Full swing for private developers
What do you see while driving through downtown Grand Rapids? Cranes, construction sites and future construction sites. All you have to do is open your eyes and you will know that development is alive and well in West Michigan, most notably in downtown Grand Rapids. Many are betting on downtown Grand Rapids (me among them), and for good reason.
After years of public and institutional investment, the progression of spinoff development by private developers is in full swing. Paths of growth extend to the north and south, marked by numerous planned or in-process developments. Think South Division, South Arena District, the Downtown Market and the near north side along either side of the Grand River. Less obvious are the numerous renovation and in-fill construction projects taking place in the surrounding neighborhoods.
The dominant trend? Downtown rental housing. Numerous housing units have been introduced in the downtown area, with additional units planned in the coming years. These units represent a mix of affordable and market-rate rentals, available to renters with a range of income levels. Renters are growing accustomed to smaller living spaces when amenities exist outside their doors. The financing community is cooperating as banks catch on to new square footage and parking norms, and to the fact that alternative forms of equity (government-funded programs) reduce development risk. Given this activity, we predict significant densification in downtown Grand Rapids over the next five years.
Taking chips off the table: Substantial selling activity has taken place over the past 12 months as owners of commercial and multi-family properties have taken advantage of cyclically low-cap/interest rates. If you are not one of them, I suspect you are one of the lucky folks enjoying healthy cash flow from their real estate holdings. If you are neither, I’d be getting a little nervous.
Racing to the bottom: Those holding cash flowing assets are looking to lock in historically low rates for the long haul. A caution to the borrower: Pick your partners wisely. Not all are created equal, and not all will fit your needs. Consider your options carefully, and seek advice from people you trust.
Traffic jams and parking problems: Nobody likes dealing with these. But viewed in the proper context, traffic and parking shortages represent increased population density, greater entertainment options and more jobs — that is, they are high-quality problems.
The pedal is not perfectly set, however, as project funding remains an issue for new development. Specifically, the financial crisis has drained many developers of the liquidity required to fund new projects, and there remains a healthy dose of skepticism among the private investor community.
Many were stung during the downturn and now struggle to trust development as a predictable asset class. Alternative forms of equity do exist (for example, state development incentives), but the relatively short track record of the current programs makes bridge financing hard to come by. Few banks have been comfortable lending additional dollars so that developers may complete their projects, which is a prerequisite to collecting the state funding. This said, experienced and well-funded developers are managing to get plenty of deals done (as the cranes suggest).
So what could influence development, either positively or negatively?
Interest rates: These are being held artificially low by the federal government in order to spur lending. When the federal spigot slows, new developments will become more difficult to finance and operate profitably. Unless increases in interest rates are combined with local economic growth, development could be expected to slow considerably.
Supply/demand imbalances: Certain asset classes are in favor now (e.g., apartments) but will inevitably be over-built in certain markets. Residential housing is once again seeing overly healthy price increases as cheap money and short supplies drive growth in values above sustainable rates. If the banks get off the sidelines and start to fund more residential construction, we can expect to see the supply side catch up. Let's hope the pendulum doesn't swing too far just when the Fed stops buying treasuries. If it does, that could sting a little.
Economic growth: Nothing heals like job growth. At the local level, commitments by significant employers to add jobs will move the development needle. Similarly, significant economic growth across the region will sustain development regardless of the rate environment (within reason). If local businesses invest and expand, we may see growth in the built environment even with higher interest rates.
There is nothing like the sight of cranes and traffic in the morning …
Rob Dwortz is president and CEO of The Bank of Holland.