The credit crunch, created in large part by the bursting of the real estate bubble, has narrowed the pipeline of real estate development projects in southeastern Wisconsin.
Banks have become reluctant to lend money, especially for real estate projects.
“Absolutely, credit has tightened, especially for new construction development,” said Tim Gokhman, director of sales and marketing for Milwaukee-based New Land Enterprises LLP. “Banks are most definitely being very, very conservative.”
However, local real estate developers are hopeful that strong projects will be able to meet the higher lending standards that banks will have, going forward.
“Good deals will still get done,” said Doug Weas, president of Milwaukee-based Weas Development.
“Deals that are solid are going to find financing,” said Mike Mervis, assistant to Joseph Zilber, founder of Milwaukee-based real estate firm Zilber Ltd. “A good company with solid financial footings doing a project that’s economically feasible, which fits within the lending parameters of a bank exercising newfound cautiousness and frugality, those deals will get done. Deals that are stuck together with wire and string are not going to get done.”
The tougher lending standards by banks will provide an opportunity for stronger projects and increase the risk for weaker projects, Mervis said. Potential buyers and tenants should be confident in the success of projects that receive financing, because they will have met the increased lending standards, Gokhman said.
“Only the strongest projects will move forward,” he said. “If a project is getting financing, the marketplace and consumers can be confident that it will be successful.”
Developers are hoping the $700 billion financial rescue package approved by Congress and President George W. Bush will free up the credit logjam and improve access to credit for development.
“We just want a liquid credit market in where debt financing and equity financing are available,” said Rick Barrett, managing partner for The Moderne LLC. “The credit markets have been pretty tied up in knots to the point that liquidity and equity have been difficult to obtain.”
The Moderne is a proposed 30-story condo building in downtown Milwaukee.
Future developments are likely going to need more equity financing, Weas said.
“If you could do a deal in the past with 10-percent equity, now that same deal might need 20-percent equity financing,” he said.
However, the credit crisis is only one problem facing developers right now. An even larger problem is the weakness of the real estate market caused by the bursting of the housing bubble and the slide in the overall economy. There is a lack of commercial and residential buyers and tenants for real estate right now, said Blair Williams, president of Milwaukee-based WiRED Properties.
“I think what’s going to hurt development more than the credit crisis is the user market,” he said. “Users just aren’t making decisions.”
“It’s hard to tell what’s happening right now, since there’s so little going on (in the real estate market),” Weas said. “The retailers aren’t doing anything, and office users are staying put.”
The next 12 months are going to be difficult for the real estate market, but things could pick up next year, Weas said.
“I see the third quarter of 2009, things will start coming back,” he said.
Some area developers are confident that the Milwaukee area is better-positioned to bounce back from the slump because the region’s real estate bubble was not as severe as the bubble in many other markets.
“We live in a city that is static,” Barrett said. “It’s not like the (coasts) with giant upswings and downturns. If the bailout can get liquidity into the credit markets, I think we’re in a good situation to come out of this and be in a much better position than on the eastern and western seaboards.”