By Jon Peterson
Who will Tishman Speyer Properties Inc. and its Chinese development partner find to lend them the hundreds of millions of dollars that they hope to obtain to build their 655-unit San Francisco condominium project?
New York City-based Tishman and China Vanke Co. Ltd. said Feb. 18 that they had formed a joint venture to develop a “premier high rise residential condominium project at 201 Folsom St.” The location is across from The Infinity, a 650-unit condominium complex also developed by Tishman and now sold out at prices that reached $6 million.
The total cost of the splashy new development is expected to be $620 million, which the developers hoped to fund using $250 million in equity and the remainder debt, according to an industry source with knowledge of the transaction. The equity was to consist of 70 percent, or $175 million, from Vanke and 30 percent, or $75 million, from Tishman, with the ownership positions in the project following the same lines.
The partners had not finalized the debt piece when the project was announced. The news release did not include any details about the project’s timing.
While there seems broad agreement that the San Francisco for-sale housing market can readily absorb new supply while giving up little if any pricing power, lender willingness to take the condo leap is less apparent. “I think the timing of the Tishman project is right on. They are going to be one of the first new developments to serve a market where there is little supply and should be strong demand,” said Alan Mark, president of The Mark Co., which advises and helps for-sale housing developers to market their properties.
But scarce debt financing is impeding the return of more condominium development, he said. “Many of the former lenders have either become very conservative or have gone out of the market altogether. This is an important part of projects when you consider that a typical development has 35 percent equity and 65 percent debt,” he said.
At the end of 2012 there was a total inventory of 212 new condo units in San Francisco available for sale though more than half were under contract, according to Mark company research. That compares to a peak of nearly 3,000 at the end of 2007. In December, there were 646 homes of all types sold in the city, up by nearly a third in the same month the year before. The median price was $720,000, up 21 percent year-over-year.
Stephen Jackson, a vice president at Colliers International who works in the multifamily investment group in the company’s San Francisco office, said he, too, continues to see substantial lender hesitancy when it comes to condo development. “I don’t think that construction lenders are ready to come back. I still think many of them remember what happened to them two to three years ago. I would believe that many of them will wait until they see some success stories with condo projects before they want to be a player again,” he said.
He has no doubts about the strength of the current fundamentals of the condo market in San Francisco, he said.
As of mid-February, there were 3,700 apartments under construction in the city and less than 400 condominiums, according to research by The Mark Co. and The Concord Group.
John Manning, managing director for the real estate investment banking group for Jones Lang LaSalle in San Francisco, said lenders see apartments as low risk right now followed by industrial, office, retail, hotels and then condos. “I think part of this is that condo projects take a much longer time to sell and all of the units are delivered at once,” he said.
Still, there are lenders who think that the condo market in San Francisco is gaining in interest for debt sources. Charlie McGann, Northern California regional manager for real estate lending for City National Bank in its San Francisco office, said, “The condo market in San Francisco is attracting plenty of lending capital again given the strong area job growth combined with very little new construction inventory.”
“My prime underwriting concern is what happens to mortgage interest rates for buyers in the next few years,” McGann said. “The Bay Area is enjoying some healthy conditions, which is great, but I still need some level of recourse from the developer to account for more supply coming online and potentially higher interest rates down the road.”