Lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat.
Banks are proceeding with caution as the specter of slowing economic growth rattles financial markets and shakes investor confidence in a six-year recovery that’s helped lift property values to records. Lenders are going to be more selective and discriminating as the year progresses, said Mark Myers, the head of the commercial real estate business at Wells Fargo & Co., the largest U.S. commercial-property lender.
“We’re getting late in the cycle,” Myers said in a phone interview. “If the economy continues to grow ever so slowly, demand for commercial real estate will continue to grow ever so slowly. To the extent that the economic climate goes in the wrong direction, it’s going to have an impact on demand for commercial real estate.”
Real estate investors are bracing for repercussions as loan costs start climbing, threatening to drag down the value of their holdings and raising the risk of defaults. Credit for commercial-property owners was already contracting at the end of last year as banks reported tighter underwriting standards for property financing across the board, according to the Federal Reserve’s senior loan officer survey, released in January.
A construction boom in places such as Manhattan and Miami in the past several years has led to a glut of high-end residential condos and hotels. Those types of deals are the most likely to hit snags, said Peter Sotoloff, chief investment officer at Mack Real Estate Credit Strategies. The investment firm, which provided affiliates of developer Related Cos. with $275 million for Miami condo projects in recent months, is picking its spots carefully, he said.
“The antennas are up,” Sotoloff said. “The bar is much higher.”
In New York City, the value of construction projects initiated last year reached $40.9 billion, up from $26.7 billion in 2014, according to the New York Building Congress. The surge is being driven by a wave of ground-up development, which accounted for 76 percent of the total in 2015. Three years ago, alterations and renovations accounted for more than half of construction projects. That means there will be a lot of new space to fill.
Property owners are facing a host of challenges. Overbuilding in some areas, the protracted slump in oil prices, a strong dollar eating into tourism, declining stock values and slowing growth in China are all weighing on landlords. At the same time, the Federal Reserve is raising interest rates for the first time in nine years.
The confluence of those events is spooking lenders, said Robert Lapidus, a partner at L&L Holding Co., the New York-based real estate investment company he founded with David Levinson. The developers are building a 670,000-square-foot (62,000-square-meter) tower at 425 Park Ave., a project they started last year without a single tenant in place. The company secured $556 million in debt to fund construction in June.
“Between then and now, the world has changed,” Lapidus said. “Financing a speculative office building would be a little more difficult today.”
Borrowers with a strong track record that aren’t highly leveraged — L&L and their partners have a roughly 55 percent equity stake at 425 Park — can still get a loan, Lapidus said.
Even as commercial-property values show signs of cooling, well-funded buyers gunning for high-quality assets are pulling off record-setting deals. Anbang Insurance Group Co., a Chinese insurer that acquired New York’s Waldorf Astoria for $1.95 billion last year, has agreed to acquire Strategic Hotels & Resorts Inc., owner of 16 U.S. hotels, from Blackstone Group LP for about $6.5 billion, according to people with knowledge of the matter. On Monday, Anbang made an unsolicited takeover offer for Starwood Hotels & Resorts Worldwide Inc.
Those without Anbang’s deep pockets are are having a harder time. Developer Bauhouse Group is fighting to hang on to a plot of land on Manhattan’s east side after defaulting on about $147 million in loans, according to a U.S. Bankruptcy Court filing. The firm planned to build a 90-story condominium tower at the site.
Elizabeth Latino, a spokeswoman for Bauhouse Group, declined to comment on the project.
A dysfunctional commercial-mortgage bond market is compounding problems for landlords. Wall Street firms, stymied by volatility and new regulations, are backing away from underwriting loans to be packaged into securities. Issuance of new CMBS has slowed, prompting Bank of America Corp. analysts to cut their issuance forecast for 2016 by as much as 30 percent to $55 billion.
The breakdown of the CMBS market is choking off funding for maturing debt. Borrowers are seeking out alternative sources of capital that may offer less-generous terms, Sotoloff said. Mack Real Estate Credit is working on completing a $125 million mortgage that was originally destined for a CMBS deal, he said.
“We’re going to see more private lenders taking up the vacuum left by regulated lenders leaving the sector,” said Richard Mack, chief executive officer of Mack Real Estate Credit. “The process by which this occurs is going to be volatile and that’s part of what we’re living through now.”