The real estate development industry has created a negative impact on today’s economy. Throughout the United States, real estate developers are experiencing many concerns with their development projects. These concerns are primarily related to the lack of available financing and the unwillingness of lenders to extend or restructure current obligations. Whether you are a residential developer, home builder, commercial developer or any other real estate development professional without the proper financing terms and structure, projects will remain stagnant or sold.
Word has reached Wall Street and Main Street that developers and homebuilders need financing, restructuring and more time to manage this cycle. Lenders, investors and other financial institutions have scaled back their developer and builder loan programs due to the risk associated with real estate development. Many real estate developers rely on financial leverage to make their respective projects successful. In today’s economy, the term “leverage” has been a word that many people feel has created this current crisis.
The impact has created stalled, partially built projects riddled with graffiti, damage, and dangers facing immediate communities. The citizens of these communities demand that the police patrol the projects, the fire departments monitor access to water, and the local municipalities ensure the integrity of the community. Cities are also being adversely affected because they relate to the tax revenue projections created by these real estate development projects.
The real estate development industry has developed alternative contingency plans to adapt to the current real estate environment. Some of the most successful alternative strategies include; raising capital, developing joint venture partnerships, negotiating with your current lenders, and securing additional debt. Real estate developers who are able to raise capital can reduce their leverage position and can meet the needs of lenders to pay interest or pay down principal. The real estate developers, in turn, donate capital in the project. Joint venture partnerships involve partnering with other real estate development partners or investors to provide additional capital or relationships that create value for the project. Negotiation with lenders has also proven to be successful; however, many lenders are having a hard time with the way they restructure loans. Finally, securing additional debt to refinance the entire project or pay down existing debt and retain funds to cover interest costs has been a strategy for real estate developers.
There are other issues and concerns that real estate developers face besides financing, such as finding homeowners, builders to develop projects, and ultimate tenants to occupy the projects. The residential mortgage industry has been experiencing a tremendous increase in bankruptcy filings, foreclosures, and a lack of funds available to create mortgages for new home buyers. The government has been creating programs and ideas to help keep homeowners in their homes and also to stimulate new buyers in the market.
The commercial real estate retail sector has seen retailers scale back their operations in terms of growth and expansion. Retailers are also struggling to get financing for tenant improvements at their locations. One of the most troubling concerns for retailers has been a lack of consumer spending. Office tenants have also had to scale back their operations, reduce staffing needs, and cut expenses as much as possible. Office tenants are also experiencing opportunities to move to more desirable locations at more affordable prices, leading to vacancies in many submarkets.
Recent economic indicators and stock market trends show some signs of strength in the economy, while others believe that the economy has yet to slowly recover. As credit markets begin to thaw and lend to real estate developers, projects will begin to return to normal and build momentum. There will be many learning experiences that real estate developers take away from this current real estate market and hopefully not repeated in the future.