Development Projects Hit Hard by Global Financial Crisis

Starting with the failure of Lehman Brothers and sale of Merrill Lynch, the global financial market turmoil of the past year rapidly escalated to a full-blown crisis.

Events in recent weeks range from bank seizures, buyouts and mergers to the end of the Wall Street investment banking industry

Unfortunately, real estate developers will not be given the same bailout that Wall Street received. Wall Street woes have exacerbated the credit crunch, further limiting the availability of credit to businesses and consumers, which in turn will hinder spending and intensify the downturn.

With the current capital markets crisis, it is more difficult than ever before to finance a redevelopment project. There are equity sources in the market willing to assist, but the cost of those dollars may make some projects unprofitable.

Those developments in mid-completion stages are finding it challenging to get their lender on the phones, especially when their lender is one of the firms that are no longer operating as originally established.

Currently, all projects--whether they are multi-family, office or retail--are being reevaluated.

Fundamentals in the apartment market, however, remain the healthiest, followed by warehouses. The office and retail sectors will continue to soften in the months ahead.

Given the current economic climate, some developers are willing to sell portions of their completed developments, making this a buyer's market. The buyers, who can acquire these projects at enough of a discount to warrant the risk involved, will likely turn a profit.

Investors circling these projects are looking for an opportunity commensurate with the calculated risk of that particular project. There are hard money lenders willing to step in for the right risk/reward ratio. This money is expensive and may be the difference between the developer breaking even or taking a loss.

Over the short term, many of these projects are waiting for a sign of what the future will bring. Over the long term, these projects will be completed, but it may not be by the original developer.

There is an ample amount of capital from sovereign funds, institutional investors and REITs seeking out the right properties. Once the financial markets establish a floor to this crisis, capital should become more abundant for development deals.

Marcus & Millichap Real Estate Investment Services' national brokerage platform is designed to provide support to developers and investors during these challenging times.

With more than 1,300 investment specialists in offices throughout the United States, our investment specialists have unlimited access to nationwide investment capital. Every agent has the resources available, in the form of in-depth research, real-time market data and unmatched market expertise.

Marcus & Millichap's agents serve as advisers and have the tools to provide clients all of their options when selling isn't the most productive route to take. The firm's investment professionals specialize in a wide range of product types. We can create a program that includes net leasing, ground leases, financing or other creative out-of-the-box ideas that will yield our clients the highest returns.

In New York City and other financial centers, office owners will experience reduced demand for office space, and Wall Street job losses are likely to negatively impact other commercial real estate sectors.

For New York City, the effects will be most pronounced in Lower Manhattan. Direct job losses from the financial crisis, including the Lehman bankruptcy and takeover of Merrill Lynch, could exceed 20,000 financial services positions in New York City alone.

Ultimately, each Wall Street position eliminated could translate to the loss of an additional two to three jobs for the New York City economy. Fortunately, New York City has become one of the tightest markets globally, entering this downturn with strong fundamentals.

A widespread financial crisis has evolved as the domino effect of plunging stock prices and the liquidity crunch have led to mergers, bankruptcies and government intervention. While unlikely to deliver a quick overall fix due to the complexity of financial issues, the Fed's $700-billion bailout bill will give the markets the confidence they need to get back to business.

BY ADELAIDE POLSINELLI

ASSOCIATE VICE PRESIDENT

MARCUS & MILLICHAP