Is it lip service from an ingenious marketer known for self-aggrandizing promotion? Not this time, say longtime Chicago multifamily developers. Consider that locally based multi-family stalwart RMK Management is ready to break ground on a 221-unit luxury high-rise in the River North submarket—but the 35-year-old developer can't find financing, even with a 30 percent equity buy-in from a pension fund packing recourse clauses.
“A year ago, I would have had this financed in a week, and the bankers would have come to my office with term sheets, and I would have picked out who was the best,” says RMK president Tony Rossi. “Now, the response is, ‘We are not doing anything,' or ‘We want 45 percent equity.' The financing market has totally, totally changed.”
JUST IN TIME Developers with secured construction financing consequently are sitting in the driver's seat. Lynd Development Partners broke ground two months ago on the 29-story EnV, a green concept high-rise in River North that will couple LEED certification with luxury amenities to fill 249 units upon delivery in 2010. Despite sitting in a submarket with 96 percent occupancy and few concessions, Lynd Co. CEO David Lynd says EnV was lucky to get the green light. “Timing is everything,” Lynd says. “We raised our debt and equity in arguably the most challenging market in history.” Construction loans on EnV won't mature until 2011, and Lynd included two favorable extensions options. He will likely follow Trump's suit in extending financing, if needed. “In today's turmoil, you don't want a gun to your head to sell if the economy and the capital markets are in the tank,” Lynd continues. “You want to be able to extend your loan, giving you the ability to hang in there and ride out the storm.”
Chicago-based Jupiter Realty also will leverage LEED certification for its 2010 lease-up of the unnamed, 50-story apartment tower at 215 W. Washington Street. “Sometimes, I think we may have been the last deal that got done in Chicago,” says Jupiter principal Don Smith of the $157 million project. “Obviously, we're a rental project, and I think Trump is talking specifically about the big condo projects that will never be built again, and I think he's right about that. I know of a number of deals on the drawing boards that have been scrapped. They are just not happening.”
For companies with condo stock already on the ground, the only alternative to selling through a recession is to revert to apartments. Local development firm The Brixton Group just announced that it will move forward with construction on phase two of the 48-unit CA/23, a condo project with units priced between $650,000 and $1.6 million that has pre-sold 12 of 24 units in phase one.
NO DEAL FLOW “There is a general feeling in the market that now isn't quite the time to purchase, and we're fighting to counterbalance that with the argument that it is an incredible time to buy,” says Brixton principal and CEO Geoffrey Ruttenberg, who adds that he'll address the possibility of apartment conversion when construction completes. “We'll see where we are at the time we start to deliver units, but we don't feel an urgency to go that route. Chicago is a sophisticated, affluent city with a lot of wealth, and we're 50 percent sold. That has to account for something.”
Apartment players say that type of glass-half-full optimism won't change the realities of the market. “You cannot get pre-sales in this market. No one is buying,” says Michael Newman, president and CEO of Golub & Co., a Chicago-based development firm in the midst of completing construction of the 480-unit, 54-story, high-end rental companion tower to the existing Streeter building. “We went rental when everyone was underwriting for condos, and we are opening in mid-2009 and expect to be successful. Sometimes, you are lucky and guess right.”
Rossi also questions whether condo projects will be able to re-pencil to rentals when established market leaders in the apartment space can barely get a loan. “We'll get ours done, but it'll come down to the wire; we'll put in more money; and the rate will be higher than we wanted,” he says. “Most of the condo sponsorships in the market have little apartment experience, and the money will go first to experienced rental developers. If you don't have an ‘A' next to every single line item, you are not getting financed. I've never seen anything like it. All of our bases are covered, and it still doesn't work. Chicago is a great multifamily market, but it doesn't mean anything.”