Increasingly Cautious Lenders Delay Mixed-Use Development
Shy lenders are trying to avoid mingling with “mixed use.” They’re putting brakes on developments that blend offices and stores with condominiums, apartments and hotels.
Before the housing bubble’s pop and a crunch in credit, developers drew up many mixed-use plans. They were a way to enliven urban blocks and use space economically.
But now it’s harder to find lenders who’ll back all parts of a project. They vary in which parts of mixed-use they fear.
Some consider office and residential aspects to be higher-risk, says Scott Lynn, a principal at Dallas investment bank Metropolitan Capital Advisors. It’s far tougher today, he says, to get financing for mixed-use plans that are part residential, vs. a sole-use retail property.
“Banks are terrified of the residential market and see retail or hotel projects as a safer loan,” he said, citing better assurance of income in the latter categories.
The hesitance to loan forces developers to seek more investor backing, which can be costly and hard to get.
Mitigating Risk
Lending tightened fast as the credit crisis developed last summer. The plentiful liquidity of early 2007 all but evaporated.
Ugly credit markets are still wreaking havoc with commercial property sales, as detailed in a recent report by research firm Real Capital Analytics. Its first-quarter data show problems in retail, office and apartment investment markets.
New offerings outpaced sale closings 2-to-1 in retail and office. Retail property sales plunged 75% to $6 billion from a year ago. Office sales slid 62% to $13 billion. Apartments fell 40% to $12.1 billion.
Mixed-use projects are difficult to get off the ground when times are good, making it particularly hard to get financing now, says Dan Fasulo, managing director at Real Capital.
“Credit is tight and there is a lot of nervousness in the market because of the unknown,” he said. “Banks are demanding higher rates and requiring developers to put up more equity to mitigate their own risks.”
Developers across the U.S. are delaying mixed-use projects as lenders back away, concerned that risks outweigh returns. High construction costs and worsening fundamentals are jeopardizing major plans.
“These are mega deals in which developers must take on more debt, and there is only a finite group who could incur that,” Fasulo said. “Couple that with tighter lending, and it’s no wonder why we’re seeing huge spikes in stalled projects.”
In Los Angeles, developer Related Cos. found that prospective lenders want more plan details than they once did. That is causing an eight-month delay in work on The Grand, a $3 billion downtown renovation. Phase one includes a hotel, condos, restaurants and shops.
Two months ago in New York, Forest City Ratner Cos. warned of difficulties with office and residential parts of Atlantic Yards, a $4 billion, 22-acre Brooklyn project. Given lack of demand in both niches, the firm said, it would be hard to get enough leasing commitments to secure financing. This week it issued new designs and outlined a 10-year construction schedule that does include offices and residences.
In Seattle, Clise Properties took 13 downtown acres off the market, reportedly due to concerns that well-suited projects couldn’t get financing in today’s credit markets.
Tougher Terms
When banks do agree to lend, their requirements are typically so high that many developers can’t make the grade and are forced to look at alternatives, Lynn says.
“Banks are anxious about the current economic environment,” he said. “We’re a leveraged business that is deleveraging, which forces developers to put up more equity capital to get deals done.”
Some developers try creative approaches for their mixed-use projects. One is LandCo Equity Partners, doing a $53 million office, training and living project for the U.S. Olympic Committee in Colorado Springs, Colo.
Other locales tried to tempt away the USOC, which pumps more than $300 million a year into the area. LandCo struck a partnership with the city to keep the committee local.
It had already secured a loan from Denver-based United Western Bank for a new office building. It offered the building to the USOC as part of a complex deal that included $27 million in city-arranged bond financing and $23 million in private monies to be raised by LandCo.
“Many banks now require more equity for financing,” said LandCo Chairman Ray Marshall. “And today developers are seeking the aid of local banks, who are more familiar with the area and therefore more apt to lend for projects that will help revitalize an area.”
The credit crunch makes financing difficult, but “mixed-use developments are worth it,” he said. “The new headquarters for the USOC will serve as a springboard for the revitalization of downtown.
