Commercial real-estate markets across the nation are improving. Occupancy levels are up. Rents and property values are rising. So what are commercial lenders worried about?
“My biggest fear is a rush to build new developments,” lender Philip J. Ward said during the Mortgage Bankers Association of America convention here.
Despite improvements in the market, little new commercial real estate development is needed in most markets now, said Ward, senior vice president of Cigna Investments Inc., of Bloomfield, Conn. Although rentals are rising, in most markets they aren’t near levels required for new development.
But the amount of money available for real estate investment has been swelling at a rapid pace. A year ago, the industry was starving for capital. Today, there is more available capital than there are good existing properties to buy, Ward said.
Steve Wood, president of Woodmark Inc., a commercial mortgage banking company in Brentwood, Tenn., said the current situation is “the biggest imbalance of capital chasing real estate that I’ve ever seen.”
Investor interest in commercial property in Orlando is among the highest in the country. Many of the major publicly held real-estate investment trusts (REITs) in the country, for example, have bought apartment communities in the area.
Apartments are a favorite investment for REITs, and most markets today are at 90 percent or higher occupancy. In metropolitan Orlando, apartment occupancy is at 94 percent. However, rental growth has been slow in most markets, Ward said.
Chicago, too, is attracting its share of investment interest. Several national studies have ranked Chicago near the top of cities in terms of the strength of its apartment and industrial property markets.
REITs may be the first to touch off a new round of competitive development, Ward said.
“REITs must grow,” he said. “They (experts) originally thought they could do that through acquisitions (of existing property) at discounts, but that’s all over.’
The funds already are moving into new development. The fear is the urge to grow may lead to uneconomical decisions, Ward said.
Ronald Poe, chief executive officer of Dorman and Wilson Co., a mortgage banking company in White Plains, N.Y., said he doubts commercial banks will contribute to a frenzy of new development. Bankers are lending cautiously and only on well-conceived projects by strong developers.
