Is the Condo Craze Over, or
Just Gaining Steam?
by: Mike Myatt
Over the last two years there has been so much condo
activity that many commercial real estate lenders
are starting to express concern over the future
stability of condo markets. Some lenders have recently
found themselves over allocated in condominiums
as a result of the recent activity and have therefore
become wary of all but the best opportunities.
While the best opportunities (typically in Florida,
Southern California and select destination markets)
are still attractive, developers in smaller markets
are finding condos much more difficult to finance
in recent months.
The reality is that many of the lenders expressing
concern over the current state of affairs in the
condo market are the lenders that have been the
least active and have less knowledge about the asset
class. Lenders familiar with the condo market are
not as concerned about the opinions of their peers,
but rather with the fundamentals of the projects
and sponsors they underwrite.
that demonstrate that they underwrite according
to the following guidelines should be able to find
financing even with the caution currently being
expressed by some in the lending community:
Sponsor Suitability: Sponsors that have a successful
trackrecord of developing other condo projects will
be looked upon more favorably than those who are
building their first project. Having net worth and
liquidity in reasonable proportion to the project
size always helps as well.
Capital Structure: Projects that have a sufficient
sponsor equity contribution will receive more interest
than those projects looking to move aggressively
up the leverage curve.
Entitlements: Projects that are fully entitled and
permit ready will attract more interest than early
Market Feasability: How many units are you building
vs. how many competitive units are currently available
for sale. How many competitive units are coming
online during the time period that your project
is being built and how many units does the market
absorp each year? What are your per square foot
sales prices, how do they compare to the market,
and is your location, construction quality and ammenity
package in line with that of comparably priced projects?
Marketing: Who is going to sell your units and do
they have a strong track record of selling condos
within the market you are building in?
Presales: What type of presales have you been able
to generate? The higher the percentage of presales,
the more are lender interest you will attract.
The bottom line is that good projects from good
sponsors will always receive interest from the capital
About the Author
Mike Myatt is Executive Managing Director of Pacific
Security Capital, a leading commercial real estate
investment banking firm providing commercial real
estate loans, structured finance, investment sales
and advisory services. Contact Pacific Security
Capital at 1-800-844-6085 or by visiting the company
website at www.PacificSecurityCapital.com