Don Tishman's Real Estate Development and Investing Solutions

It is either impossible or very difficult to obtain a bank loan to build a new commercial real estate development. Banks fear collapse of the commercial real estate market. Many banks remember that they  collapsed or nearly collapsed from the disintegration of the residential real estate market.

In addition, commercial real estate rents have fallen. Vacancies in commercial real estate have increased.

Is there any type commercial real estate in demand? Several! First, there are existing commercial real estate that have loans that are expiring. The owners of these developments are finding it equally difficult to refinance these existing developments.  The same is true of potential buyers of these developments not being able to finance the purchase, thus making it very difficult to sell these existing developments.  Many of these buildings need work- with no funding of loans available- no needed work being done. Secondly, there is a demand for new mixed use developments that include residential, commercial, and entertainment.

Many banks that were large construction lenders for real estate, are not making any loans. They are saying that the earliest they will even look at new loans is the second quarter of 2010.

Meanwhile governments and other groups, are demanding  all new or rehab construction  meet L.E.E.D. standards.

I think in the next few years commercial real estate loans will be 75% or less of cost. In the last building boom loans were at 80% to 85% of cost. Despite the Fed keeping down interest rates, commercial loan interest rates will be higher. So if a building cost $1 million, the developer could loan $850,000. Now with the lower loan to value and the increase in interest rates- the developer will probably be lucky to get a $700,000 loan.

This doubles the equity required to be raised from $150,000 to $300,000. If the building was projected to have a cash flow of $20,000 per year for the first five years, and the investors received 70% of the cash flow.  With the lower equity requirement- the investors would receive a 9.3% annual return. With the higher equity requirements, the investor’s return is only 4.6%- hardly a rate that will attract capital. One of the solutions is to cut the development budget.  This means that we will not be able to add anything to the building specifications. UNLESS, we can substantially lower the operating costs enough to substantially increase the cash flow.  Do not forget the 30% tax credit for alternate energy systems.

This what architects, engineers, and contractors should be working on in their now spare time. Next year,  clients will come into your offices wanting to develop commercial properties faced with problems similar to the foregoing example. They have a budget and are having difficulty meeting the local  L.E.E.D. requirements. Their bigger problem is raising equity capital.

You wave your hands – abra cadabra – you may have the answers to their problems. You will  have to work on the design of their building to see if your solution is feasible for their project.  You can not do this on a contingency. They have to invest in your work. What are their alternatives? This is your ticket to the contract.

Most designers, regardless of how well known they are, are hurting for work. For quite a while, public and non-profit work filled the gap created by no private work. Today, the budget crunch felt by public and non-profit organizations is severely limiting this work.

First, this has nothing to do with the designer’s abilities.  Many  architects, planners, engineers, and all other designers are blaming themselves. Their rainmakers are just as capable as when they were bringing lots of business. Why is this drought hitting these professions?

The population keeps growing.The demand for various uses and products continues! Therefore- why are you not executing design contract where you agree to design X for Y dollars? Simple, there are no Y dollars for development available. Banks have previously made development happen. These banks accomplished this by being in the business of making construction loans for new developments. These loans included funds for the acquisition and development of the development sites.  After the housing debacle, there were huge inventories of available new housing. Finally, inventories are being reduced. Today inventory of lower priced housing (under $350,000) are back to normal. This apparent housing demand should start development of this type housing. However, most banks are not making construction loans this year. Most do not expect to start making construction loans until mid 2010. If the media’s prediction of the collapse of commercial and retail real estate is adopted by the banks, there will not be construction loans in 2010.

We have developed in most of the major metropolitan  areas in the U.S.- each metropolitan area claims to be different and each is different. Think of San Francisco vs. New York City, or Madison, Wisc. vs. Albuquerque.  Today I was checking the unemployment rates in several metropolitan  areas: San Francisco, San Jose, Albuquerque, Santa Fe, and Madison Wisc. All the attention is to a national rate of close to ten percent. The unemployment rate in the foregoing metropolitan areas are 6% or less. Surprising, these are similar to these area’s unemployment rates to when development was booming. Talking about vacancy rates in the U.S. is useless. There are 250 U.S. real estate markets where the National Association of Realtors keeps a mass of statistics for. All these markets are different.

Real estate is local. Albuquerque and Santa Fe are about 50 miles apart. There is not much difference in the Area Median Income for each. Yet, the average home price in Santa Fe is almost  double of the average home selling price in Albuquerque.  The building cost is about 20% higher in Santa Fe.

These strange differences are true throughout the U.S. real estate markets. In Dallas and many areas of the country, , a mansion will cost under $500,000. In New York City, $500,000 will buy a 300 square foot efficiency.  Much media is located in or near New York City. Many writers for these media may believe NYC real estate statistics as what happens throughout the U.S.

Professional organizations in each area must start having programs that show the demographics for their area as compared to national statistics. Showing that your area is indeed different. Only by making your community aware of these figures will you help to create a lending environment for development. These organizations must do market studies to show what type real estate developments fill unmet needs and are feasible in your area. You can not wait for bankers to do this. Their last experiences still has their CEO’s, directors, and stockholders shaking violently. The only way to calm them down is to conservatively show them great opportunities for their bank. Like it or not _”Money makes the world go around.”

Nothing for private markets has been built for several years. These opportunities are there – your professional organizations can advocate these opportunities – these organizations do not have an ax to grind- your community will be the winner by solving the locals unmet needs and stimulating the local economy.