Capital Seeking Investors Seek Stability
Author: Garland Pollard
Source: Inside Business
Date: 03-11-2002
Capital Seeking Investors Seek Stability
| SPECIAL REPORT Capital Seeking As investors seek stability, commercial real estate looks more attractive Garland Pollard Inside Business Monday, March 11, 2001 The good news for developers seeking funds for larger real estate projects is that there is more money out there than ever. The bad news is that with the economy, there are fewer good projects around. “Overall, there is more capital out there than there are good projects to invest in,” said Andrew Little, principal at John B. Levy & Co., a Richmond real estate mortgage banking firm. “Real estate is viewed as a good investment now.” Because some stocks are seen as riskier in this economy, Little said good real estate offers the large investor the opportunity to spread risk, namely because most commercial real estate properties have multiple tenants. As a result of this trend across the United States, and in spite of the downturn, there is more long-term capital available for big projects, not less. “I think overall there is a bias against the stock market and against corporate bonds, which will help real estate investors get more capital,” Little said. The bad news is that in key sectors like retail and hotels, delinquency is high, making lenders skittish. For instance, hotels make up 9 percent of the lending but account for 36 percent of the delinquencies. And retail investments make up 30 percent of the national lending market. All told, hotels and retail projects account for about two-thirds of the commercial loan delinquencies in the United States. Office and apartments are seen as strong sectors for national lenders, which Little said is “sort of counterintuitive” as sublet and empty office space has soared around the nation. Instead, Little said that many office properties, while vacant, still are being paid for by tenants. “I don’t think we’ve seen it top out yet,” he said. In such an economy, lenders can be a bit more aggressive — provided the project is still good. But this will not be a big help for smaller local projects, because those real estate loans typically are personally collateralized by developers rather than by the building itself. In contrast, larger loans are not as dependent on personal guarantees. “Most of the projects are done on the quality and the credit of the developer,” Little said. Still, smaller developments have good prospects. For those projects, local developers turn to community banks such as Richmond-based First Market Bank. And unlike household mortgages that are resold to larger companies, First Market typically re-lends deposits from account holders into local real estate developments. Because of this, First Market must seek a wide variety of loans to protect itself. “We try to keep our portfolio in a certain balance,” said Dave Fairchild, executive vice president of the bank’s commercial operation. Much of the activity in commercial lending has been in refinancing, he said. Those unsexy projects, which include strip shopping centers, can be easily financed because they have a dependable income stream. “These projects are still very underwriteable,” Fairchild said. That confidence in lending extends to local office buildings and apartments. “All of those income streams have stayed pretty steady,” he said. There is room for a niche projects, Fairchild said, and projects that serve a solid market are seen as positive. For instance, First Market financed the successful River Road II Shopping Center, a retail strip in Henrico County that serves a high-income residential market. One important area of lending of late for First Market has been renovations for in-town apartments, what Fairchild called tax-credit apartment deals. While large real estate investment trusts, or REITS, do much of the lending for larger apartment projects, smaller projects frequently seek local financing. Two such projects that were recently funded include the Superior Warehouse Apartments and the Shockoe Place Apartments, both on East Franklin Street in Shockoe Bottom. Shockoe Place is finished, and work on Superior Warehouse has begun. Meanwhile, Jeff Bisger, executive vice president at local commercial real estate brokers Insignia Thalhimer said because of low mortgage rates, businesses are more likely to buy their own offices as opposed to leasing. Much like a new homeowner, buying the space allows companies to build equity. While Wall Street typically prefers publicly traded companies keep their capital out of real estate and in their core businesses, local companies are not under the same restraints and find sometimes it’s cheaper to own than lease. “A lot of their net worth is tied up in their business,” he said. Bisger sees an eagerness for good loans at small and large national banks, but said in this economy better deals can often be found at the bigger banks. “The big banks are probably being a little more aggressive on rates,” he said. And while bankers are still wary of what the economy will do, they remain upbeat. “On the commercial real estate side versus a year ago — we still feel pretty good,” Fairchild said. “It’s not as bad as everyone had thought.” |