One obvious effect of the issues with the subprime markets has been on the home market. "People have stopped buying new and used homes, at least at the rate we are used to," says moderator Norman Nagel, a partner with Warady & Davis. Financing has also been obviously affected. "The old days of having non-conforming loans…seems to be over," says panelist Marks Attwood, president of the residential development division of Lincolnshire, IL-based Amcore Bank.In addition, more equity is required for loans and more pre-sales or pre-leasing is required, says panelist Bernie Cohen, vice president of Chicago-based Draper & Kramer Inc. Whereas developers used to be able to obtain a construction loan for 90% of the cost of the project, loans are now maxing out at 75% to 80% and requiring presales of condominium units at 50%, Cohen says. Interest-rate only loans are harder to obtain and are, then, only interest for a few years, as opposed to the entire term of the financing. Interest rates have gone up but they are still low compared to 15 to 20 years ago, the panelists said.
Conduit lenders have not made a comeback yet, says panelist Barry Axelrod, senior vice president of Chicago-based Dwinn-Shaffer & Co. "It takes a certain supply out of the market" although there are still financing opportunities such as life insurance companies, Axelrod says.
For retail, "Cap rates are inching up," but retail properties "are not moving as quickly," says panelist Ross Glickman, CEO of Chicago-based Urban Retail Properties. Real estate investment trusts focused on retail have been affected in the past couple of months but "We think that real estate investment trusts in our sector have been overvalued," Glickman says. "Over the last several months, the REITs in the shopping center sector have really taken a pretty severe hit," Glickman says. Market values have been, at times, as much as 20% and 30% below what they were nine months ago. Specialty retail is expected to be affected during the holidays in what some are predicting to be a train wreck, he says. "Big boxes will prevail (as well as) the discounters, the mass merchandisers," Glickman says. "Families are now prioritizing their spending needs."
Developers are having a hard time obtaining loans for new office buildings and lenders are looking more at tenancy in the acquisition of existing office buildings, Axelrod says. In the South Loop, there have been longer market times but still a strong number of bidders for land, says panelist Marty Paris, president of Chicago-based Sedgwick Properties. "We have seen stabilized land values and appreciated land values," Paris says. "We are seeing competition from hotels, for sale condo, apartment, land speculation and retail users." There has been an "influx" of international buyers, he says.
Industrial, on the other hand has not really been negatively affected. "The industrial markets in Chicago have remained very strong. Chicago is a hub city. It is a strong industrial location," Cohen says. "I think industrial has held up very well." Also, residential rental properties have fared better since the subprime problems. "There have been some new apartment developments and rents have continued to go up," Cohen says. Some condominium units will be rented out, with estimates of 800 units on the shadow market, and that will affect apartment rents in the future. "It will keep the price of rentals down," he says.
Attwood believes that the "crisis" is not nearly as bad as it is being portrayed. "I think it is a media phenomenon," he says. The sub-prime loans are about $500 billion with repayment problems of only about $100 billion, in comparison to the $14 trillion GDP, Attwood says. Glickman believes that developers and companies have to diversify, particularly when it comes to who they will join in joint ventures. "I think there are a tremendous amount of opportunities outside of the confines of this country," he says, noting there are opportunities in places such as Panama, Brazil and southeastern and central Europe.
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