We hoped to hear some great insights (if not encouragement) at last week’s ULI meeting but there wasn’t much to go around. The short version: we’re still in for a long slow recovery, so don’t expect to see huge improvement anytime soon. The lone bright spot appears to be the multifamily sector. With occupancy rates hovering above 90%, apartment projects are cash flowing and lenders feel comfortable enough with the underwriting to lend on them. As far as any other real estate category, it’s persona non grata. Here’s what we heard:
Capital Sources
- Pension Funds & Insurance Companies: no interest in participating in blind pools or anything with comingled financing. (For some crazy reason, they want to know what they’re investing in before they commit money. Yet another "new normal". )
- Private Equity Groups: appear to be sitting on more money than the Swiss banking industry but have been slow to put it in play. Reasons abound, along with pointed fingers: hurdle rates are too high, the best deals are tangled up or owners (read banks) are not willing to absorb the impairment to market values (read “what a willing buyer is willing to pay”). As one hedge fund veteran described it: “We’ve initiated letters-of-intent on 40 deals this year and have yet to complete one of them.
- Foreign Capital: One regional homebuilder enjoying success in the fast recovering Mid-Atlantic region said private equity groups, along with a few regional banks who weren’t heavy in real estate before, have been pursuing their business. Regardless, he said he’s seen more than a few deals completed this year with capital sourced offshore, through groups in Japan and Germany. Will this become more common? Do they interpret underwriting differently than their domestic peers?
Hardest deals to finance
- The blind pools and deals with comingled financing mentioned earlier, along with distressed properties or anything that has hair on it (e.g. unresolved regulatory issues), are next to impossible to finance at the moment. Of course, those metrics describe the majority of the deals out there, but who's keeping track? Creative underwriting won’t help; it’s like putting lipstick on a pig. Until something happens that allows re-pricing of these assets, they will continue to be pigs in the eyes of every capital provider... no matter how well you dress them up.
Key to success for new projects
- Using entrepreneurial skills to bring distinction to a project over what is already out there. For community developers, is there a deeper role the information center can play in the community versus just a purveyor of collateral materials? What about a day care center exclusively for residents in a first time buyer community? Or, an on-site medical center in an active adult community? (If any of this resonates with you, check out “Different” by Youngme Moon.)
- Smaller tracts with shorter build-out cycles appear to a the honey hole. (Check your redneck dictionary for that term.) Ten reasonably priced deals with 100 lots per community carry far less risk than a bargain basement purchase of a single 1000 lot PUD. Deals that don’t require massive upfront investments for infrastructure and can begin booking sales sooner are like a warm Snuggy to capital providers. Five to ten year build-outs no longer work for most of these firms, no matter how much data you plug into the proforma. One private capital player said he’s even skeptical of three and four year projections; he wants to see deals that can be bought and sold out within a few years.
The Chairman's Report
Finally, we were hoping to hear some really good scoop from Sheila Bair’s address. Ms. Bair is the Chairman of the FDIC and the holder of all things secret in that department. For the most part, they remained secret. She gave a confident, eloquent speech that lasted fifteen minutes, followed by another 15 minutes of Q&A. When all was said and done, her 30 minutes of face time yielded little in the way of specifics: no action plans, no strategy, no policy direction. But gee whiz, she sure sounded impressive on the podium. Maybe that’s why she’s parked in Washington DC; she sounded like a politician!
Turns out there were better panels to sit in on. Earlier this week, Builder Magazine posted a much more informative article on deals that have been done with the FDIC and how they were structured. We’ll save you the trouble of looking for it; check it out here. Next time, we'll study the program agenda a little better. Click here to read the Builder Magazine report.
