As the economy continues to struggle out of its current downtrend,
different industries have been affected in different ways. So how has
the economy influenced the real estate
industry in St. Louis and are banks still
lending money to finance projects?
“We’ve been working with our clients
to obtain various forms of tax abatement and tax credits and different facilities to lower capital costs and bring
down the overall costs for projects,”
says Alfred Henneboehle, an officer
with Greensfelder, Hemker & Gale, P.C.
“It also increases the pool of end
users capable of moving into that
development.”
Smart Business learned more from
Henneboehle about how real estate has
been able to stay afloat in these hard
economic times.
How has the economic situation affected
the St. Louis real estate market?
The credit crunch has had a twofold
impact on the real estate industry. First
of all, it has made it very difficult to
obtain construction financing. It has
also reduced the demand for space in
general, as companies are scaling back
or even eliminating their expansion
plans.
One area that hasn’t seen as dramatic a
reduction in demand has been the health
care field. Even in the health care industry, the capital needed for long-term
investment in real estate has become
scarce and end users such as hospitals
are working more closely with developer
partners to meet their capital needs.
In addition to the health care area, we
anticipate a push to revitalize or retrofit
existing properties. The green building
movement is creating some new demand
in this area, and as buildings are forced
to become ENERGY STAR rated, we will
drive see quite a bit of work in existing
buildings. As a result, a number of attorneys are becoming LEED (Leadership in
Energy and Environmental Design)
Accredited Professionals in order to tap
into this new source of business.
Are there still any large projects in
progress?
There are a few, if any, big deals going
on at this time. That’s due in part to the
inability to leverage the development
costs, due to much tighter lender underwriting standards. There is a defacto
moratorium on financing any land acquisition loans or retail developments.
These days financing is often only
available for end-user-driven developments where the owner actually winds
up using the facility for his or her own
business. The days of ‘if we build it, they
will come’ are long gone.
Are banks still lending money?
Banks certainly have money to lend,
and they’re still lending it, ultimately to
people who don’t need it. There is an
increased focus on very strong balance
sheets with substantial amounts of free
cash flow and also a proven business
model that has demonstrated that these
companies can sustain that cash flow.
In general, all lenders (local, regional
and national) have become more risk averse and are focusing on cleaning up
the problem loans that they made at the
time of free and easy credit. They aren’t
as keen about getting involved with any
new real estate deals at this point. Only
time will tell if they will succeed in
cleaning it up as they have only
scratched the surface on the commercial
side, unlike the residential lending
industry, which has been doing it for a
while.
On the commercial side, a lot of the
five- and 10-year loans are coming up
for renewal and since many of them
won’t be renewed, a lot of people are
struggling with how to deal with that.
The lenders don’t want to end up owning these properties. However, vacancies caused in part by tenant bankruptcies and tougher underwriting guidelines will make refinancing these loans
challenging.
So is it better to lease than to buy real
estate?
That is a decision that each company
has to make based on its long-term business plan and the determination of
whether it is better to have ownership
and the control that comes with it, or to
lease the property. If ownership ties capital up that could generate a greater
return in the business, then leasing
would certainly be the preferable option.
Also, it’s easier to lease existing space
than it is to buy the property. We view
leasing as a financing device, an alternative to going out and borrowing
money to buy the property. Finally,
ownership of real estate has a balance
sheet impact since owned real estate
must be listed as both an asset and a liability, whereas a lease generally doesn’t
have to be capitalized.
ALFRED HENNEBOEHLE is an officer with Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2601 or [email protected].
