Developers hoping to build the Valley’s next big shopping center, condominium tower or office park will have to win over skeptical lenders first.
The recent mortgage crisis has left banks reluctant to dole out cash — making construction financing tough to come by for many builders.
The result: Commercial projects across the Valley are being delayed or scrapped.
“Developers right now have to really be putting their best foot forward in this market and have their ducks in a row,” said Michael Rudinsky, one of three manager partners in Scottsdale-based firm Balance Capital Partners.
The financial services firm specializes in securing capital for developers and investors.
Lenders are looking for detailed plans with projections that are realistic and conservative, Rudinsky said.
Scottsdale-based WestStone Communities, together with a California developer, recently secured a $27.8 million construction loan to build an apartment complex in north Phoenix.
One reason the developers found success was the project’s location in an established area, WestStone president John Iorillo said.
“The first markets to come back are the ones closest to the city where people work,” Iorillo said.
Lenders are also requiring condo projects to have a certain number of pre-sales before they’ll OK funding.
For one large building, 50 percent of the units may need to be pre-sold, Iorillo said.
A townhouse project with six buildings and 36 units total may need to pre-sell 20 homes, he said.
WestStone is currently planning a 196-unit condo project, called Onyx Tower, on Tempe Town Lake and will open a sales center by the end of March.
“There’s a lot of money sitting on the sidelines that needs to be deployed,” but lenders are being cautious, Iorillo said.
With more than 50,000 homes for sale Valleywide, it can be especially hard for condo projects to get off the ground, said Bruce Francis, vice chairman at commercial brokerage CB Richard Ellis in Phoenix. “You’re building into that kind of competition in a market that’s weak with falling prices,” he said.
The mortgage crisis and concerns about the economy are also taking a toll on commercial developments, such as shopping centers and office buildings.
When times were good, lenders required builders to put 10 percent to 15 percent cash down on a project, Francis said. Today, it’s closer to 20 percent to 30 percent.
Banks are also requiring projects to be 50 percent to 60 percent pre-leased, Francis said, compared with little or no pre-leasing in the past.
Developers who have proven they know what they’re doing and have long-standing relationships with banks will still be able to get loans, he said. It’s the up-and-comers who jumped into the market late, have done one project or don’t have enough cash for a large down payment who will be hurt, he said.
Despite the current market doldrums, Francis said he believes the Valley’s long-term outlook is bright.
Phoenix has a lot of factors going for it: population growth, tourism, a diverse economy and beautiful weather, he said.
Ryan Weissmueller, also a managing partner at Balance Capital, said his firm has been encouraged by the new lenders and investors who are planting flags in Arizona.
“You’re seeing a lot of big players who seem to think the long-term process is good,” Weissmueller said.
When investors start coming in and buying up land, they’re signaling that they think the bottom of the market is here, said Rudinsky with Balance Capital. The land prices are right to make future projects pencil out financially, Rudinsky said.
“They are now making their plays,” he said. “They know the market is going to turn around.”