The Year it Was and the Year it Will Be in Real Estate Development (maybe)…
Last year saw significant increases in interest rates (ebbing somewhat in December) and carrying costs while rental and sales rates flattened in virtually every major property type. South Florida and select Sun Belt markets have fared better, with increased population and corresponding demand for new product off-setting development cost increases.
Meanwhile, the unabated increase in commercial office vacancy rates and impending foreclosures continues to drastically (and likely permanently) alter the urban landscape in most Central Business Districts across the country.
This year looks to be a year of recognition that the “warm, supportive breeze” that has been at the backs of many developments for the past several years will likely be reduced to an “unsteady crosswind.” There is an awful lot riding on the hope that interest rates have peaked, which would throw a new lifeline at midstream projects currently enduring floating rate notes as well as new projects whose return profiles depend on historically low-cost debt financing.
There is little doubt that the historically dependable form of currency known as Central Business District Commercial Real Estate will continue to devalue, given the maturation of loans, accelerated pace of foreclosures, and continued negative absorption predicted across all major office markets.
This devaluation will ultimately result in a very large quantity of transactions (between those moving on and those making new wagers on the future), and will include foreclosures, loan sale repositionings, adaptive reuse projects and in some cases, complete demolition and redevelopment projects. How local governments address and assist in the remaking of our Central Business Districts will determine the pace and degree to which each area will recover.
With over 300 active projects across the country (totaling in excess of $85 billion in property value), SPD is in a unique position to collect and evaluate market data and assist our clients in formulating and executing an evidence-based strategic approach to real estate development. Going forward, SPD will provide monthly updates and / or case studies for the benefit of our existing and potential clients.
In the meantime, should you have any particular questions or projects you wish to discuss, please feel free to contact us.
