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.