Wednesday, September 26, 2007

What doesn't this say?

When I first read this story about large residential projects pulling back, I was not a happy camper. Things looked bad.

But then I read it again, between the lines, and came to the following conclusions:

1. Projects are still being done. Of course, if you want the penthouse at the Chicago Spire, it'll cost you $40 million.

2. I saw no mention of any mess in non-residential commercial deals. Then I read that cap rates in August are still slightly lower. Take a look. A look at the chart in the WSJ showing where cap rates were, even pre-9/11. (On the other side, however, the Journal also reports that there is a current "paralysis" in the market, notwithstanding rate cuts. But is that for huge portfolio deals or for everything? From what I am hearing, there's money to be had for smart, well-planned single asset deals, especially from traditional lenders.

3. Check out this quote:

"The debt market is frozen for the inexperienced developer," said Robert Horowitz, a partner at Cooper-Horowitz Inc., which places about $15 billion in real estate debt a year. "To finance a supertall luxury condo project today, you need to have be an experienced developer with at least 30 percent cash equity, 50 percent presales and the ability to pay 9 to 10 percent interest."

In recent years, developers often obtained loans with 5 percent equity, fewer presales and lower interest rates.

OK, 20% equity would be better, and certainly lower interest rates would be good as well. But this, once again, seems more like sanity than a freeze. And I see nothing wrong with a lender looking for a developer with a track record -- do you???

4. No talk whatsoever of money waiting for deals to start up again. Sellers are waiting to see how things shake out in this market unless they are in a distressed situation. The same is true for loans, but again, not fatalistically. Per the WSJ story: "Many industry watchers believe it will be months before the market fully recovers. "Some deals have gone through, and pricing for senior bonds is firming up, but the market is still a little bit choppy in trying to work its way back to health," said Tad Philipp, a managing director for Moody's Investors Service."