GRAND RAPIDS, MI - As hundreds gather today and tomorrow for the University of Michigan/Urban Land Institute Real Estate Forum in Grand Rapids, the shadow of the dire financial markets remains a major issue for many in the construction and real estate industry. For months, commercial real estate developers have complained the sub-prime market had prompted lenders to significantly tighten their purse strings on financing projects. As the situation in the financial markets went from bad to worse in the past few weeks, so too has commercial real estate development, industry leaders say.
"It's only gotten worse," said Rick DeKam, broker at Midwest Realty Group in Portage. "Financing is still very difficult to find outside of the local community banks, who generally have lower lending limits. That said, there are still a few small pockets of funding, but terms are much more difficult which significantly impacts project economics. Therefore, most investors are currently waiting on the markets to adjust."That has stymied some West Michigan projects, developers say, and further threatens others.
"I think that the retail and hotel side are the most difficult to get lending for; medical and life sciences are strong," said Curt Peterson, group vice president at CSM Group, a construction management firm based in Kalamazoo, with an office in Grand Rapids. "The major challenge will be for municipal projects where the variable-rate bond funding is very high compared to the norm. I have heard rate changes of triple."
The banking crisis "pretty much stopped the majority of commercial development dead in their tracks, except non-leveraged projects, smaller investments and owner occupied deals, and institutional projects that were already in progress," DeKam said. "I think you will see institutional, medical and even multifamily development as the steady-performing real estate over the next few years." Michael Cagen, associate broker specializing in multifamily investment at Marcus & Millichap's Grand Rapids office, has seen the same financing challenges of late as other real estate categories.
"Only several months ago, we were able to find financing, but at higher interest rates and at lower loan to values," Cagen said. "Today, lenders tell you they need to have the complete banking relationship with you, that the buyer needs to be local and that it needs to be newer property. In essence, this means the number of lenders who are available to finance a given deal has continued to shrink.
"Some sellers have asked us to re-underwrite properties we looked at six months ago. Since the underwriting requirements are tougher, their values have come down," he continued. "On the other hand, we're also seeing some people recognize tougher underwriting standards are here to stay. And for those that think they might be sellers within the next three years, they're thinking now is the time to get their property to the market before interest rates go up, since rising rates would have a very significant negative impact on valuation. "If the government pours billions upon billions into the market, the flood of capital will have an inflationary effect, which will cause the Fed to raise interest rates to help cool things off."
Some say they have not suffered a significant cool down in available financing. "We have found that money is available, but it is flowing slowly to only the strong deals with very good credit," said Mike Maier, president of Rockford Development Group in Grand Rapids, a sister company to Rockford Construction. "There seemed to always be lenders available for good-quality deals. Maybe some deals were not getting done that shouldn't have been getting done.
"I will say some permanent lenders were starting to drop out of Michigan, but there were other lenders available. The situation now is that there are few lenders, and their underwriting is much stronger." General contractors have suffered from a shrinking pipeline of development, as well, even in Grand Rapids, which has been lauded statewide for a perceived construction boom. "Most of the commercial developers are in limbo," said Tim Schowalter, president of Pioneer Construction in Grand Rapids. "Some have good projects that they are very uncertain about obtaining financing for. Others are just not investing the time and energy into new deals right now assuming financing will be too big of a challenge.
"The anxiety causes people to hit the pause button and take the wait and see approach. This does not affect ongoing projects or projects that are about to start and already have financing commitments, but it will create a vacuum of new deals down the road." The repercussions of the national financial meltdown on commercial development may further stymie Michigan's economic return, those in the industry fear. "If this situation lasts for six to 10 months and returns relatively slowly, over the next 12 to 18 months, with much tougher lending requirements and at higher pricing, then it will have a very definite impact on increasing commercial-space rental rates and terms and will also push property selling prices higher across all of the commercial property sectors," DeKam noted.
The time frame it will take Michigan to surface from the lending chill is uncertain. "There are reasons why the credit situation should start improving as soon as the Fed starts buying up toxic mortgages," Cagen said. "On the other hand, it would be tough to imagine that, with balance sheets partially restored, lenders will all of a sudden jump in with both feet. I've seen estimates from 'right away' to 'as long as 18 months.'"
And Michigan may face a longer road ahead than the rest of the country, which went into the crisis with stronger economic situations. "I unfortunately feel we have a longer climb out than other states," Maier said. "We have been slowly declining in Michigan over the past years while the rest of the states' economies have been steady or even growing. Now we are behind the eight ball. "I really hope we can figure out how to use the tremendous talent and resources this state has to offer, rather than try to attract industries that are only looking for short-term handouts and not improving our long-term economy. I will say though, if there is any area that can decide to rally and pull together, it is West Michigan."
Source: Mlive.com