How Do New Jersey’s High Construction Costs Impact Capital Calculus?
by Josh Anderson
NEWARK, NJ – The New Jersey multi-family arena is in a bit of a holding pattern – there is a lot of opportunity out there, but a lot of insiders are hesitant to get too excited with a slow-down potentially looming on the horizon. But that doesn’t mean that everyone is on the same page. That’s why CapRE featured a panel titled “Overreach and Grabbing? Finding Capital for New Development at the End of the Cycle, Headwinds, Tailwinds & Other Challenges” at CapRE’s Eighth Annual New Jersey Apartment Summit.
Below we highlight a snippet of that conversation in which Moderator Mark DeLillo, Managing Partner at BlueGate Partners asks his panelists to talk about capital in the realm of construction.
“Given where prices have gone and where construction costs have been, particularly in New Jersey with union costs, is there an adjustment internally about where the terms are?” asked DeLillo. “Do you adjust your threshold?”
“You have to. I mean, you have to, or you’re not going to build,” replied Michael F. Keyes, Director for Acquisitions at Intercontinental Real Estate Corporation “We’re building a hotel in Boston right now. We’re building apartments and a hotel in Chicago. We’re doing an office in Oakland. Which is 100% union execution throughout both on the construction and the operation. So you better believe that with the cost increases, the waiver component, the operations component, we’ve had to drop our returns.”
“So that’s why it’s always kind of been like, Hey, do you want to go and do this project in XYZ market? We’ve always kind of gravitated toward, Eh, maybe we’ll just de-lever our Hoboken stuff, and invest more equity there,” he explained. “Because again, I think that a point of parity or a point of difference for Hoboken is that, Y-Zone places are convenient places to live. And I still believe that Hoboken is a destination.”
“One question I frequently get rom developer sis that once a property is developed and they go into the lease up, at what level and how quickly can they put that permanent financing in place?” followed up DeLillo. “And a few years back, when we weren’t in a rising interest rate environment, most developers that we worked with would ride out that construction loan as long as possible. Now there’s basically a fear, and this can change, but some fear and concern about rising interest rates. How often, how early, do you see a project get turned down? What kind of occupancy and what kind of leverage?”
One panelist to offer a response was Michael Staton, Vice President and Mortgage Officer at the Community Preservation Corporation. “There are terms of forward commitments,” he cautioned “There are some agency product types, especially in the affordable housing space, that allows for forward commitments. So the construction that I see, and I see one of my former colleagues from TD Bank in the industry, and when I was there, and we would do a construction loan, and I would know who my take-out source is. it didn’t have to be stabilized. That was my take-out source. You can lock a rate before stabilization with those forward commitments – 36 months in advance.”
Lastly, Israel Schubert, Senior Managing Director, Meridian Capital Group offered some thoughts. “This year, in the last six months, we have taken five deals that were mid-construction. No lease up,” he remarked. “And they have closed when they reach the 1.0 coverage with a per-lender.”
“In other words, they applied their A Block while still under construction and the bank provided to the seller some additional security. The capability of that closing was taking all of the interest papers off the table before they were even stabilized,” explained Schubert. “In addition, there was another lender that we are currently doing a deal with, and the property is still under construction. It’s a phase property, so 80% of it is occupied, but two or three phases are still being built. And they need to be occupied for the bank to be comfortable with the leverage. And they’re doing a portfolio loan to take that project out as well.”
For more coverage of this panel, check out previous CapRE Insider Reports:
- Meridian Capital Group’s Israel Schubert on NJ CRE Market: “I Don’t Think We’ll See a Crest Anywhere in Near Future.”
- NJ’s CRE Cycle May Be Slowing, But “Affordable Housing is Still on the Rise”
- George Vallone at CAPRE’s NJ Apartment Summit: The Cycle’s Not Over Just Yet