Lending revives stalled projects

February 24, 2011

An influx of fresh capital into U.S. commercial real estate is bringing some long-stalled development projects back to life and launching new construction of apartments, office buildings and shopping centers, according to a Wall Street Journal article.

The moves show that the industry, in a deep slump just a year ago, has entered recovery mode—at least in the nation's largest and healthiest markets. Analysts say the improved economy is giving rise to pockets of demand for new commercial space, while low yields on other investments prompt investors to seek higher returns in real estate.

The nascent turnaround comes even though many U.S. banks still are slogging through billions of dollars in bad commercial-real-estate loans, a big cause of bank failures. Still, some of the largest U.S. banks are tiptoeing back into commercial real estate.

The cranes looming above the halted construction area at the Streets of Buckhead project in Atlanta are expected to start moving again this year.

J.P. Morgan Chase & Co. financed as much construction lending in the first six weeks of 2011 as the nation's second-largest bank by assets did in all of last year.

The New York company won't disclose construction-loan origination volume. "We have certainly started making construction loans again," Todd Maclin, head of J.P. Morgan's commercial bank, said in an interview. "In the third quarter and fourth quarter of last year, it started as a trickle, and now you're starting to see much more activity."

In Atlanta, development company OliverMcMillan said it has secured $300 million in private-equity funding to take control of and complete an unfinished, eight-acre development of shops, residential units and office space that has languished in the city's Buckhead section for two years. In Atlantic City, N.J., the developer of the half-built, 1,100-room Revel casino resort last week nailed down $1.15 billion in financing to complete the project.

Doug Linde, president of Boston Properties Inc., said the office-building landlord is increasingly confident it will able to restart construction this year on a $1 billion Manhattan skyscraper. Work stopped in 2009.

In an interview, Mr. Linde said the company might even go back to work on the 40-floor building without first signing up a major tenant, as banks, law firms and media companies dust off expansion plans to chase an expected scarcity of New York office space.

Last week, the Census Bureau reported that new construction of apartment buildings jumped 80% in January to a seasonally adjusted annual rate of 171,000 units, the highest rate since February 2009. New York City Mayor Michael Bloomberg unveiled plans earlier this month for, he said, the city's largest affordable-housing complex since the 1970s. Zaremba Group said Friday that the Cleveland developer has a $30 million deal to finish a 375-unit high-rise apartment complex in Tempe, Ariz., that has been stalled for more than two years.

Of course, the U.S. still is dotted with thousands of stalled construction sites, ranging from struggling apartment projects on the Brooklyn, N.Y., waterfront to shells of buildings in suburban Sacramento, Calif. And it will take years to replace more than two million construction jobs, or about 30% of the 2006 peak, lost since the real-estate bubble popped.

In Chicago, a 150-story skyscraper called the Chicago Spire and long planned to outstretch the 110-story Willis Tower as the city's tallest building, is a hole in the ground. Anglo Irish Bank Corp., the nationalized commercial-property lender at the center of Ireland's banking crisis, launched foreclosure proceedings against the Spire's developer last fall.

But office buildings and other projects could help cushion the U.S. economy if public-sector building declines, as expected, due to government budget cuts and waning economic-stimulus aid.

An index of new-construction lending by hundreds of federally insured savings institutions rose 12% to $489 million in the fourth quarter from the third quarter, according to research firm Trepp LLC. That was the index's first increase in more than a year, though loan volume remains far smaller than 2007 levels. Most banks don't report construction-loan originations.

The American Institute of Architects' billings index, considered a leading indicator of future construction, climbed in November and December. That was the first two-month increase since mid-2007. On Wednesday, the trade group is expected to report that the index remained stable in January, suggesting that the commercial real-estate recovery is likely to be slow.

"People and businesses and institutions in markets that are strong are finding ways to get things done," said Clark Davis, vice chairman of HOK in St. Louis. The architecture firm saw a slow rise in billings last year. The recovery "will be slow and gradual, and not a dramatic bounce," he said.

Earlier this month, a major California office landlord, Kilroy Realty Corp., told analysts that the company is in talks with potential tenants for at least five of its San Diego development sites. "We believe demand has turned a corner," Kilroy Chief Executive John Kilroy Jr. said.

In Philadelphia, developer Liberty Property Trust on Feb. 8 announced plans to build a 205,000 square-foot office building for pharmaceutical giant GlaxoSmithKline PLC. Construction is expected to start this summer.

Some developers are even moving forward with speculative office buildings. In Rosslyn, Va., developer Monday Properties is erecting a speculative 35-story office tower even though it lacks any signed tenants.

As new construction comes back, building strategies are emerging reshaped by the recession. For example, some shopping-mall developers are breaking ground on outlet centers that sell brand-name clothes at discount prices. Taubman Centers Inc., which owns or manages 26 upscale malls in the U.S. and converted one to an outlet center last year, expects to announce at least one new outlet project this year.

In Atlanta, the long-stalled cranes at the Streets of Buckhead project are expected to start moving again this year, according to the new developer, Dene Oliver. About 1,500 construction jobs will be created to finish more than 300,000 square feet of retail and entertainment space, 376 apartments and 40,000 square feet of office space.

"We're starting to see product types and values firming up in major markets," Mr. Oliver said in an interview. "The time is just perfect for this project to come forward."

Source: The Wall Street Journal

         
 

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