Higher Interest Rates, Tighter Lending Regs Battering Region’s Development Markets
John Jordan | November 9, 2022
WHITE PLAINS—A panel of regional commercial developers offered a mixed outlook for the sector with somewhat optimistic forecasts for the medium- and long-term for Westchester County and the surrounding suburban markets, but a much darker view on prospects for the short term. One developer put it simply: “The federal government is undoubtedly trying to shut down the real estate market.”
The Hudson Gateway Association of Realtors and its Commercial Investment Division held a “Westchester County Developer Showcase” on Nov. 3 at the HGAR offices in White Plains. The panel, moderated by CID President John Barrett, consisted of: Greg Belew: Divisional President, NY Tri-State Area, Quarterra, (formerly known as Lennar Multifamily Communities); Dan Bsharat, Managing Director, Hudson Hill Partners and Nick Williams, Founder & Managing Partner, St. Katherine Group.
When asked by moderator Barrett how higher lending rates were impacting developers, Quarterra’s Belew responded, “The Fed is undoubtedly trying to shut down the real estate market, without a doubt.”
In addition to the higher interest rates, Belew said federal regulators are also increasing the reserve requirements for banks for construction and other real estate loans. “What that means is it becomes less practical, more expensive and less desirable for a bank to lend on projects,” he said.
He predicted that in the short-term, there will be a dramatic drop-off in new development projects breaking ground. The Federal Reserve’s actions have doubled the effective borrowing rate on construction loans from 3.5% to 6.5%.
“You could imagine what that would do to a pro-forma on a project, if there are any lenders that are actually willing to loan right now,” Belew related. “Unfortunately, lenders tend to move in herds and move in tandem with each other,” and for that reason he predicts the commercial real estate market will see a dramatic shortage of institutional debt capital going forward, particularly for large projects, from pension funds, insurance companies, endowments, and sovereign wealth funds.
Belew’s firm recently opened The Mitchell, a 434-unit-unit high-rise tower on Mamaroneck Avenue in White Plains and is expected to break ground sometime in 2023 on its delayed 60 South Broadway project that calls for more than 800 rental apartment units at the site of the former Westchester Pavilion shopping mall that at one time housed the headquarters of the Hudson Gateway Association of Realtors.
Belew added that he expects a lag effect from the Federal Reserve’s actions to slow down the economy. “There is a lot of sentiment (from developers and lenders) towards not really doing very much of anything until the second quarter of 2023 if not later,” he said.
Bsharat said Belew’s assessment of the markets going forward was “spot on.” He noted that his firm was in the market for selling assets until the market turned.
He said that many commercial real estate owners that wanted to sell assets have recently retreated. ‘I don’t think you are going to see many transactions (in the near term),” Bsharat predicted.
He added his firm’s market niche in the $1-million to $20-million range has “been completely shut off in terms of the pipeline flow. We are seeing less deals or at least deals that won’t get the pricing that they are asking, or we are just not seeing any deals at all.”
Now, many investors are “hibernating” until they find a good distressed opportunity or a deal they just can’t pass up.
Hudson Hill Partners won the 2022 Best Adaptive Reuse Award from The Building & Realty Institute of Westchester & the Mid-Hudson Region and Westchester Home for its conversion of a 1907 brick warehouse in Tarrytown into three single-level condominium units. The firm is focused on redeveloping Main Streets in Westchester County.
Bsharat said that there has been a lag in terms of the impact of higher rates and cost on the commercial markets, but activity has certainly slowed down.
While bearish on the short term, all three developers expect market conditions to improve once interest rates stabilize in 2023. Williams said that due to the United States indebtedness, it is in the government’s best interest to keep rates low.
“There is still demand for product, for housing. I think rents will be fairly stable and I think if we have that coupled with the construction pricing coming down, my medium- to long-term view is still pretty optimistic,” Williams said.
The St. Katherine Group has a host of development projects in the pipeline including 28 Pearl Street, a 12-story, 194-unit multifamily apartment building in Port Chester and 30 Broad St., a nine-story mixed-use building that will house Port Chester’s first MicroBrewery, 4,000 square feet office space and 36 residential units that is located opposite the Port Chester train station, next to The Capitol Theatre.
One silver lining in the current environment is that the pause in development over the coming months could help lower expenses, particularly labor costs on new projects.
Belew said that dramatically rising labor costs have made it “exceedingly difficult to get any new deals to pencil (out) over the course of the last six to 12 months,” he asserted. “We have re-priced projects year-over-year and have seen increases from anywhere from 17% to 20%. So that makes projects completely unfeasible…”
All three panelists believe that while Westchester has seen significant multifamily development activity of late, the region is not overbuilt like many areas of the South and will continue to see strong demand for multifamily investment in the future.