Jurock’s Real Estate News – Sept.10
Sept. 10 to 17, 2014
I N T E R N A T I O N A L: Soggy Phoenix Sees Less Homeowners Underwater
Phoenix, Arizona is experiencing record rainfalls and flooding this week and the high-flying housing investment market is receding – but less homeowners selling are underwater, mortgage wise. In July, home sales and prices dipped. Sales fell 4.5 percent from June and 18 percent from July 2013. The Valley’s median sales price was $210,000 in July 2014 according to a report from the W.P. Carey School of Business at Arizona State University. A year ago, the area’s median was $194,000.
Supply: Housing inventory is shrinking again. Supply fell 3% in July to 24,994. Last summer, supply was too tight for a healthy market. The number of houses for sale is 36% lower now than a year earlier.
High-end houses: In July, 553 houses with price tags of $500,000 or higher sold. Luxury sales accounted for about 23% of metro Phoenix sales in July, up from 21% a year earlier.
Short sales: Higher values are helping more struggling homeowners sell without completing a short sale.The number of lender-approved sales for less than what is owed on a house is down 71% from a year earlier and accounted for only 3% of all Valley sales.
Out-of-state buyers: The number of sales to people living outside of Arizona declined with overall sales. In July, out-of-state buyers were involved in 16.9% of all metro Phoenix sales. That compares with 17.7% in July 2013. Californians are the biggest group of out-of-state buyers, accounting for 4.2% of all sales. Canadians are second at 1.9%.
Cash buyers: The number of people paying cash for houses instead of financing the purchase with a mortgage has been declining with the number of investment purchases. In July, 20.9% of metro Phoenix’s sales were closed with cash, down from 29.3% in July 2013.
Major Point: Let’s see, average house price of $210,000; one in five is being bought with cash and only 3% of sellers are under water. Sounds like Phoenix has risen from the ashes and is now a very healthy market with still a very promising upside.
C A N A D A: Best Mortage Rates
If you build it, they will come … and finance it …
Dustan Woodhouse AMP, PH# 604.351.1253 writes: Thinking about construction? Will you require any level of financing along the way? Start at the beginning with an in-depth project review with a Mortgage Broker specifically experienced with construction mortgages. In fact, have this conversation prior to purchasing the lot if possible. Land financing is not so simple itself, with most lenders requiring plans and a build sheet up front in order to finance the land alone. Lenders want to see exit strategies on land files.
Both ‘What’ you are building and ‘being liquid enough to complete’ matter immensely to the lender, as of course to yourself. Working out the mathematics on the true liquidity (Cash) requirements in advance is vital.
Perhaps the #1 thought to keep in mind is that construction financing is not defined as a lender advancing funds with which one builds a home, rather it is a case of the Lender advancing funds based on the percentage of the house completed. Typically the first dollar (aside from the land advance) is not released to a client until the structure is ~35% complete … i.e. a foundation, framed, roof, doors, windows, etc. A ‘locked-up’ structure exists.
So, once you build (a portion of) it, then they will finance it.
To be clear, lenders are equally unlikely to enter into construction financing mid-build. A lender wants to see the complete plan up front before the first shovel full of soil is moved.
It is all about A-Z, not A-B and not J-Z.
Self-builds are also challenging to finance currently, primarily due to owner/occupied builds being a one-off often completed by an individual with limited experience and even more limited industry connections to reliable trades.
Having a team of (New Home Warranty Certified) professionals involved is key.
And that (new) old story about documented income, that is a pretty important one these days as well. Lenders care deeply about their client’s line 150 documented personal income as shown on their T1, and the composition of that income will be looked at closely. Less so about earnings retained in a Corporation.
Rates on construction mortgages are typically Prime +2.00% (5% currently) and the draw mortgage floats as a line of credit until completion, at which point the initial lender selection becomes very important as many have fine print locking clients at completion into 5 year fixed mortgages at uncompetitive rates. The landscape is changing (tightening) in this area of lending as well.
Dustan’s best rates:
Variable p-.65 – 2.35%
Uh-oh, We Are Building More Places To Live Than Places To Work – A Lot More
In Canada’s two most important cities, there are more homes being built than stores, offices or industrial warehouses combined and twice as much money is being spent on residential construction than all other construction in the country, including infrastructure.
And, if you shake it out, more condos are rising than places for all the future residents to work, shop or learn.
In Toronto, the value of building permits for multi-unit housing (read condos) in July soared nearly 30% to $1.65 billion, while such permits were up 46.1% to $718 million. And that is for one month. Across Canada in July – the latest month for all figures – residential construction increased 18.2% while non-residential construction increased by 5.2%.
For the first seven months of this year in Metro Vancouver, residential permits reached $2.9 billion, while total non-residential construction was $1.27 billion, according to Statistics Canada. The city is on track to build 20,000 new homes this year.
There is something out of whack here. Residential construction this far ahead of non-residential reflects a weak pattern of business investment that could stunt economic growth and depress Canada’s standard of living.
Simply put, once the construction of a home is complete, it is no longer a job generator, unlike say an office tower, a manufacturing plant or even a shopping mall or a transit station.
Major Point: We can cheer the housing starts – which are already surpassing the most optimistic forecasts – but we must realize that they could reflect a slowdown in our national economy. In a truly robust economy, more investments would be made in commercial buildings and infrastructure than in condos!
The Rich Get, Well, Richer And Home Sales Show It
The wealthy have led every housing market recovery ever seen and the skyrocketing sales of homes priced more than $1 million gives solid evidence of that in Canada’s major cities.
Sales of homes priced at $1 million or more – and often a lot more – soared 34% in both Vancouver and Toronto this year and were up 17% in Calgary and 11% in Montreal in the first half of this year.
“We expect Canada’s high-end housing market to see consistent growth through to early 2015,” said Ross McCredie, president and CEO of Sotheby’s International Realty Canada as Sotheby’s released its annual Top Tier Real Estate Report.
Here is Sotheby’s take on Vancouver, Calgary and Toronto’s top tier housing action:
Vancouver: From January 1 to June 30, 2014, sales over $1 million increased to 1,664 units for condominiums, attached and detached single-family homes combined, 34% more than the units sold in the first six months of 2013. Most of the $1 million plus sales were detached houses, with 1,317 units – but there has been a “significant increase” in sales of townhomes and condos priced at over $1 million as well.
Calgary: Through the first half of 2014, Calgary’s $1 million-plus homes posted a 17% increase in sales compared to the same period in 2013. Low inventory in the beginning of the year drove bidding wars and price increases. Calgary’s robust economy is expected to sustain demand for luxury real estate, and notable growth is expected in the $4 million single-family home market throughout the fall and into 2015 as this category has already outpaced 2013 sales numbers.
Toronto (GTA): The Greater Toronto Area (Durham, Halton, Peel, Toronto and York) is expected to lead Canada’s high-end housing in every category: single-family homes, attached homes and condominiums. Toronto is seeing record-setting sales with July numbers representing one of the strongest months of the year. The $2 million plus price range performed exceptionally well, with a greater number of homes sold over $2 million than within the $1.5-$1.75 million range. The top-tier market is expected to favour sellers into fall 2014, driven by lack of inventory and strong consumer demand for single-family homes.
Look it up here.
Major Point: Add to this, that even big boys like Concord Pacific are building condos over $1 million in … wait for it … Calgary … you realize that all our predictions at Landrush and Outlook conferences in the last three years are not only going to happen but are here now. Two markets, we said in February 2012 … the rich and everyone else.
Cool Gastown Indicative Of A High-Tech Migration
Vancouver’s funky and heritage Gastown neighbourhood is emerging into a high-tech hub with a number of tech firms setting up offices, often in the older brick-and-beam buildings that characterize the area and add to its cool factor. In fact, Global Relay, a Vancouver-born tech firm is now the largest office tenant in Gastown, just signing on for 60,000 square feet.
It is trend of high-technology start-ups and middle-level companies seeking lower-cost and hip neighbourhoods that is being seen across North America.
The following are five of the hottest – and some surprising – U.S. centres emerging as new high-tech hubs, based on a survey by Jones Lang LaSalle’s New York office, which notes that civic incentives – like generous tax breaks – are fueling the migration.
Detroit: High-tech growth has been expanding thanks to increasing demand for sophisticated vehicle technology. Compuware was one of the first companies to move its headquarters from the suburbs to downtown Detroit in recent years. Amazon, Microsoft, Twitter and Google have now joined Compuware in the urban core.
West Los Angeles: Los Angeles’ Westside is home to a burgeoning group of companies at the confluence of high-tech and entertainment. Video game creator Riot Games is likely to be joined soon by Google and advertising mogul RPA, both of which are actively looking for space nearby.
Indianapolis: Indiana has one of the lowest business tax climates in the U.S., making it attractive to young start-ups and high-growth, middle-market high-tech firms. For example, California-based Systems in Motion is adding 400 jobs by 2017 and leasing new space in suburban Kokomo and Carmel.
Orlando: Over the past year, high-tech has become Orlando’s second largest industry with a $14 billion annual economic impact to the metropolitan area. Buildings like the Church Street Exchange- a former mall re-purposed for tech companies – have gone from mostly vacant to more than 90% leased in less than a year.
South Florida: Miami is getting some buzz as an international high-tech hub, with Microsoft announcing Miami as its first U.S. based Innovation Centre at the downtown incubator Venture Hive. Other high-tech companies with an eye on Latin America are beginning to show interest too.
Major Point: The savings potential is huge: downtown Palo Alto, California, considered the heart of Silicon Valley has office rents at $86 per square foot compared to the U.S. national average of $30 (!), and even topping New York City’s Plaza District at $85 per square foot. Rents in smaller markets can be less than half that. Vancouver should benefit not only from a much lower rental rate, but also a lower dollar. If you have an office space for lease, look for a large US company.
Self-Storage Turning Into A Cash Cow
The self-storage business is seeing high occupancy rates and is attracting both large and small investors across B.C.
“Five years ago occupancy levels were down to about 60%,” said Vadim Kobasev of Re/Max Commercial, “but things have really picked up.” He estimates that current occupancy rates are north of 85% in most markets.
Kobasev recently sold a 300-plus-unit self-storage business in Vernon for $4.5 million, but more common listings are smaller facilities that sell in the $1 million range, he said.
Self-storage businesses offer space-challenged customers a secure place to store thing s they don’t need right now, but can’t bring themselves to throw away. On average, about one-third of self-storage clients store their stuff for three years, meaning a steady cash flow for the owners.
Television shows like Storage Wars have helped raise the profile of the industry – and the reality shows are often based in fact. Some self-storage business owners hold annual “auctions” where the contents of lockers that are delinquent in rent are sold off to the highest bidder, Kobasev said.
There are other quirks that make self-storage property quite different from most commercial real estate. They can be situated in less-than-desirable locations: facilities on the outskirts of town, or tucked in behind industrial areas are totally acceptable. As well, tenants pay little or no deposit, and are free to leave at a moment’s notice. Yet, on a square-foot basis, the rents for storage locker can be as high as an apartment or a small office.
For instance, in the Okanagan, 50 square feet of storage space rents for around $95 per month, which, on a per-square-foot basis, is about the same as the typical residential apartment rent. In Coquitlam a 200 sq. foot unit is $356 (unheated) … I know, because that is what I pay!
Storage lockers are a simple investment. There is often no heat, little maintenance and as I have preached for 15 years … if you want to make it a luxury unit you put in a light bulb!”
Major Point: We have advised the purchase of storage and mini/strata warehouses since 1996! Studies show that nearly 80% of self-storage properties remain in the hands of small, independent investors. The sector’s solid past performance has begun to capture the attention of large institutional investors, however. Larger properties in particular are increasingly attracting institutional buyers, including big self-storage companies. The typical facility and investor, though, are “mom and pop” operations that provide a relatively secure investment or semi-retirement income with a minimum of management.
Lenders More Friendly To Commercial Loans – But Warning Issued On Rental Apartments
Commercial real estate developers and investors rushing to secure low-cost financing amidst fears of higher interest rates are finding a warm welcome this summer from a lot more lenders. But low-cost loans for residential landlords may soon be facing barriers, experts’ caution.
New commercial mortgages in Canada reached $33 billion in 2013, well above the pre-crisis levels of 2008, reports Jones Lang LaSalle (JLL) Debt Capital Markets, and the trend is apparently ascending.
“We track more than 100 sources of debt capital available to Canadians, and there are strong indications that lending is on an upswing”, said Amar Nijjar, vice president and practice lead for JLL Canada’s Debt Capital Markets team.
“Nearly all of the lenders are expressing an interest to lend at the same or higher levels from than last year. There is also an emergence of non-traditional sources that provide creative financing solutions, filling a void that previously existed in the marketplace.”
Canadian Mortgage Backed Securities are also on the rise – lenders originated approximately $1.5 billion in 2013 compared to $500 million in 2012. “The market anticipates that these lenders will surpass $2 billion in 2014,” Nijjar said.
Canadian interest rates are anticipated to increase in the near future as inflation continues to edge up and unemployment levels decrease, according to JLL. Lower unemployment translates to increased consumer spending and the ability for landlords to raise rents, Nijjar notes.
Major Point: JLL warn that the multi-family sector, which benefits from low-cost Canada Mortgage and Housing Corp.-insured mortgages, is facing federal government scrutiny. “We expect further regulatory changes restricting available capital in this sector,” JLL states in its report on commercial financing. If they turn out to be right … be ahead of them. Get yourself refinanced NOW! 10 year money for commercial and rental property can be as low as 2.8 %! You may well wish you locked yourself in a few years from now!