Midwest Real Estate News recently spoke with Charlie Cafazza, commercial real estate team leader at the St. Louis office of Associated Bank, about the steps that developers need to take when seeking financing for their projects. Cafazza’s take? Developers still need to prove to lenders that once they build their apartments, strip malls or office buildings, a steady flow of tenants will fill these new spaces.
Midwest Real Estate News: Is it getting easier for developers, provided they have a solid project, to receive financing for their new buildings? Charlie Cafazza: One of the things that is so difficult about the economy today and that makes it more difficult for developers is the demand argument. Developers need to prove to lenders that there is going to be demand for whatever it is they are planning. Apartments are still running great today. It’s easier to prove the demand for a new apartment project. It’s easier to lend in that space. But where developers are challenged is in those spaces where demand isn’t as strong. When developers can prove the demand for what they are going to build, they dramatically improve their chances to qualify for lending dollars.
MREN: In what sectors is it more difficult to prove that demand? Cafazza: Commercial office is one of the harder ones. It’s more challenging to receive financing when you want to build new office space. The job numbers are improving, but they have been weak for a long time. Vacancies are higher in the office space. If someone comes to you looking for financing for an office building, the first question is, ‘Who will use that space?’ If you can qualify demand for that office building – maybe you want to build in a strong infill area with low vacancies or maybe you already have tenants who have pre-leased some portions of the building – you can still get financing. When developers have their own cash or cash equity from investors, too, that is always helpful. That lowers the risk on our end. But if you don’t have those things, it can be hard to convince lenders to provide the financing in the office sector.
MREN: How about some of the other commercial sectors? Are there other sectors that pose challenges for developers seeking financing? Cafazza: One of the areas that is harder for us to get our arms around right now is single-family housing. We are confident that we are seeing a recovery in that area. We are confident that there is going to be additional recovery. But that market remains challenging. Proving the demand is a more difficult task. We just don’t know how many people are going to show up to buy new homes today
MREN: As you’ve already said, it’s much easier for developers to qualify for financing for multi-family projects. Do you worry, though, that the multi-family market might become saturated soon? There has been a lot of building in a lot of Midwest markets. Cafazza: There are arguments on both sides. One argument says that there has been so much built recently that we don’t want to end up in the same place as we were with single-family housing several years ago. The other argument is that there are a lot of good underlying stats saying that the multi-family market will continue to more than hold its own for a while. I’m a believer in the multi-family market. I don’t think it will continue on in exactly the same trajectory as it is on today. That would be unrealistic. But I do think multi-family will remain a strong, stable market for a long time. Just look at some of the underlying trends. Single-family mortgage financing has become constrained in terms of what the banks can do. There is a segment of the market that used to qualify for mortgage loans that no longer qualifies because of new credit requirements. The obvious answer for these folks is to rent. That is a trend that will continue to boost the multi-family market.
MREN: How strong is your local market, St. Louis? Are you seeing more real estate activity here today than you did last year or the year before? Cafazza: We are. St. Louis is following the path of the national economy. If you watch the headlines of the Wall Street Journal you see that the jobs numbers are getting steadily better. That bolsters the economy. What follows is that the consumer-spending numbers gets better. Our market follows those same numbers. As the jobs numbers get better, as people get more comfortable, the first thing we see perking up is single-family housing. We are also seeing spending increasing in retail sales. Because of that, we are starting to see the retailers looking for more space. They are coming to the developers we work with and saying that they need more retail units. Many of these retailers were dormant. Now they are coming back to the market looking for more space. As people buy more goods you see the industrial market pick up.
MREN: Is it easier today, then, for developers to get financing for their retail projects? Cafazza: Retail is easier to approve than new industrial space. There is a lot of traction today in retail among some of the discounters such as Marshalls and Ross Dress for Less. As the economy gets better, I think we’ll see more traction in the higher-end spaces in the retail sector. The interesting thing we are all watching is the Internet and how Amazon and others are impacting retail. The common wisdom is that new retail centers will be more event-driven. You’ll see more movie theaters and restaurants, things that you can’t just get through the Internet. The movie-theater and restaurant experiences are ones that you can’t buy online.