The commercial construction market continues to struggle much as the rest of the overall economy. With the exception of the financial and legal markets, the rest of us remain on the slow train toward recovery.
In the private development market, re-capitalization is one of the biggest hurdles to overcome. As billions and billions of dollars worth of term loans come due, owners and developers are struggling to find the capital necessary to refinance their properties. A huge problem comes in the form of appraisals that set the market value for a property. For example: a property owner has a $3 million equity stake in a building that was worth $9 million a year ago. A new appraisal comes in at $1.5 million. The bank, now wants $1.5 million to continue to carry the debt on the property. Understand that the new appraisal is not worth the paper it is written on, but it shows the 180 degree turn around in the process that helped get us where we are today. This newly found conservatism is having a profound impact on the commercial real estate industry.
As more and more of these properties go through this process, many owners will lose their properties and many others will have properties of lesser value making it difficult for new development to compete. As the developers of new projects seek loans, the lower market value means higher equity contribution from the investors, and a longer duration before a similar return. Therefore, many investors are looking at investment opportunities other than development.
Having said all that, once this process runs it course, the market will settle down, and new development will commence again. In the meantime, there will be a few owner-occupied projects to bid, plus a decent amount of work in the public and hospital sectors to keep us going for a while....
Sincerely,
Gary Zagelow
Commercial Segment Manager
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