Specialty: Specialty: Real estate development and advisory services
Commercial real estate development opportunities will be limited in the next two to three years because of an oversupply of all product types except industrial, and a tightening of lending standards, including higher equity requirements, said John Teutsch, founder and managing member of Teutsch Partners.
“It appears to me the game has really changed in the real estate lending world,” he said. “It’s premature to say it’s permanent, but it’s going to be with us for a while. Underwriting is going to be more conservative for the foreseeable future, for good reason.”
Uptick in 2011?
Teutsch said he doesn’t expect a rebound in commercial real estate next year, but perhaps some uptick in 2011 if there’s job growth, increased demand and more office space gets absorbed.
“Ultimately when the dust settles from all this, things will probably be more rational and healthy and the fundamentals will be better,” Teutsch said. The Puget Sound region has a “wonderful real estate community” and that “those relationships are the things that will help all of us get through the really difficult period,” he said.
Teutsch Partners develops apartments, warehouse/distribution facilities and some retail and office space, including medical office.
While his firm doesn’t develop condos, Teutsch offered his take on that market. He said people may be deterred from buying high-end condos because lenders are requiring larger down payments in connection with jumbo mortgages, which also have higher interest rates than conventional mortgages. Jumbos generally are used to finance the luxury condo purchases so this may limit demand for the units and therefore development of them, he said.
Buyers are “going to have to really want (the condos),” he said, “and they’re going to have to use way more equity and way less debt to have a high-end home.”
Additionally, he said, condo development overall may be hindered because of a new Fannie Mae requirement that at least 70 percent (up from 51 percent) of units in new projects be under contract or sold before the agency will guarantee mortgages, even though Fannie offers an exception in some cases.
“The lenders are very much risk adverse and they’re going to say ‘I don’t want to presume you’ll meet the exception, so you have to have the 70 percent,’” said Teutsch.
This will make financing for condo development more difficult and expensive to obtain, which will mean less of the higher-density development “that everybody wants to have happen.”
“If it’s harder to build it (developers may think) why not just build a tract home,” he said. “They don’t have all requirements.”
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