In real estate, it's often said that location is everything. Developers and investors know that a carefully selected address can help property maintain value over time and withstand hiccups in economic cycles. This fact extends to commercial real estate lenders. Those that bring significant capital to the table and have experience with complex deals are in a better position to obtain financing to back their projects.
A recent mixed-use, multifamily transaction demonstrates how both location and developer expertise work together as essential ingredients for a successful deal. In early 2015, CIT Real Estate Finance announced nearly
$45 million in financing for a joint venture between three entities - a real estate investment firm, a development company and a real estate-focused private equity fund - all based in the New York City area. The financing will support the development of a seven-story property in the Astoria area of Queens, New York, which will include 114 rental units as well as street-level retail.
Location was a key factor in the funding decision: The project's proximity to public transit conferred instant value. The partners' experience also made this an attractive transaction. The real estate investment firm had decades of experience in property development and management in the New York area. In addition, the contractor already had experience with new residential buildings in New York City, and a PE firm further bolstered the deal by offering additional equity.
When considering deals in locations such as New York, it's key to look at current and future residential demand. According to a
study by the Center for Urban Real Estate at Columbia University, it's prudent to focus on new or refurbished buildings in areas where the available space for new construction is limited.
Retail lending is evaluated on a similar basis. Retail in prestige locations that are close to public transit, in addition to having strong earnings performance per square foot, are optimal.
Earlier this spring, we provided
$41 million to support the refinancing of a 120,000-square-foot retail center in Palm Beach Gardens, Florida. We had an established relationship with the owner, having helped finance the recent renovation of this property, and saw future growth in the area's demographics. The region's population is on the upswing, and many local firms are hiring again as the economic recovery takes hold.
It's also critical to evaluate location and developer expertise when financing industrial properties. For instance, in a recent transaction, we financed
Hillwood Investment Properties' development of Trade Center 83, a Central Pennsylvania warehouse and distribution center. Big-box tenants and e-commerce companies have been struggling to find appropriate space for their fulfillment centers and distribution operations in densely packed areas like New Jersey, pushing them to look elsewhere, such as Central and Eastern Pennsylvania. The York County, PA location of Trade Center 83 will place the 1.2 million-square-foot facility within a day's drive of six of the 10 largest U.S. markets, as well as 60 percent of the population of Canada.
Opportunities Exist in an Accelerating Economy
Transactions such as the Pennsylvania warehouse suggest that the U.S. economy may have found its footing. In this environment of rising expectations, consumers who shop online want goods to be shipped more quickly. And companies need access to facilities that can help them receive and distribute goods through the most efficient combination of rail, road and air connections.
Finding the right real estate projects amid this recovery is critical. Real estate investors are flush with cash. Nonetheless, lenders have to make prudent decisions about the types of projects they will finance. Lessons from the past show that the risks for lenders and clients are real: properties need to have enough embedded value to weather a downturn, or they may not be worth the risk.
Matt Galligan is President of
CIT Real Estate Finance, which provides stabilized, value-add and construction loans between $20 million and $50 million to highly experienced and well-capitalized developers in the office, retail, industrial and multi-family rental sectors.
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