Yes, things don’t seem as bad here as in the rest of the country –- check out this headline from southern California -– but that doesn’t mean we don’t have some concerns. Specifically, what’s going to happen to all of the residential, retail, and mixed used developments that have been announced in this neighborhood over the past 18 months?
A variety of projects have made news over the past 18 months. Will developers be able to finance these projects, or any of the others that they want to build? So I talked to Misty Willcox, an attorney with Thompson & Knight in Dallas who handles real estate deals. We talked generically, and didn’t discuss any specific projects. Her take: If someone doesn’t have the money now, they may have a very difficult time getting it later. “The number of term sheets we’ve received recently has dropped dramatically,” she says.
Willcox says developers finance deals in two stages. First, they get a loan to buy the land. Second, they get a loan to build. Currently, she says, given the upheaval in the credit markets, it is increasingly difficult to get any kind of loan. It’s still possible, but lenders have strengthened their lending standards. In particular, they want more money up front from developers, and they want to see retail projects as pre-leased as possible. They especially want to see an anchor tenant signed before construction begins. “They want developers to do their legwork before they come in and ask for a loan,” she says.
Other considerations: Lenders are more likely to finance apartments than condos, retail or mixed use. This doesn’t necessarily mean an apartment project can get financing, says Willcox; rather, just that it is less difficult to get financing for an apartment deal. Also, since interest rates are higher and more volatile, it’s becoming harder for developers to allow for lending costs. This means loans are not only more expensive, but developers aren’t sure how much more expensive. This wreaks havoc with their budgets.
So what does this mean to us? How does it affect the empty land you drive past every day, or any apartments waiting to be torn down? Generally, says Willcox, if a developer hasn’t started construction yet, don’t expect to see construction any time soon. There will be exceptions to this, but if a developer hasn’t lined up construction financing, the odds are against the developer finding financing in this lending market. We still may see deals announced, because lenders will be less reluctant to make land loans –– they’ll have the land for collateral, after all. But, says Willcox, how many developers will do a deal if they have to sit on the land until they can borrow money for construction?
And how long will this climate last? Willcox isn’t sure, but wouldn’t be surprised if it goes on for another 12 to 18 months.
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