Even before COVID-19 hit, Tom Shapiro, president, founder and CIO at GTIS, says many rental and for-sale residential developments were facing challenges.
"A lot of projects under development we're already having issues pre COVID, especially with cost overruns," Shapiro says. "The capital markets were bailing them out."
If a multifamily development had a $20 million budget overrun before COVID, Shapiro says a developer could have refinanced the construction loan before completion by taking out an additional $30 or $40 million. "They would plug the $20 million overrun hole and then put the balance in their pocket," he says.
But after COVID-19, the capital markets aren't there to bail these developers out. "That $20 million problem could become a $30 or $40 million problem as the lease-up will be slower now," Shapiro says.
The cost overruns are even a bigger issue in the condo sector, given the general slowdown in their sales. "Certainly condo projects are a major issue," Shapiro says. "As you can imagine, the condo sales market, particularly in urban hubs, was already very soft, and this just compounds the cost problem."
Shapiro has concerns about condo sales in places like New York City, where he says way too many units are being delivered. "Absorption had already slowed, but sales have now fallen off of a cliff," he says. "So, now the question is how do you plug that hole in the condo market given it is so hard to predict absorption and pricing?"
Many of these condo deals haven't started construction.
"We've seen several projects which have substantial condo pre-sales with big deposits, the senior loan was supposed to be 65% to 70%, now it's 45% or 50%," Shapiro says. "So they need a mezzanine loan or preferred equity to fill the shortfall so the project can be fully capitalized."
GTIS is looking for opportunities to provide this necessary capital.
"We are in the capital solutions business," Shapiro says. "We were very active before [the COVID-19 crisis). If a sponsor needs capital, we can provide it at market rates. We provide structured capital for homebuilders and land developers, as well as multifamily and condo developers.."
The one place where Shapiro is wary about stepping in is on those New York condos, especially with people fleeing dense environments with COVID-19. "We're not so focused on that, except if you could buy it at a point where you could rent the properties," he says. "It will come back, but it will take time before people want to be in the city. So, I think that is the distress currently."
While Shapiro sees plenty of opportunities to inject capital into new construction, he doesn't expect the same pain with existing assets. "Existing projects weren't over-levered that much," he says. "I think we'll see some distress, but I think it will depend on what happens to the unemployment benefits on a going-forward basis."
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Leslie Shaver
Les Shaver has been covering commercial and residential real estate for almost 20 years. His work has appeared in Multifamily Executive, Builder, units, Arlington Magazine in addition to GlobeSt.com and Real Estate Forum.
