Despite the rumblings that life companies and banks, both large and small, are dipping their toes back into the development game, third-party builders such as Summit Construction in Jacksonville, Fla., and LandSouth Construction in Jacksonville Beach, Fla., don’t really seem to be seeing the fruits to these discussions. “We don’t have anything [new] underway that isn’t a HUD deal,” says Marc Padgett, executive vice president for Summit. “Everything has been HUD or tax credit or some type of government-backed type deal.”
That doesn’t mean Summit is doing poorly. In fact, Padgett says the company has enough of these government-backed starts to have a fairly strong year. Other parts of the industry could be seeing this as well with multifamily starts rising 19 percent in March, but it doesn’t seem like conventional construction lending is driving that spike. That could create a real demarcation between the public and private builders over the next couple of years. Until that market comes back, REITs, who are talking about putting shovels back in the dirt, seem to have the edge in getting new product started for what is expected to be healthy demand in the next couple of years.
“I only know of one conventional deal,” says James Pyle, president and CEO of LandSouth. “There has to be more, but I don’t hear about them. You do hear that some insurance companies and pension companies potentially talking about doing some deals, but I haven’t seen any.”
One of his clients is working on a 75 percent loan-to-value deal with an insurance company. “That was the first glimmer I’ve seen of traditional financing in the past year and a half or two years,” Padgett says.
That’s a good sign but not enough to affect his business preparation for this year. “I didn’t hear anybody talk about anything conventional a few months ago,” he says. But they are starting to talk about conventional stuff. I don’t think the talk has gotten far enough along for anything to happen this year. But in another year, I think the banks will be starting to do a little more.”
The conventional construction loans that are out there require a lot more from developers than they were accustomed too during the boom years. Farmington, Mo.-based Peak Land Construction Co. was able to push through a couple of small deals with community banks. But it had longstanding relationships with those banks. Deals with larger groups would be tough, according to Andrew Braxton, president of the company.
“The larger banks want 30 percent to 50 percent equity,” Braxton says. “That does not make sense for our model.”
Unless you’re a REIT, that leaves FHA as the only source of funding—and that getting to be a tougher avenue now, as well. As that’s happening, many of the REITs are actually firing up the construction engines or even putting shovels back in the ground.
“How much of a head start will an AvalonBay get in some markets if they have the line of credit and the cash,” wonders Rod Petrik, managing director at St. Louis-based Stifel, Nicolaus and Co., a regional brokerage and investment banking firm. “They can just write a check.”
Pyle, who says things coming through FHA make it unpredictable in terms of how many starts he will have this year, doesn’t really see things picking up for the privates for another year or so.
And he’s starting to bid a lot more work. “There are more discussions, but I haven’t seen any increase in starts,” he says. “We could see loosening up by the end of the year. I think in 2011, we’ll start to get busy. We may even see some at the end of 2010.”