San Diego Developers Talk Competition and Spec Lending
By Cathy Cunningham,
CommercialObserver.com | Feb. 23, 2017, 12:15 p.m
The Borrower/Developer panel at Mortgage
Bankers Association’s 2017 CREF/Multifamily Housing
Convention & Expo began with a little coaxing from moderator Steve Kenny, a senior vice president at Bank of America Merrill Lynch, who told attendees: “Don’t treat [the session’s
seating] like high school. Come forward!”
Kenney moderated
the panel discussion between Kaitlin
Arduino, executive vice president and partner at Murphy Development Company and Paul LeBeau, a principal and the chief financial officer at Bollert LeBeau Commercial Real Estate—a
developer of office, industrial, and life science properties.
The trio
discussed factors impacting the financing of commercial projects and also how
smaller developers can stay ahead of their competitors.
Arduino
attributed her company’s success to its expertise in the industrial market and
its strong track record. Murphy Development Company—which specializes in the
creation of corporate industrial and technology parks—has built more than 10
million square feet of projects throughout San Diego County. “Redevelopment and
owning land at a good basis is where we see the opportunity these days,” she
told the audience.
LeBeau said the
trick is in “Recognizing where there is a good opportunity and getting a great
architect in to figure out what the market wants.”
Indeed, tenants
are getting picky in terms of what they seek in a property. “Amenities have
gotten crazy, people are putting yoga classes in and hiring yoga instructors
for the property,” he said. “They’re really thinking outside of the box to
create value.”
And in a time of
heightened leasing competition, it’s not just the tenants who are being
somewhat demanding: Brokers are also getting a little cheeky, said Arduino.
“We’re seeing
very aggressive proposals from tenant-representative brokers. They want an
open-book policy and want to know our returns [to base their own pricing on].”
That’s not happening, however, she said.
With regard to
financing challenges, LeBeau said that a lot of tenants these days don’t want
leases that stretch beyond 5 years and often want termination options. “The
days of a 10-year lease are dwindling,” he said, adding that financial firms
often won’t sign up for more than 7 years and tech companies “don’t know where
they’ll be in 2 years let alone 10. It’s very challenging.”
On the plus
side, technology tenants are speedier to sign a lease, said LeBeau, while
traditional Fortune 500 companies are much slower. The tech market [tenant]
says “I need a 5,000-square-foot office tomorrow. They’re growing like crazy
and not as focused on the real estate so they make decisions quickly.”
Murphy
Development recently opened a 121,970-square-foot industrial speculative
building in Otay Mesa, and when the conversation turned to speculative lending
all panelists agreed that it isn’t greeted with the warmest reception by the
lending community. “Spec [lending] is still a four letter word,” LeBeau said.
Kenny chimed in,
and described spec lending as equity risk, not debt risk and said that Bank of
America has shied away from it. “We’ve shied away from nonrecourse construction
lending in general,” he said. “After the downturn we tried to protect our
balance sheet even more.”
Arduino said
that in her own experience, the big banks such as Wells Fargo and Bank of America are still generally focused on big
loans and big guarantors. “We wish the bench was a little deeper with
banks—we’ve traditionally gone to smaller and regional banks. We think we are
great clients, we just wish we had the attention of more banks.”
Kenny said that,
from his perspective, the deals banks are willing to take on are often a
function of scale for that particular client and the risk associated with
individual transaction. “As risk is increased the availability is compressed,”
he said.
Ending on a
positive note and addressing what’s next for the conference city, Arduino said,
“San Diego and Southern California have few more years on the runway. The
industrial market is really picking up steam, everyone is excited about
ecommerce. The fundamentals are different than last time because we didn’t
overbuild. We’re excited about the next few years.”
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