Liquidity has returned for strong, well-located construction projects. That was the sentiment of the “There Grows the Neighborhood” panel at Wednesday’s 12th Annual Commercial Real Estate Forecast Conference at the Sheraton Hotel & Towers.
The panel, moderated by Susanne Cannon of The Real Estate Center at DePaul University, featured speakers Rand Diamond, GlenStar; Michael Drew, Structured Development; and Daniel Rosenberg, Cohen Financial.
Rosenberg said with mixed-use and other types of assets, pre-leasing, sponsorship and location are very important, but there is also a lot of liquidity for construction projects from banks and other non-traditional sources that are looking to put capital to work.
“I am happy to say that we are starting to see liquidity come to construction projects in a major way all across the country, not just in Chicago,” Rosenberg said. “Certainly, location, pre-leasing and sponsorship matters, but the market is a whole lot better today than it was 12 months ago.”
He said institutional equity sources are looking for a place to put their capital and they are very competitive on strong, well-located projects. On smaller projects that are not institutional in nature, the market is still very inefficient, according to Rosenberg. There is still a lot of opportunity for high net-worth and family office types, he added.
“I tell people today that if you have a strong project, money will be lining up for it,” he said.
Diamond added that currently there is rationality in the market.
“We’re at the point in the business cycle where things are pretty rational,” he said. “At the end of the last cycle, which is probably the first half of 2008, we all heard about projects that were sold for prices that we all kind of scratched our heads at. Now, things are very rational.”
Diamond said the equity will go to a sponsor who has a good track record and who has a project that makes a lot of sense.
“It makes a lot of sense because you can demonstrate that there is demand for what you are trying to develop,” he said. “You can demonstrate that there is good infrastructure, good amenities and there is a marketplace for what you are trying to do, whereas when the market gets crazy, almost anything can get financed.”
Diamond added that the best projects are the ones that are attracting equity. They’re also getting the best rates on financing and they are ultimately going to sell for the best prices if the market continues.
Rosenberg, however, said the market is starting to see some irrational behavior regarding apartment construction, especially among smaller projects.
“We are seeing folks who think they can pop up 500- or 200-unit apartment buildings with no experience,” he said.
Drew said he also has heard the term irrational used to describe the cap rates on certain apartment projects.
“It’s hard to understand certain multi-unit apartment buildings selling for sub-five caps,” he said. “It’s a sign of the lack of available investment vehicles for institutional lenders and they are driving this boom in multifamily.
“I’m told that the market is there and people will continue to rent, but it sure feels a lot like the bubble in the mid-2000s,” he added.
Cannon also asked the panel where they see opportunities in the future.
Diamond said in the last nine months and going forward for the next 12 months, his firm is looking at suburban markets.
“You’ve heard everybody talk about the death of the suburbs, but we don’t believe that,” he said. “To be an opportunistic investor you have to be a little bit of a contrarian. You have to buy with a lot of room for error.”
He said GlenStar has been looking at well-located, larger office complexes in the suburbs that “need TLC” and are possibly capital starved.
Drew said his firm sees opportunity in the conversion of former industrial and loft buildings.
“Now it appears that the hip companies, the tech companies … are now looking for that kind of space for their office use. It’s hip and trendy,” he said.