate strains and the massive amount of risk to their next move relative to T-bills –they may simply use the time to delever the last upcycle.
Your comment about sitting in T-bills is bloody spot on. Safe 5.2% hasnt’ been seen for this long in a very long time but it triggers the risk-weighted calculation to smack up against that number. ZIRP is about the only way a large number of ideas (and developments) were ever brought to market and, with inflation tame back then, risk and rates were both oh so low. Now, it takes really astute investors to clear 5+%.
Either Papa Dave’s oil or MPO45v2 in T bills.
Turtles and inflation come to mind.
“This election will be decided by NON-ASSET-HOLDERS”
Possibly but I still think non-asset holders working two or three jobs won’t have time to vote, they can’t afford to but we will see, election only 5 months away now.
People are pretty fired up, I bet turnout is near record. Even the non-asset-holders have a sports team level of connection to the parties now.
Some of the reasons projects got completed in the past compared to now are:
1) Less stringent building codes meant you built for less $ / sq foot (adjusted for inflation comparing today).
2) Soaring Debt at all levels of government (city/state/federal) has meant taxes (profits, buying the land, buying stuff to build buildings etc) and permits and everything else related to building a building and then maintaining it has gotten much more expensive (also adjusted for inflation) because the governments at every level are taking more money.
3) Rent Control (in places that have them which is increasing).
You may be onto something Tim. Just ran across this article about Houston which has plenty of land but….
link to bisnow.com
Looked into buying some acres and putting a house on it. Went soliciting expertise and the general consensus was “don’t”. Beyond the costs there’s a whole moronic bureaucracy to navigate. If you’re building at scale it isn’t so bad.
That’s not even mentioning the cost to build being very inflated. Also, after built they have to operate and maintain the place. Low end wages went up the most (bout time). Even the rental office secretary costs double, the grounds crew and snow removal, the HVAC contractor, the lawyers to get evictions going more smoothly…
I was hesitant to mention wage cost because I’m not sure whether it has or not.
As Mish as posted many times, real wages have been stagnant for 30 years or more. That means they just kept up with inflation. So technically it shouldn’t be any more costly now than 30 years ago wage wise if rents have also kept up with inflation (I think they have).
People actually believe that liberal spew? Wages haven’t kept up with inflation is utter nonsense. Ask anyone who was alive in 1970 if living conditions were better back then. Utter nonsense. The problem is you can’t measure standard of living improvement in any meaningful way relating to monetary policy, so we’re stuck with cpi. Can’t measure longevity either, so HC costs are massively overstated by CPI. It costs more because we are being kept alive 20-40 years longer. Put a dollar figure on that. Put a dollar figure on something as simple as smartphone with data plan. Massive, massive standard of living improvement. Hedonic adjustments attempt to capture these things but they’re wholly inadequate.
Wages haven’t budged compared to nonsense CPI might be accurate.
You are correct. Interest rates might come down but the Pundit class is ALL OVER THE MAP with “Maybe so, Maybe NOT, DEFINITELY WILL” and “NO WAY.”
I cannot make sense of anything.
So true about the pundits and rates. I don’t care about the Fed, I feel they really just follow the bond market. I am 100% convinced that NO ONE knows where rates are going, ever. There are solid reasons for them to shoot up, and equally solid reasons for rates to collapse. But I do know this…we just had a 40 year down cycle in rates, all the way to zero (should have only been 30 years). So it seems logical to me for us assume that we have just started the 30 year “up” cycle now…if so, most people are screwed. Now, conversely, on a technical basis, the bond yield charts all look like a topping pattern to me. It would not surprise me at all if the yields collapse in 2025.
Everything was bid up to stupid levels with borrowed money, and now that borrowed money is gone.
An engine will run without oil, for a little while…
This election will be decided by renters
Yep.
The ones who can break free of their tribalistic party affiliation to see the truth of their situation.