On balance, this is good news. Still, the height of the development boom in this cycle is clearly over. And developers are finding
it’s not as easy as it was three years ago to make projects pencil out.
Creative financing methods, plans for multiple uses and joint venture partnerships are among the responses savvy developers are
exploring to get to the ground breaking point of new developments as the market evolves.
THE CHALLENGE OF GETTING OFF THE GROUND
Of course, challenges developers face vary by product type and
market. Carleton Riser, president of Transwestern Development
Co., would certainly know. Transwestern has 32 developments
across the country in the pipeline or currently underway, including
15 million square feet of office, 13. 9 million square feet of industrial and over 3300 multifamily units.
“Land prices and construction costs have increased across the
board while new construction deliveries have slowed or halted
rent increases needed to justify the higher cost,” says Riser.
“Construction loans have become difficult to obtain and where
loans are available, the leverage levels and terms are more restric-
tive than they have been in a number of years. Finally, the volume
of construction activity in many markets is giving investors pause
regarding new projects.”
Some markets are more far challenging than others. Michael
Smith, a partner at Herrick Feinstein, says New York City’s exorbi-
tant land and construction costs make it difficult to envision an
enticingly-sized pot of gold at the end of the rainbow, especially
where high-priced debt is involved. He offers the example of a
new residential condominium development.
“It’s difficult to underwrite sell-out prices that make sense
given the related development costs,” Smith says. “Many local
developers are also in a holding pattern, waiting for the renewal
of the city’s 421-a affordable housing tax exemption. The new
program affects everything from tax incentives to the wage floor
for construction workers. Without a definitive plan in place, many
developers are staying on the sidelines.”
Among the strategies Trinity Financial has employed to get deals to work recently include controlling
land costs by participating in public RFP processes. It did so with its Boston East project in East
Boston, where it bought an existing structure for adaptive reuse.