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I appreciate your responses and I'm not trying to be naïve and assume all investors make wise decisions. I'm quite literally asking whether or not any data metrics exist that should promote either pessimism or optimism about the rental market, specifically in Pittsburgh. I live in Lawrenceville and I'm affected by the mass amounts of construction that have been going here with hundreds of units currently under construction. I just wonder if the pessimism for this market is because it's been so unfamiliar in Pittsburgh to see so much new apartment construction in the city in a relatively short period or because there are genuine indicators that suggest that this could be a huge flop.
I would love to dig in the data but wouldn't really nowhere to start. I'm not arguing either way I am just saying developers aren't immune to bad decisions. I appreciate the constructive discussion. I would say the negative factors would be the stagnant population of the city. Yes I know this is debated ad nauseum but the old people excuse can only go so far. Job creations has also slowed around the area. Definitely macroeconomic factors but I think what we have seen is pent up demand from prior years it could hit a point soon where those buyers dry up. Anecdotally the younger areas of the city are more vibrant than ever and people seem to have no shortage of money.
It seems like every time a new apartment building is announced there is a knee-jerk reaction on here that it's going to lead directly to a market over-saturation. Every single time.
Is there any evidence or data for OR against this? Has this happened at all or are there signs that point to an impending doom?
I would assume that if investors are putting up so much money for what are essentially investments that they would have done their homework.
The evidence is the topic of a PG article this morning, November 21, 2016.
* vacancy rates are creeping higher, possibly due to an increasingly saturated rental market.
*some landlords who priced their rents too aggressively during the boom years are being forced to
either accept lower rents or leave units vacant; others can find no renters at all.
* rental prices no longer rising at the pace they had been.
The executive vice president of the Realtors Association of Metro Pittsburgh, said permits have been issued for about 5,600 new and rehabbed apartment units in the Pittsburgh area in the past five years and only about 60 percent have been absorbed by the market so far. He is quoted as saying the market has been saturated.
Who could have seen this coming?
I recall a much maligned opinion piece by Hoddy Hanna a while back, come to think of it.
Last edited by corpgypsy; 11-21-2016 at 07:48 AM..
The jury is still very much out if there is true saturation. Two people whose livelihoods depend on the acceleration of housing sales are not going to tell you both sides of the story.
The evidence is the topic of a PG article this morning, November 21, 2016.
* vacancy rates are creeping higher, possibly due to an increasingly saturated rental market.
*some landlords who priced their rents too aggressively during the boom years are being forced to
either accept lower rents or leave units vacant; others can find no renters at all.
* rental prices no longer rising at the pace they had been.
The executive vice president of the Realtors Association of Metro Pittsburgh, said permits have been issued for about 5,600 new and rehabbed apartment units in the Pittsburgh area in the past five years and only about 60 percent have been absorbed by the market so far. He is quoted as saying the market has been saturated.
Who could have seen this coming?
I recall a much maligned opinion piece by Hoddy Hanna a while back, come to think of it.
This depends on which landlords they are referring to. If it's regarding the new places being built then yes, I agree it's indicative of a possible issue; if it's the landlords who have been able to rent out a substandard product for years because of a lack of better options then that's another story. I hope the construction boom puts such people out of the rental business.
This depends on which landlords they are referring to. If it's regarding the new places being built then yes, I agree it's indicative of a possible issue; if it's the landlords who have been able to rent out a substandard product for years because of a lack of better options then that's another story. I hope the construction boom puts such people out of the rental business.
This was the lens through which I understood the article too. I don't really think this is the smoking gun that would indicate that there is not enough demand for these new construction rentals, unless I am completely misinterpreting it. Since, as the article points out, traditional property managers are unable to provide the amenities of these new developments, it would make sense that vacancies at the higher end that also offer perks such as a few months free rent might put downward pressure on the rental rates for the unremodeled dumps that are so ubiquitous in the east end and that property management companies have been able to exploit due to the high demand for east end housing.
Property management companies would have a few choices: renovate/add amenities if they want to keep their rents at current levels, which would benefit the neighborhood, reduce their rents, which would benefit those seeking affordable housing (an issue that is often discussed in at least Lawrenceville but probably all over the east end), or sell their property and exit the market.
Property management companies would have a few choices: renovate/add amenities if they want to keep their rents at current levels, which would benefit the neighborhood, reduce their rents, which would benefit those seeking affordable housing (an issue that is often discussed in at least Lawrenceville but probably all over the east end), or sell their property and exit the market.
In a lot of cases the latter is the ideal solution. A lot of Pittsburgh neighborhoods are hard to buy into because landlords even own a large proportion of single-family homes, restricting what's available on the market at any given time. This is particularly true in Oakland, where the city has been trying to crack down on landlords who rent out houses which aren't divided into separate units to a half-dozen or more unrelated tenants. But it's a lesser issue in other parts of the city as well.
Obviously some people do need whole-house rentals - for example people with families who have short-term gigs in the city. But in general good housing policy steers renters to apartment units, freeing up more single-family homes for homeowners.
There are a lot of multi-unit properties in areas like Friendship and Shadyside that are ripe for conversion back to single-family. Any pressure on the landlords to sell will make conversion a more attractive option, so you may see more families opting to remodel and invest in restoring neighborhoods.
There are a lot of multi-unit properties in areas like Friendship and Shadyside that are ripe for conversion back to single-family. Any pressure on the landlords to sell will make conversion a more attractive option, so you may see more families opting to remodel and invest in restoring neighborhoods.
Yeah, the conversion of multi-units back into single-units would also help in places. When we were looking for a house a few years back we tried to look in Bloomfield. We weren't looking necessarily for a "grand old house" like the one we eventually got - we would have been happy with something in the range of 3 bedrooms, 1.5 baths, and 1500 square feet. But virtually everything of reasonable size in the core of Bloomfield had been subdivided into a multi-unit ages ago, which meant we found basically nothing which suited our needs.
Keep in mind though that the conversion of multi-units into single units can be bad if there also aren't new apartments coming on line in a neighborhood. I think it's fine in areas like South side, Shadyside and East Liberty where there are hundreds of new apartment units coming online. But if the unit count decreases in a neighborhood it will probably hurt local business districts significantly.
Keep in mind though that the conversion of multi-units into single units can be bad if there also aren't new apartments coming on line in a neighborhood. I think it's fine in areas like South side, Shadyside and East Liberty where there are hundreds of new apartment units coming online. But if the unit count decreases in a neighborhood it will probably hurt local business districts significantly.
Correct.
I think the other thing to consider with the continued construction of rental units despite the increase in vacancy is that most of these larger companies tend to have larger capital and are looking at 10-20 year plans as opposed to just month over month forecasts.
Example? Look at the 325 unit project in SS for $34M. Let's break this down:
If a projected average rent of $1,500/mo combined with an impossible 100% occupancy rate would net just under $6M/year, and if we also factored in impossible feat of having NO maintenance cost or project cost overruns, it would take just under 6 years to pay off. I can assure you, a company like this isn't playing a 6 year game. Best case scenario is it taking until year 10 before there's any type of return on their investment. The other (more likely if they're more of a developer) alternative is waiting until the vacancy rate is low enough and the rents are high enough that the project is stabilized to the point where they can sell off the asset as an investment to recoup their original investment (and then some) while using that capital to likely invest in a new project elsewhere.
Because of the forecasting nature of their business model, I'd imagine they're likely less concerned with what today's vacancy rates are (though not to be entirely dismissed), but are more likely interested in looking at what rates are going to be in 2, 5, or 10 years. The annual overhead costs of vacancy in a large, multi-unit building like that are much lower than it would be in a single family home or smaller multi-unit building, meaning it's CHEAPER to build larger now than to continue to keep building annually to meet demand.
Large companies with the capital to build something like this are likely spending hundreds of thousands of dollars on research and analysis before giving the green light. Things they're likely considering among other things:
How much more expensive will construction costs be in 2, 5, or 10 years?
How much more expensive is it to build to a smaller scale in future years?
In just the past 5 years alone, the value of the property they're building on has increased by 33% - if they wait to build, how much further does the cost grow?
In an large scale project like this, the cost of waiting and building to scale is likely more expensive than the maintenance/overhead cost on the number of projected vacant units.
Even still, at the end of the day these 325 units make up not even a quarter of less than 1% of the overall housing units in the city, let alone the entire region. This is small scale in the grand scheme of things, and as such the normalization of the vacancy rates of the new properties being constructed today will level out over time.
Honestly, the slowing of new construction probably makes their forecasts brighter since additional new construction from this point forward would only slow the vacancy normalization timeline.
The jury is still very much out if there is true saturation. Two people whose livelihoods depend on the acceleration of housing sales are not going to tell you both sides of the story.
The latest Building Permits census data shows a huge drop in Pittsburgh area building permits in the last 2 years:
Year to date as of:
October 2016: 1248 units (844 single family)
October 2015: 1949 units (887 single family)
October 2014: 3708 units (2594 single family)
This appears to be a local trend not a national trend, as compared to peer cities (October to October):
Pittsburgh - 1248 units - down from 3708 in 2014 (-66.3%)
Milwaukee - 3470 units - up from 1958 in 2014 (+77.2%)
Cleveland - 2525 units - up from 2521 in 2014 (+0.2%)
St. Louis - 6862 units - up from 6162 in 2014 (+8.4%)
Buffalo - 1561 units - up from 1273 in 2014 (+22.6%)
Rochester - 1690 units - up from 1211 in 2014 (+39.6%)
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