by Todd McNeill, Senior Director
Before you laugh and think to yourself “there is no reason to build any new commercial projects, we’re still in a recession”, it might be helpful to step back and take a look at the market. Yes, the national scene seems grim for future development opportunities save for user driven developments and/or single tenant build-to suits. However, in the Texas and Oklahoma markets, two of the most insulated markets during the Great Recession, there will be a market driven need soon enough for more apartments, single-family, retail and even, perhaps office construction in the not too distant future.
In Feb. 2011, The Dallas Morning News cited that the population of Texas increased 4.3 million as compared to the 2000 Census. A recent study by Texas A&M University’s Real Estate center suggests that the Texas population is expected to grow by another 9 million to possibly 18 million people by 2030.
Texas housing markets are among the healthiest for home building, according to Hanley Wood Market Intelligence. The firm’s Builder Market Health Index gives many Texas MSAs a market health indicator well above 50 out of 100 (50 being the minimum to be considered healthy). According to Hanley Wood, the index weighs housing conditions in the 100 largest home building markets based on the 2011 outlook for six key variables most associated with strong home sales. Those include unemployment rate, change in unemployment numbers, home price appreciation, household growth, job growth and median income growth.
As the population continues to pour into Texas, the market will need to have adequate development to keep pace. Moreover, Texas has lead the nation out of the last three recessions, so surely, viable development opportunities will begin sprouting up in other markets throughout the nation. With this need for development, who is going to fill the void in the healthier markets for construction financing?
The local and regional banks have continued to work through their balance sheet issues and we continually hear from these same banks that their “construction bucket” is full and they cannot take on any more construction loans. Those that do have a “bucket” of money for construction, are saving most of it for existing customers of the bank and thus, are not seeking new opportunities. The big money center banks are only looking at larger $20mm and up projects for “the Best of the Best” Borrowers, those Borrowers with huge cash balances, net worth and little or no contingent liabilities or “legacy” issues. On top of all of this, the OTS and FDIC pounding the regional and local banks to clear their balance sheets of all commercial real estate.
This leaves very little room for the Entrepreneurial Developer, the life blood of development market. Retail, Apartments and Office developments under $20mm rarely hit the radar screen of the Institutional Developer leaving these deals in the hands of the smaller regional developers to execute. We are now seeing viable development deals come across our desk. Soon, however, there will be more demand for interim loans than the current stock of lenders can provide.
In addition, there are viable acquisition properties that need heavy renovation and may have little or no positive cash flow during the renovation that are also searching for a viable Bank or “On Book” Lender. These deals are very difficult to finance in today’s environment with traditional money sources. There are a variety of “Private” lending sources to fund a construction loan at 10% to 15% interest; however, this pricing simply doesn’t work for most development deals and certainly won’t work for an acquisition candidate unless you are stealing the property. Furthermore, most developers “banking relationships” have been completely wiped out during this recession.
In today’s highly fractured market, it is important to know what banks have available construction money and who will lend to “entrepreneurial” development and investment companies. The only way to really know which capital sources are in the market at any given time is to have consistent “deal flow” with a wide variety of providers. The problem is the average entrepreneurs may touch the capital markets once or at best three times a year. On the other hand, a good finance intermediary is constantly touching the market with deal flow on both debt and equity transactions. So at the end of the day, picking a good finance intermediary may very well be a more important decision than picking the actual capital provider.
Want to learn more about this? Feel free to contact Todd McNeill, Senior Director.