Developers trying to analyze which projects are more apt to receive financing, take heart. There are opportunities in all asset classes and in all markets. You just need to know where to look, and be willing to take a fresh look at a property before putting in a loan request.
That could mean adding a mixed use element to your project or redevelopment into a new asset class. “Change becomes opportunity,” said Greg Warsek, group senior vice president, Illinois market manager at Associated Bank. “It’s the smart, hardened developers that have made it through this last recession that are sitting there right now not getting more nervous, but saying, ‘this is an opportunity.'”
So where are these opportunities? Here’s a look at the four major asset classes, and the market situations that will make financing easier or harder to come by, depending on how you position your project.
Retail
Brick and mortar is dying, and e-commerce is the main culprit. That’s the conventional wisdom, and it’s certainly not without some merit. But e-commerce is not the sole enemy. Retailers fail every year. Poor business planning, misreading consumer trends and the natural lifecycles of some business concepts have sunk plenty of retailers before the arrival of the internet.
Regardless of the reason, acquiring financing for a retail project is difficult, but not impossible. It might just require a little imagination. The most successful brick and mortar retail outlets are those that have found a way to integrate their physical and online stores.
“I like to use the example of retailers that have adapted well, in my opinion, like Nordstrom’s or Target or some of the other that have supplemented what they do with e-commerce,” Warsek said. “[They’re] trying to figure out how to find that right mix of brick and mortar and e-commerce to ultimately get to a net-positive revenue growth and margin growth.”
And though the retail landscape has changed with the advent of e-commerce, it’s not as if there are no new developments going up. Stronger retail projects include well-located, pre-leased and/or in-fill multi-tenant strip centers. Stand-alone grocery buildings and grocery-anchored centers also remain solid.
Multifamily
Lenders continue to be bullish on multifamily, particularly transit oriented developments in the city and suburbs. However, the large number of luxury apartment units that have been or will soon be delivered to the Chicago CBD should make financing larger downtown residential high rises more difficult in the near term. The availability of concessions such as a short term of free rent to secure a lease will also give lenders pause.
According to Warsek, there is a larger impediment to development of apartments downtown: the city’s Affordable Requirements Ordinance. “The city’s new affordable housing ordinance has effectively shut down all future apartment developments since no new projects make financial sense with the new requirements,” Warsek said.
The Affordable Requirements Ordinance was passed in 2007 and it kicked into effect when developments made use of city-owned land, received financial assistance from the city or acquired a variance prior to construction. As amended in 2015, the ordinance closed a downtown density bonus and increased in-lieu fees. The new version of the ordinance also requires some affordable units be built on-site, with expensive exceptions.
“There is a big disconnect between the developers and land sellers. There are some very prominent real estate developers on the multifamily side that have told us that, with this ordinance, they are effectively done,” Warsek said. “There is no way they can make any of the deals work.”
There are opportunities for financing on multifamily projects outside of downtown. Underserved suburban markets that haven’t seen new luxury product in over 20 years represent untapped demand, as renting empty nesters and young professional couples still like the suburbs but desire the same living alternatives that are available in the CBD.
Office
Financing on office developments, both downtown and in the suburbs, may be harder to come by in 2018. There are millions of square feet of new, luxury, Class A properties that were recently delivered or set to open soon, including 625 W. Adams Street, 151 N. Franklin Street, 110 N. Wacker Drive and the Old Main Post Office redevelopment. So far, these projects are well leased.
However, the vacancy that these new tenants are leaving behind is a concern. It’s unclear where the occupants will come from to take this older, Class B or C space. Most need significant capital improvements to modernize and attract tenants. Are there enough tenants out there willing to pay a high enough rent to justify these investments?
Hospitality is another segment that has seen dramatic fluctuations over the past decade. Specifically, the past three years have seen a significant increase in the number of new, downtown hotel rooms. While occupancy numbers are still solid, there are reports of softness in overall revenues and rates. Full-service downtown hotels are buoying revenue with food and beverage sales, which is lucrative, but perhaps not sustainable. “I like the limited stay because there’s no reliance on food and beverage, it’s mostly business and leisure,” Warsek said. “Those are doing really well.”
Industrial
Industrial still has a good balance in most Chicago submarkets. According to Warsek, developers are getting smarter about building spec in the right submarkets, based on broker feedback. Among the hottest markets right now, as he sees it, is southeast Wisconsin because of the Foxconn project. And the O’Hare submarket’s thriving industrial presence should continue with the west access going in, providing more teardown and infill opportunities.
He is also optimistic about self-storage facilities, which were resilient throughout the last recession. Here he sees a trend towards smaller unit sizes and urban locations, driven in part by downsizing baby boomers. The trend for self-storage as small business incubator should also help to drive funding toward this asset class.
There are opportunities, but you have to seek them out. The right combination of submarket and asset class can present ventures upon which it’s hard to believe no one has yet capitalized. “That happens a lot. In the last year and a half, we’ve seen some really interesting deals,” said Warsek. “Sometimes you have to take a leap of faith.”
