ancientmtk Wrote: ------------------------------------------------------- > how is the RE development market these days? > > I have a friend who is a RE develop in Socal. > Apparently he is doing fine by snatching up > half-done projects from banks and filling in the > rest himself. > > I find it hard to believe that there are > opportunities in RE development despite the > continuous slump in RE nation wide. maybe i know your friend. i invest in the socal market and work with many of the local developers out there. industrial by any chance? my 2c is that nobody in there right mind would break ground today on a spec development pretty much anywhere in the country. if you’ve got a build-to-suit that’s a different story; there’s some of that still going on.
RE development isn’t doing much because financing has become so tough. For example, your standard, creditworthy developer will need approximately 50% LTV on any project with vanilla financing. Hard money interest rates have pushed into the 20+% range, which destroys return rates. So it’s the availability of financing that has killed development, not the “market” per se, if that makes any sense at all.
I know a dude who had a totally unrelated business and some capital to invest. He invested $1.25M and made like$2.8M in no time back in 2004. Of course he fell in love with RE development but never had those kind of returns after that deal. He is very disciplined about his debt structure so he didn’t get screwed when things went bad. Now he has small deals here and there but nothing compared with that nearly $3M deal.
i think it’s more an issue of land basis vs. current market rents. it makes no sense to move on a project because it’s not going to make any money – unless you’ve been holding your land for a real long time and have a very low basis. if you bought land late last cycle best you can do is hold and pray. edit: if you’re buying land now and need financing, then i agree w/ kkent.
jbald is correct. Sellers, out of necessity I suppose, have refused to lower asking prices to true market rates because they will lose a lot of money. Lack of sales causes a death spiral in a market because there are no comps and no comps equals uncertainty, which raises cap rates (required returns) and lowers prices and makes sellers less likely to sell and so on.
Ok, but there is capital out there looking for yield. I guess the question is where do the buyers and sellers meet. Think public companies could spur and acquisition cycle since they have a lower cost of capital and can access the equity markets?
^could be. i’m not sure how much of the typical volume they pick up though. i think most players are waiting to see how the CMBS market and recapitalization gap shake out before jumping in in a big way. job growth could dull or even eliminate the potential pain from all the loan maturities coming in the next couple years. my guess is that things won’t get too much worse because uncle sam and the fed have staked too much against a financial collapse to let the real estate market go without support.
Sorry, by “developer” I meant “developer/investor/investment group”. I agree that development won’t be feasible for a couple of years and when it is, in many markets you’ll have about a 6 month development window. Rent is simply too low to justify development costs.
jbaldyga Wrote: ------------------------------------------------------- > my guess is that things won’t get too much worse > because uncle sam and the fed have staked too much > against a financial collapse to let the real > estate market go without support. Yeah, I guess I just don’t think that the govt can do enough to fight off the storm that still hasn’t played out in CRE. For example, in Massacchusetts 33.8% of the CMBS loans maturing in 2010 ($1.075 Billion) have debt yields below 10% and 40.6% have debt yields lower than 11%. For 2011, those numbers are 24.0% and 41.5%, respectively on $1.4 Billion. That’s a ton of equity that needs to get invested, in order to take out the in-place financing. I think it’s crazy to believe that this won’t put additional downward pressure on rent. On top of that, if you rank the states in terms of worst performing CMBS loans (measured by delinquency plus 50% of special servicer watchlist), Mass ranks 37th out of 50, so other states have it much worse. I just don’t see how the govt can fix this.
Yeah, it’s like a ticking timebomb. I work in multifamily, and we are expecting pretty devastating financials from our borrowers for year-end 2009, and even worse numbers for mid-year 2010. Although, we just reviewed 3Q 2009 financials for our watchlist properties, and they really don’t seem that bad (thanks to a ton of cost cutting–eventually, a property can only cut so many costs). It will be interesting to see how this plays out.
maybe my view is colored by the lack of industrial that made its way into CMBS. CMBS will probably be a huge cluster f* that will be fought out in the courts over many years. i just pray for job growth some time soon.