Starter Home

You can still here this phrase on the varying HGTV flip shows. How they are still in business in this housing market is beyond me as now with rates over 6% and costs to rehab doubling down I suspect that there will be fewer and fewer of them doing this as a full time business. But then again they were always a bizarre mash of people doing the same home repeatedly and acting as if it was the greatest project ever done. Yes we need more shiplap.

With that there were two articles this weekend about what defines Starter Home. The LA Times says this about the California marketplace:

For decades, the single-family home has been Southern California’s ultimate lure — a chance to live a life of sun and sand from the comfort of your very own property.

Most buyers’ ticket into that life is the starter home. Something modest but not minuscule. Two bedrooms, maybe three. A picket fence in front and a yard out back for the kids and dog to play.

But the starter home has changed. As home prices have soared and higher mortgage interest rates have made everything less affordable, wish lists have become more and more wishful, and buyers have been forced to find something smaller and less practical.

Want two bedrooms? How about one, plus an office that might fit a twin-size bed. Want a backyard? How about a space shared with the rest of the condo complex. Want to paint the exterior of your townhouse? The homeowner association won’t allow it, but feel free to spruce up the inside.

Making compromises has always been a part of house hunting, but in a market where some two-bedroom homes are selling for $1 million or more — often for hundreds of thousands over the asking price — middle-class buyers are forced to take whatever they can get.

So we have over bidding and homes now in the six figures that defines a median or at least an average price in some markets – Seattle, LA, Portland are good examples of how out of control it has been as they are the “it” cities. San Francisco and NYC have always been out of range of many but now that includes the burbs and boroughs that were for years ignored are now equally competitive in the marketplace. Is it really jobs? I doubt it as New York City is facing a massive tax downfall from the pandemic and the offices that have not reopened fully to workers. So with that comes that many of the higher tax bracket did leave and have not returned. As the article states:

The sheer number of people who left in such a short period raises uncertainty about New York City’s competitiveness and economic stability. The top 1 percent of earners, who make more than $804,000 a year, contributed 41 percent of the city’s personal income taxes in 2019.

About one-third of the people who left moved from Manhattan, and had an average income of $214,300. No other large American county had a similar exodus of wealth.

On that note the reality is that many of them never left and with that they are pushing the housing market into untenable reaches as they bid up for rentals the same way one does in purchasing housing. And many who did kept their apartments for pied a tier’s for when they do return and/or visit keeping them vacant and off the market. So who is moving here? I suspect many who dreamed of living here and with that sold homes, cashed out savings and are living off 401Ks and investments the same way I am. The difference is that the market is shit now and with that we are all at risk. Things will not end well I am afraid.

The article goes on to state:

In the years before 2019, the people who left and the people who stayed in New York City had similar average incomes, the IRS data showed. But during the pandemic, the residents who moved had average incomes that were 28 percent higher than the residents who stayed.

Still, New York City collected more tax revenue in both 2020 and 2021 than in 2019, thanks in part to at least $16 billion in federal pandemic aid.

The outlook for this year has become much less certain as the stock market has plummeted in recent months and certain forms of federal aid, like stimulus checks and expanded unemployment benefits, have (long) ended.

Again the current financial state of Manhattan and its environs are at risk in ways not seen since the 80s. And with that I suspect many a newcomer will find themselves wanting to leave, but the costs of leaving are considerably higher and for many it will be akin to a hostage situation. I saw that quite a bit in Nashville during its “it” heydays. People come for jobs, to seek adventure, to find a new life and a tribe. It never works out that way. Sorry folks I know this better than most.

Inside the incredibly shrinking Southern California starter home

By Jack Flemming Staff Writer LA TIMES Sept. 23, 2022

For decades, the single-family home has been Southern California’s ultimate lure — a chance to live a life of sun and sand from the comfort of your very own property.

Most buyers’ ticket into that life is the starter home. Something modest but not minuscule. Two bedrooms, maybe three. A picket fence in front and a yard out back for the kids and dog to play.

But the starter home has changed. As home prices have soared and higher mortgage interest rates have made everything less affordable, wish lists have become more and more wishful, and buyers have been forced to find something smaller and less practical.

Want two bedrooms? How about one, plus an office that might fit a twin-size bed. Want a backyard? How about a space shared with the rest of the condo complex. Want to paint the exterior of your townhouse? The homeowner association won’t allow it, but feel free to spruce up the inside.

Making compromises has always been a part of house hunting, but in a market where some two-bedroom homes are selling for $1 million or more — often for hundreds of thousands over the asking price — middle-class buyers are forced to take whatever they can get

“Beggars can’t be choosers,” said Zach Zyskowski, a TV producer who bought his first home last summer.

His search started with two-bedroom homes in West Hollywood and Mid-City, but he quickly realized that everything was out of his price range.

“Anything under $1 million was hard to find,” he said. “There was nothing that was both nice and unique, and I wanted something that wasn’t cookie-cutter.”

Zyskowski decided to switch strategies. He stopped searching for homes on the market and got creative, asking friends if anyone was planning to sell in their respective condo complexes. He ended up buying a one-bedroom condo directly from a seller in an off-market deal.

In the end, he sacrificed space for character. His new home is in El Cabrillo, a Spanish-style courtyard complex built by movie mogul Cecil B. DeMille in the 1920s.

It’s a bit small at 800 square feet, and he uses a pull-out sofa in the living room to host guests. But the stylish building, which has been featured in shows such as “Hollywood” and “Chuck” and enjoys a spot on the National Register of Historic Places, more than makes up for it.

“Would I have loved something bigger? Yes, there’s always more you can want,” he said. “But I’d rather have something smaller and nicer than bigger and boring. I was just amazed I could buy a place at all.”

For Elena Amador-French, smaller wasn’t an option. A planetary scientist for NASA’s Jet Propulsion Laboratory, she grew tired of working on the Mars Rover from her dining room table during the pandemic. The newborn baby didn’t help.

She and her husband started house hunting last year and set their sights on Altadena, a community tucked into the San Gabriel Mountains filled with charming Craftsman, English Tudor and Colonial Revival-style homes.

With a budget of $800,000, they wanted a house with character — as long as it had two bedrooms. But their search played out like many others: putting in an offer, watching dozens of other buyers drive up the asking price, and seeing the house sell for hundreds of thousands more than they could afford.

“You just have to laugh at a certain point. We couldn’t get upset because we couldn’t even compete,” she said.

They switched strategies and aimed for a duplex, which didn’t have the appeal of the single-family lifestyle but also didn’t have dozens of buyers swarming every open house.

In the end, they paid $970,000 for an 1,800-square-foot duplex with three bedrooms and three bathrooms in an east Pasadena complex.

“There’s still a piece of me that wants a single-family home that I can truly make my own.”

— Elena Amador-French

It didn’t have the charm of a single-family home, and it didn’t quite check off all the boxes; they couldn’t fit a swing set for their daughter into the outdoor space, and they weren’t able to add any personal touches to the exterior because of HOA regulations that require all houses to be painted the same color.

But it was an easier process that ended with more space for less money.

“There’s still a piece of me that wants a single-family home that I can truly make my own,” she said. “But this was so much less of a battle.”

In today’s market, it makes sense to settle. Homes that check all the boxes — hip neighborhood, plenty of space, interesting architecture — are still attracting plenty of offers and often selling for over the asking price. But for buyers willing to let go of the dream of single-family housing and redefine what a starter home can be, there are plenty of options.

Condos are regularly on the market in L.A. in the $300,000 range, a fraction of what some single-family homes are commanding. Other buyers are opting for tenancy-in-common units, arrangements in which residents share ownership of a building.

As more buyers choose alternatives, condo price increases are outpacing single-family home price increases. In August, the median sale price for L.A. condos was $675,000, a 7.1% jump year over year, according to Redfin. During that same stretch, single-family homes increased 0.4%.

The same is true for townhouse prices, which have increased 6.7% year over year for a median of $700,000.

For many Southern Californians, single-family homes are simply out of reach. The Times has published a “What Money Buys” series for the last five years that highlights homes on the market at certain price points in different neighborhoods. Now, those stories read like a time capsule.

For example, a 2019 piece featured homes on the market for $800,000 in a handful of L.A. neighborhoods including Jefferson Park and Cypress Park. Both areas had a five-bedroom home listed for around $800,000.

The Jefferson Park home ended up selling for $850,000 in 2019. Now, Redfin estimates that the home is worth $1.28 million. The Cypress Park home grew even more valuable, selling for $800,000 in 2019 and now worth an estimated $1.45 million.

Those prices have become standard. In Jefferson Park, there are no five-bedroom single-family homes on the market for less than $1.2 million. The $800,000 price point now buys a two-bedroom home — or a three-bedroom fixer-upper.

The change becomes even more pronounced at lower price points. A 2017 entry in the series explored what $500,000 buys in the L.A. neighborhoods of Van Nuys, Leimert Park and Boyle Heights. Every single home on the list had at least 1,000 square feet, and most had three bedrooms. One had four.

Five years later, Redfin values all the properties on that list at $750,000 or more, with a few valued north of $850,000.

A look at the options currently on the market in those three communities finds no three-bedroom homes for $500,000 or less. The closest thing is a three-bedroom townhouse in Van Nuys asking $550,000 — cash offers only.

For comparison, a 2022 story exploring homes at $500,000 highlighted much smaller options including a 648-square-foot bungalow in East L.A. listed at $485,000 and a one-bedroom condo in downtown L.A. asking $509,000 (plus $813 in monthly HOA dues.)

Spoiler alert: Both homes sold shortly after the article ran, and the East L.A. bungalow sold for $10,000 more than the asking price.

More buyers are settling for two-bedroom homes as a starter, and it’s driving up prices.

In L.A., the median two-bedroom home — the typical size for starter homes — sold for $765,700 in August, a 10.1% increase year over year, according to Rocket Homes. That outpaces one-bedroom homes, which increased 8.8% year over year, and three-bedroom homes, which increased 9.1% year over year.

Earlier this year, Compass agent Allie Altschuler sold a two-bedroom home in the hills of Eagle Rock for $1.442 million — or $293,000 more than the asking price. What it lacked in bedroom count, it made up for with unique features such as a breakfast nook with a built-in booth and a separate structure in the backyard that can be used as an office or studio.

“Younger buyers are OK with buying smaller homes because they know they won’t be in it forever,” she said. “Buying a house and living in it for 30 or 40 years isn’t the case anymore.”

Big Rent Due

While I have written about the issues facing residential renters that is a double edged problem as some owners are small scale landlords with one or two investment properties that rent is the primary financial investment to pay the mortgages, taxes and incidental costs required to maintain and own investment properties. In 2008 many single investors bought numerous properties with the intent of owning as a method of long term investment and when that market collapsed it led many tenants in the lurch as banks foreclosed or the property was sold to larger REIT venture capitalists in which to again refurbish and resell or use as rental markets demanded including short term/Airbnb use. That too is another fallout post Covid for the small investor who are now listing furnished properties for rent with shorter leases in anticipation for the long term while others are simply moving to the more traditional means or trying to sell them. And once again the venture capitalists are quickly buying up such properties as well for their own long term gain.

That said the multiple family units be they condos or apartments are a market I have yet to see what will result as again I suspect many residents will want out of such hot boxes of confinement due to costs, lack of space and simply fewer demands to distance upon entering or exiting the property. The building behind me is one such example as an albatross that they stupidly accelerated and now will have multiple expensive units in which will go vacant for I suspect quite some time.

This from Forbes:  According to RealPage, about 370,000 new high-end units are to reach competition this year (although construction delays and disruptions could deflate this number), marking a 50% increase from the national supply that came online in 2019. 

“We have too much product that was either just completed or under construction and you’re not going to have people moving around as much as [it would be otherwise] typical in the near term,” says Willett. “It’s going be really hard to get that new product filled up.”

For the summer months, which usually see a peak in rental demand, it’s still hard to tell what the effects will be, despite the impacts already rippling throughout the industry.

“Everybody’s wondering what this all means for the summer leasing season,” says Robert Pinnegar, CEO of the National Apartment Association. “Traditionally, the summer period is when you see the most movement of people from property to property, from state to state, from city to the city.

“With the uncertainty that’s going on now, especially with the economy essentially being at a standstill, nobody really knows what that’s going to do. And the unknown factor here is what government policy is going to be with regards to how we interact when the businesses reopen.”

And if working from home becomes the norm it may mean larger plans other than just redesign and scheduling staffing needs for many companies as it too will have a ripple affect and nowhere will feel it more than Manhattan.

Which brings me to the issue of commercial properties which have been on the upswing in most markets, while housing lagged, this is one area of build that has not. Crane watch became the mantra of most business journals under some misguided (intentionally or not) to sell and market their cities to businesses in which to relocate their operations. Along with massive tax incentives that enables business to not pay income nor other revenue generating taxes for decades it become an inticing invite to enable business to hopscotch across America while small business are given no such breaks and they continue to generate the most jobs and in turn revenue to the state coffers. Then came Covid and that game changed.

Small business owners closed are already struggling with rent and now the added lootings we may see more closures and in turn that will affect overall taxes and mortgage burdens.   But it is not only the small businesses.

This from the Washington Post:   Nearly half of commercial retail rents were not paid in May. Companies as big as Starbucks say the financial devastation from the shutdown has left them unable to pay their full property bills on time. Some companies warn they will not be able to pay rent for months. And this from the New York Times:  If building owners cannot come up with enough money to pay their next property tax bill in five weeks, a deadline the city has refused to postpone, the city will be starved of an enormous revenue stream that helps pay for all aspects of everyday life, from the Fire Department to trash pickup to the public hospitals. It could lead to a bleak landscape of vacant storefronts and streets sapped of their energy.

But again like residential rents, commercial ones are not doing much to re-examine their balance sheets and rental agreements. This is from one such store owner in New York:  In 2018, even the national chains began closing more spaces than they opened. Rents have come down somewhat in a few heavy shopping arteries, but on the streets where I was looking to open stores, rents didn’t seem to budge. In 2019, rent for my NoLIta store jumped from $360,000 a year to $650,000.

And I laugh at the once adored WeWork that had everyone salivating at their “worth” that fell hard and fast before Covid and now it too has been infected with LayOff mentality and demands to reduce rents.

This is one new road we are going down and it sure as hell is like the rest of our infrastructure, rocky, bumpy and full of holes.

Office Towers Are Still Going Up, but Who Will Fill Them?

Developers around the country are grappling with the fallout from the coronavirus pandemic as tenants cancel plans and workers fear returning to the office.

The New York Times
By Kevin Williams
Published June 2, 2020

Before the pandemic shut down businesses, a robust economy had powered a building boom, sending office towers skyward in urban areas across the United States. The coronavirus outbreak, though, has scrambled plans and sent jitters through the real estate industry.

Skyscrapers scheduled to open this year will remake skylines in cities like Milwaukee, Nashville and Salt Lake City. Office vacancy rates, following a decade-long trend, had shrunk to 9.7 percent at the end of the third quarter of 2019, compared with 13 percent in the third quarter of 2010, according to Deloitte.

Developers were confident that the demand would remain strong. But the pandemic darkened the picture.

“There is a pause occurring as companies more broadly consider their real estate needs,” said Jim Berry, Deloitte’s U.S. real estate sector leader.

The timing is unfortunate for Mark F. Irgens, whose 25-story BMO Tower in Milwaukee opened in mid-April at the peak of the statewide lockdown in Wisconsin. A month later, a small fraction of typical daytime foot traffic was passing by as most businesses adhered to the governor’s stay-at-home directive, which expired last week. A restaurant that was slated for the ground level was canceled, and three potential tenants have delayed their plans.

Instead of showing off the building’s sparkling Italian marble floors and panoramic vistas of Lake Michigan, Mr. Irgens is worrying about who is going to pull out next and what type of corporate landscape he might face when the pandemic finally ends.

But he is not putting on the brakes. The BMO had been planned for five years, and he has leases to negotiate, investors to please, tenants to woo and loans to pay off.

“Development projects are different than making widgets,” he said. “You can’t stop; you can’t turn it off. You have to continue.”

Slowly, workers are filling their BMO offices. Managers, who were scheduled to report on Monday, constitute about 15 percent of the building’s occupancy. Mr. Irgens thinks it will be the end of the summer before it gets up to 50 percent. Without a coronavirus vaccine, it may be year’s end before the building approaches a “normal” occupancy, he said.

Other developers around the country are also dealing with the fallout, especially for towers with Class A space, regarded as the highest-quality real estate on the market. In most cases, new buildings are not fully occupied, and developers were counting on a strong economy to do the work for them. For instance, the BMO Tower was 55 percent leased before the pandemic.

The question facing the owners of office towers is: Will anyone still want the space when coronavirus crisis fades?

If the economic pain drags on, there could be long-lasting changes to the way people work and how tenants want offices to be reimagined, said Joseph L. Pagliari Jr., clinical professor of real estate at the University of Chicago’s Booth School of Business. Some of the changes — like more spacious elevators — could be costly to put into place, he said.

The pandemic could be a “pivot point,” Mr. Pagliari said, and that would be bad news for building owners. The office towers were designed to be “best in class,” he said, but the pandemic has suddenly made their most salable amenities — common areas, fitness centers and food courts — into potential liabilities.

The economic crisis could also spur high interest rates on debt, which would cause building values to fall, Mr. Pagliari said. That may happen even if the crisis diminishes in the weeks ahead.

“The current pandemic has raised perceptions about the likelihood and consequences of future pandemics,” Mr. Pagliari said. Developers who can factor in such events will gain an advantage, but any skyscrapers that are built with pandemic fears in mind are years away.

The prospect that workers may want to continue working from home does not worry John O’Donnell, the chief executive of Riverside Investment and Development, which is developing a 55-story tower at 110 North Wacker Drive in Chicago. The tallest office building erected in the city since 1990, it is scheduled to open in August and will be anchored by Bank of America. Other tenants include law firms, many of which are doing business from home.

“There is a need for collaboration, team building, common business cultures and a continuous desire to have social contact within a business,” Mr. O’Donnell said.

The building is 80 percent leased ahead of its August opening. One tenant signed for 40,000 square feet of office space at the height of the lockdown, which Mr. O’Donnell took as an encouraging sign.

The building is already being adjusted to meet post-pandemic needs, something Mr. O’Donnell said newer structures were better able to do. Amenities are being updated to be touch free. And owners are talking with tenants about walk-through thermal imaging to monitor workers and visitors for fevers.

The pandemic will result in a demand for more office space, not less, said Paul H. Layne, the chief executive of the Howard Hughes Corporation, a national commercial real estate developer based in Houston. Developers will move away from the industry-standard 125 square feet per person toward roomier workplaces.

But others say it is too early to tell when demand for office space will return. Jamil Alam, managing principal of Endeavor Real Estate Group, said the situation would vary by city.

“There will be winners and losers,” Mr. Alam said, explaining that he thinks denser metro areas like New York and Boston, which have been ravaged by the coronavirus, could find their luster lost in favor of smaller markets.

Endeavor, which is based in Austin, Texas, has a portfolio that includes 15.6 million square feet of commercial real estate in cities like Dallas, Denver and Nashville. One of its projects, the 20-story Gulch Union, will be the largest office tower in Nashville when it opens in August with 324,254 square feet of office space.

Smaller markets like Nashville are well positioned for companies wishing to pull up stakes from major metropolitan areas with higher density and costs, Mr. Alam said. Gulch Union has leased 27,000 square feet, and four more deals totaling 40,000 square feet are near completion.

“Deals are still being done,” he said.

There will be an appetite for urban, walkable, mixed-use office environments, Mr. Alam said, and changes will need to be made in buildings over time, like fewer touch points on handles and elevator buttons.

But projects that have not been started yet will be paused, said Chris Kirk, managing principal of the Salt Lake City office of Colliers, the commercial real estate brokerage firm.

“If you are a developer or landlord or C.F.O., you are concerned,” he said. “Everyone is feeling the impact.”

And the city is experiencing a building spurt downtown. A 24-story Class A tower developed by City Creek Reserve, the development arm of the Church of Jesus Christ of Latter-day Saints, is scheduled for completion next year. The building, which will have 589,945 square feet of office space, is already 80 percent leased.

Salt Lake City has been averaging a new Class A office high-rise every decade, and the pace is increasing. Still, the pandemic might put the brakes on that.

“Anyone who would be coming out of ground speculatively now without the commitment has got to be thinking about their timing,” Mr. Kirk said.

Mr. Irgens hopes to ride out the pandemic and continue with other projects. In February, his company broke ground on a six-story building in Tempe, Ariz., and it is moving forward with a 235,000-square-foot Milwaukee office project that is 42 percent leased.

“My partners in my business are working really hard to figure out how to have business continuity, and it is really hard to do that,” he said. “Things are changing daily.”