As the economy continues to struggle out of its current downtrend, different industries have been affected in different ways. So how has the economy influenced the real estate industry in St. Louis and are banks still lending money to finance projects?
“We’ve been working with our clients to obtain various forms of tax abatement and tax credits and different facilities to lower capital costs and bring down the overall costs for projects,” says Alfred Henneboehle, an officer with Greensfelder, Hemker & Gale, P.C. “It also increases the pool of end users capable of moving into that development.”
Smart Business learned more from Henneboehle about how real estate has been able to stay afloat in these hard economic times.
How has the economic situation affected the St. Louis real estate market?
The credit crunch has had a twofold impact on the real estate industry. First of all, it has made it very difficult to obtain construction financing. It has also reduced the demand for space in general, as companies are scaling back or even eliminating their expansion plans.
One area that hasn’t seen as dramatic a reduction in demand has been the health care field. Even in the health care industry, the capital needed for long-term investment in real estate has become scarce and end users such as hospitals are working more closely with developer partners to meet their capital needs.
In addition to the health care area, we anticipate a push to revitalize or retrofit existing properties. The green building movement is creating some new demand in this area, and as buildings are forced to become ENERGY STAR rated, we will drive see quite a bit of work in existing buildings. As a result, a number of attorneys are becoming LEED (Leadership in Energy and Environmental Design) Accredited Professionals in order to tap into this new source of business.
Are there still any large projects in progress?
There are a few, if any, big deals going on at this time. That’s due in part to the inability to leverage the development costs, due to much tighter lender underwriting standards. There is a defacto moratorium on financing any land acquisition loans or retail developments.
These days financing is often only available for end-user-driven developments where the owner actually winds up using the facility for his or her own business. The days of ‘if we build it, they will come’ are long gone.
Are banks still lending money?
Banks certainly have money to lend, and they’re still lending it, ultimately to people who don’t need it. There is an increased focus on very strong balance sheets with substantial amounts of free cash flow and also a proven business model that has demonstrated that these companies can sustain that cash flow.
In general, all lenders (local, regional and national) have become more risk averse and are focusing on cleaning up the problem loans that they made at the time of free and easy credit. They aren’t as keen about getting involved with any new real estate deals at this point. Only time will tell if they will succeed in cleaning it up as they have only scratched the surface on the commercial side, unlike the residential lending industry, which has been doing it for a while.
On the commercial side, a lot of the five- and 10-year loans are coming up for renewal and since many of them won’t be renewed, a lot of people are struggling with how to deal with that. The lenders don’t want to end up owning these properties. However, vacancies caused in part by tenant bankruptcies and tougher underwriting guidelines will make refinancing these loans challenging.
So is it better to lease than to buy real estate?
That is a decision that each company has to make based on its long-term business plan and the determination of whether it is better to have ownership and the control that comes with it, or to lease the property. If ownership ties capital up that could generate a greater return in the business, then leasing would certainly be the preferable option.
Also, it’s easier to lease existing space than it is to buy the property. We view leasing as a financing device, an alternative to going out and borrowing money to buy the property. Finally, ownership of real estate has a balance sheet impact since owned real estate must be listed as both an asset and a liability, whereas a lease generally doesn’t have to be capitalized.
ALFRED HENNEBOEHLE is an officer with Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2601 or firstname.lastname@example.org.