Consensus Is Reached: Nowhere To Go but Up
For developers able to roll with the recession’s punches, some new activity in markets this fall has owners and lenders finally mustering some optimism and cautiously returning to the fray.
“Not so bad is the new good,” says Joe Coradino, executive vice president at Philadelphia-based Pennsylvania Real Estate Investment Trust. He made the observation in September while on a discussion panel at Philadelphia’s Urban Land Institute, where regional developers echoed other builders around the nation that the first signs of recovery are evident in projects in the government, medical, education and hospitality markets.
“We’ve hit bottom, the free fall is over, and we have our legs under us now,” says Larry Puboda, chairman of NAIOP, the Washington, D.C.-based commercial real estate development association.
Tim Murnane, president of Minneapolis-based Opus Group, says, “There was an uptick in the spring that dropped off but [now] is gaining more momentum, particularly in the office and industrial sector. We’re definitely responding to more proposals.” The firm “has been actively quoting net leases for build-to-suit projects for traditional 100,000-sq-ft [offices] and 300,000-sq-ft industrial distribution facilities in the Midwest. Today, projects are smaller in total cost versus the megaprojects that filled our portfolio a few years ago.” Opus completed projects for Marquette University Law School in Milwaukee and the University of St. Thomas in St. Paul, Minn., and currently is developing facilities for the U.S. Armed Forces Reserve Center in Cedar Rapids, Iowa.
Despite the resurgence, the industry is still reeling from the recession’s fallout.
“We have a long way to go,” Puboda says. “There is still a high vacancy rate in office, industrial and retail development.” The tough times have crippled lenders and owners and caused a few outright casualties. “There’s certainly been a culling of the herd. We house America’s businesses. As they’ve suffered, so have we. It has been an equal-opportunity downturn, and small, medium and large firms have all felt the pain,” Puboda says.
It’s a shift evident both in how project bidding is changing and in what types of buildings attracting investors. “There is specialization and a lot of joint partnering going on,” says Puboda. “Green facilities are a must now. Owners see energy-efficient buildings as good business deals, and tenants demand it. It’s the only way to attract a wide pool of buyers.”
Opus’ tack through the recession matches that assessment. “Collaboration with outside firms is even more prevalent at this time. … We’ve been partnering with architecture and engineering firms to deliver projects,” Murnane says. The firm “has gone through a number of changes in the past 24 months, and we’ve emerged as a leaner design-build firm.”
While “there are no speculative projects anymore, owners with a fair amount of their own money” can secure lending, Puboda says. “A year ago the answer from lenders was no, but now there is more discussion going on as smaller regional banks are learning to get into the act.” Lenders and owners have climbed a steep learning curve to figure out the “new rules in lending. We’ve all had to go through a period of adjustment,” Puboda says.L
enders and developers are making creative adjustments. Jacksonville, Fla.-based Cranewoods LLC, a firm that in good times builds a couple of $20-million condo projects per year, is a poster child of survival in the year’s drought. When work began drying up in the coastal condo markets— Cranewoods’ bread and butter—President Andrew Howe was faced with a simple, stark choice: evolve or die.
During a year when “two or three of my biggest competitors went out of business,” Howe says competition in Jacksonville’s struggling market was fierce. “You’d go to bid on a project, and there’d be the largest developers in the country there in the room with you,” Howe says. “Banks were taking back projects, and many of them had never been through this before and just didn’t know what to do.”
When a local bank brought Howe aboard as a consultant on a stalled condo project in Jacksonville last year, “a light- bulb went on,” he says. Cranewoods took over the project, resurrected construction and brought the eight-story condo project to completion. The strategy that worked was “putting together a plan where everyone loses something, but no one loses everything,” Howe says.
Howe parlayed the experience into a full-time venture, offering hourly consulting to lenders with stalled projects on their hands, and has since taken over and completed more stalled high-rise condos, four in the Jacksonville and one in downtown Cincinnati.
“Having both construction and development experience is what kept us in the game,” he says, even though the projects presented some challenges. “[Taking over] half-finished projects is a specialized field,” he says. “Since the time when those projects were initiated, the markets had changed, which required we make design changes. We’re now in the business of fixing broken projects.”
For those left standing after the economic bouts, there are big hopes the next year will bring relief. “It’s been a year of stabilization, layoffs have leveled off, and there is booming business in education and some activity in hospitality,” concludes Howe. Puboda says, even though key markets remain “relatively quiet,” a recovery appears to be on the horizon.