Once again, the current real estate market proves that even juggernaut development companies can fall victim to its prey. The latest victim: Opus South Corp.
The Buckhead, Ga.-based firm filed for Chapter 11 bankruptcy protection in April. The restructuring—brought on by poorly executed multi-tasking, never-ending construction, toxic mortgages, and meager sales—is emblematic of problems throughout the multifamily development sector. While some industry insiders were shocked by the news, others foresaw trouble for the companies a while ago.
“These companies bit off more than they could chew.” says Jack McCabe, real estate analyst and CEO of Deerfield Beach, Fla.-based McCabe Research and Consulting. “It’s kind of a double-edged sword. Did they see it coming? No. Should they have seen it coming? Yes. They were developing projects left and right at the height of the boom.”
McCabe says companies such as Opus South took on too many projects that took longer to build than normal. “Due to a shortage of materials and labor, these projects went on longer than a year,” he explains.
As is the case with Opus South’s Water’s Edge condo property in Clearwater, Fla., McCabe says the project took longer than expected and, as a result, the development company lost the majority of its potential buyers. Of the 153 units built, only 10 have sold as of late. The company was also forced to refund most of its pre-sale deposits, making it difficult for Opus South to refinance its short-term construction loan. The development company reportedly has $324 million in loans from 12 banks, $103 million of which was designated for residential properties.
Opus Corp. announced that its Southern offices will remain open during restructuring, but it will eventually leave the market completely. “We do not forecast to be back in that market for some time,” says Winston Hewitt, Opus’ director of public relations. “However, we can’t provide an exact range of how long we plan to stay out of that market. We do know that this won’t be a one-year thing. It is a significant range that we would back out from that market.”
All told, the future still looks grim for Opus South’s parent company, Opus Corp. Opus South recently borrowed $68,000 from Wachovia bank in order to pay utility expenses such as water and air conditioning at its Perdido Key property, a 51-unit condominium complex in Pensacola, Fla. And to add more salt to Opus Corp.’s wounds, its Phoenix-based division, Opus West Corp. is considering filing for bankruptcy as well. The announcement came after Hill Country Galleria, a 1 million square foot mixed-use property in Austin, Texas, filed for Chapter 11. The multimillion-dollar development is one of Opus West’s most lucrative projects.
Despite the recent trouble Opus Corp.’s divisions are facing, McCabe doesn’t think the company as a whole will be affected. “We may see Opus South and some of its other divisions disappear, but the larger company will be able to survive this,” he says. “They have enough hands in other markets to survive this.”
Opus South Corp. is not the only multifamily firm to recently file for Chapter 11 bankruptcy protection.
Oakland, Calif.-based A.F. Evans and Charlotte, N.C-based Crescent Resources recently did so as well. A.F. Evans’ debt is more than $50 million; however, the group plans to raise $35 million by selling off its development properties and focusing more on affordable housing, property management, and senior-assisted living. Evans says it has no plans to lay off its 550 employees. Crescent Resources, meanwhile, has more than $1 billion in debt but was able to secure $110 million in debtor-in-possession financing in order to continue its operations.
Don’t expect these hard times to be over just yet. Jack McCabe, real estate analyst and CEO of McCabe Research and Consulting, says there may be more bankruptcy filings in the future. “This is very common for developers right now. They need to try and hold on to their properties, and be prepared to go through a slow sales process,” he says.
McCabe’s most interesting advice is for developers to stay away from the high-rise condo market for a while. “There is still an excess of inventory. There may not be a demand for high-rise condos for the next decade,” he says.