In Tightening Market, Florida Developers Turn To Private Lenders
Six months ago, EDEN Multifamily President and CEO Jay Jacobson would have surveyed the strong South Florida market, checked his costs and said that everything was going swimmingly.
“Monday, I had an update with the contractor building our high-rise in Fort Lauderdale on pricing,” he said this morning during a Bisnow event at the W Hotel. “It’s mind-boggling, what is starting to happen.”
Several developers agreed construction costs are getting higher, capital is getting harder to come by and profits are getting squeezed. In turn, developers are turning to private equity and high net worth families for investment while housing costs keep rising.
“The No. 1 issue is labor,” said Jacobson, echoing complaints heard around the country about the construction labor shortage. “You can’t hire anybody in the entire supply chain. Architects who have experience and know what they’re doing, they don’t exist. Mechanical engineers can’t find competent people. There’s no labor in the marketplace. Subcontractors are increasing pricing because they can. Some have got so much work, they won’t even price a building for you.”
Jacobson is also keeping an eye on other potential price hikes. Although steel tariffs are unlikely to affect Florida, any changes regarding favored-nation status on aluminum products could have a big impact, as aluminum windows are shipped from factories out of Colombia. Three concrete companies in Florida could raise prices, Jacobson said, and demand could outstrip supply in the gypsum and drywall market.
“Even on land we bought 10 years ago, which is basically free compared to now, it’s hard getting the numbers to work," Related Group Vice President Patrick Campbell said.
Integra Realty Resources Senior Managing Director Anthony Graziano said that borrowers are now using projects’ projected values, rather than current values, to qualify for loans.
“The deal doesn’t work now unless they say how much is it going to increase,” Graziano said. “They forecast two to three years from now. That can be risky.”
“The debt cost is what scares the hell out of me,” Jacobson added. Banks are raising rates, and he said that some builders are signing on to 6% and 7% rates. “That’s an incredibly scary small yield.”
Just a few years ago, Campbell said, banks would put 70% or 75% equity into a project, “and you could get it all day long.”
But stricter underwriting procedures have slowed the flow of capital. Four thousand units about to come on the market in Fort Lauderdale have also scared off lenders from funding new projects in the city.
“There’s been a shift in the amount of equity required in the job," Campbell said. "It’s now 55 or 60%. Equity is more expensive than debt by a lot. We’ve had to bring on partners and invest cash. There’s been a change in the landscape, a shift from institutional lenders to private lenders … It’s night-and-day different than five years ago.”
Institutional lenders, the panelists said, are now pulling back, but wealthy individuals and families looking for a long-term generation of cash flow could still make good partners. With these lenders, developers can still provide completion guarantees and budget guarantees, but have more leeway with repayment guarantees.
“I hate leverage," Jacobson said. "I’d rather deal with private equity or a family than a bank when things go south. With banks, it’s like like fighting the Fed — you know you’re going to lose at the end of the day.”
He said it was ideal to work with families that have $1B to $10B to invest, but they are rare.
“It’s not easy,” Jacobson said. “It’s hard to source. There’s not really one place to go where you have 50 billionaires sitting in the room, unless it’s after the Miami Boat Show at a certain bar on South Beach.”
“Today in construction financing, it’s all about ‘What’s the takeout?'" Graziano said. "How am I getting out the other end? Right now that money is being very cautious.”
Jacobson noted that institutional money will always be around for any borrowers willing to meet its demands.
“Is Goldman Sachs ever going to stop raising money for investment? No. It’s what they do," he said. "There’s a never-ending supply of capital. It’s just a matter whether you can live up to the terms and if you, as a partner, end up making money.”
The market, he predicted, would adjust — with rising costs passed on to end users.
“This whole mantra you hear, that housing should be 30% of income – that’s a 40-year-old metric,” Jacobson said. “People are going to pay 40, 45% of their income for a place to live. That’s just the way it’s going to be.”