Bloomberg reports that major developers have started going beyond building their own projects — to financing other major developments.
As an example, the news service reported that New York developer Silverstein Properties Inc. built a $4 billion pipeline of real estate deals just weeks after starting.
The developer of prominent New York city skyscrapers such as 3 World Trade Center has jumped into property lending as demand for financing grows and yields are more attractive. Silverstein set up its first lending venture earlier this month and already has a slew of potential deals going to projects in New York City. Others, including Oxford Properties Group, also have big plans to finance other builders.
“Supply and demand characteristics in New York and throughout the country are good — we think that there’s years to run in this cycle,” Bloomberg quoted Michael May, president of Silverstein’s new lending venture, as saying. “In New York, the dollars are big enough and Silverstein’s footprint here is big enough that I think we could run the entire business just doing New York if we wanted to.”
The changed financing model has occurred in part because of what Silversteen sees as a “gap in financing” that started with the 2008 financial crisis. Large banking institutions, under heightened regulation, have become more stringent in underwriting projects.
“That has taken a toll on their ability to lend to the construction industry, where there tend to be more risks and higher costs,” Bloomberg reported.
Filling the void are more lightly regulated non-banks, including debt funds, mortgage REITs and developers, often backed by private equity or other institutional capital.
Property research firm Green Street Advisors LLC estimates that U.S. originations by these lenders surged more than 40 percent in 2017 compared with the year before to almost $60 billion, and should rival that of life insurance companies and commercial mortgage-backed securities this year.
“You end up with accounting treatment reserves and with regulatory capital treatment on a lot of these asset classes, which has become extremely challenging for banks,” May said. “We can be more nimble, move more quickly and we’re not impeded by an overlay of rules and regulations that challenge our assessment of risk.”
Bloomberg says Silverstein hasn’t closed on any lending deals yet. The company is also looking at financing projects in other U.S. markets including Los Angeles, Seattle and Boston.
However, Blackstone Mortgage Trust Inc., managed by a subsidiary of Blackstone Group LP, the biggest private-equity real estate investor, originated a $1.8 billion construction loan earlier this year for an office tower in Manhattan’s Hudson Yards.
Silverstein’s lending platform is backed by a sovereign wealth fund and a pension fund with “deep pockets” and has no maximum loan amount, Bloomberg reports.
Meanwhile, Oxford, the property unit of Canadian pension fund OMERS, invested more than $3 billion in loans and plans to more than double that amount in three years.
Foreign investors have also been betting on higher-risk loans to developers as yields on U.S. developments become more attractive, and add liquidity to the debt market — more than “at any point in this cycle,” said Aaron Appel, Jones Lang LaSalle Inc.’s vice-chairman and head of New York City capital markets debt and equity.
“Despite the political environment, the U.S. is still the most stable place to invest globally of any country.” He added that national property rights laws and federal efforts to elongate current economic growth have also favored foreign investment.
“If there’s a decline in asset values, the lender is more protected than the equity investor,” Dave Bragg, managing director at Green Street, told Bloomberg. “The incentive for many players is the perception that returns on debt are higher than what one could underwrite on the acquisitions of real estate today.”
The growing number of lenders has resulted in a market where capacity outweighs demand, especially for assets that already are generating income, Bragg said. Yields for riskier construction loans are higher and there are fewer lenders competing to provide them. Banks are still the primary source of that financing but are limited by regulation because of the longer time line and larger amounts of capital required.
“Construction is one of the few spots where you can get to double-digit yields in this market as a lender,” Silverstein’s May said, adding that the company has a competitive advantage because of its experience as a developer and better understanding of the underwriting risk. Oxford’s Egan also sees a gap in construction loans and high-yield loans and plans to make more.
“Most real estate cycles ultimately reach a period of excessive construction,” Bragg was quoted as saying. “If that happens in the cycle, the debt funds and mortgage REITs would be contributing to that and would ultimately lead to weaker fundamentals and perhaps lower asset values several years down the road.”
