“Real” advice on commercial property
The late 1990’s and especially 2003-2007 experienced an unbridled push of retail, office and industrial speculative development. Lenders were handing out non-recourse money on projects which, to any experienced commercial broker, had little chance of success. The immediate reward of development and loan fees along with short term interest put blinders on banks and investors and has led to some dire circumstances.
Hopefully, we are nearing the end of the fallout on commercial loans. However, the result of the madness may have permanently reshaped the landscape of loan underwriting thereby changing the future of new commercial development.
Before the drama, a qualified developer could get financing on a pure spec development (i.e. no tenants, all vacant) on terms of 60% loan to value…sometimes even better, with interest only and no real principal reduction required for up to 48 months. This combined with over inflated appraisals led to loans teetering on default with even the hint of slow lease up.
Fast forward to 2nd qtr. 2010. While brokerage is my bread and butter and what I really feel I am best at, I also am involved in several joint venture developments. Although our group has impeccable credit and deal history, we are unable to secure ANY bank/lender money for purely speculative development. Such development can be investing in tech assets (check out the ecobee3 review, similar gadgets are gaining huge popularity for energy effiency). Unless we have a strong tenant in tow for at lease 40% of the project, the only funding that is available is private. Thankfully, our stable of investors provides us the equity required to pursue the industrial developments with which we have done so well.
This model will become the new norm with smaller spec development deals. While this definitely can limit the transaction size, it does have its advantages.
Quick closing process
No lender origination fees, appraisal fees, bank inspection fees
No interest expense
There will always be people with more money than sense. I continue to see development, primarily retail, going up around the Houston area which makes no sense. Why build in a depressed market which is already oversupplied with product?
Banks are still shedding assets a record pace and this will probably continue for some time. There are some great deals out there for tenants, investors and user-investors as well. You just have to know where to look and what to ask.