As the calendar turns from March to April, mixed-use developers seem to be caught in a rainstorm. In the past 10 days, several high-profile mixed-use projects have either been delayed or altered because of the weak economic conditions and the difficulty in securing financing during the current credit crisis.
The string of bad news began on March 21 with Brooklyn-based Forest City Ratner Cos. revealing that it will delay the office and residential components of its 8-million-square-foot Atlantic Yards development in Brooklyn. The company said that lack of demand for both uses would make it difficult to reach pre-leasing levels necessary to secure financing.
One week later, New York City-based Related Cos. said it would postpone construction on the 2.5-million-square-foot phase II of its CityNorth project in Phoenix to satisfy concerns of potential lenders.
The same day as CityNorth was postponed, Madison Square Garden, the proposed anchor tenant for the Moynihan Station project in Manhattan, announced that it was opting to renovate its existing arena rather than move. The proposed 1.2-million-square-foot Moynihan Station redevelopment was slated to grow as large as 7 million square feet because of 4.5 million square feet of developable air rights above the existing arena. Now, with Madison Square Garden waffling, developers Vornado Realty Trust and Related may have to pull the plug on the project, especially since the joint venture was already $1.2 billion short on financing the $3 billion project.
Consider it a sign of the times. As the credit crisis continues to wreak havoc on the financial services industry, large national and international banks--the primary source of funding for mixed-use mega-developments like CityNorth and Moynihan Station--have all but closed shop, says Scott R. Lynn, director and principal with Metropolitan Capital Advisors, Ltd., a Dallas-based real estate investment banking firm. And when they do agree to lend, their requirements for pre-sales and pre-leasing levels are so high that even the most experienced developers have trouble making the grade.
"I think that everybody has been amazed at the speed and the severity of the credit crunch, and what we see is that the banking community is definitely getting very conservative," says Lynn. "Any loan north of $100 million is the ground of national and international banks and the top 10 banks in the U.S. are dealing with lots of portfolio problems. We are seeing a severe pullback in the larger loan arena because the big national lenders have really put on the brakes and a lot of the international banks have just left the market completely."
In fact, the lending environment seems to be getting more difficult by the week. When Retail Traffic spoke to Kenneth Himmel, president and CEO of Related Urban, in February, he expected the search for financing to be tough, but felt confident Related would be able to line up the $570 million loan for CityNorth in a matter of months. As it turned out, however, the firm's potential lenders seem to be too concerned about waning demand for office and retail space in the Phoenix market to agree to finance a project opening in November 2009. Instead, phase II, which is scheduled to include more than 250,000 square feet of retail space, will open a year later, in 2010.
The Phoenix market will see a 90 basis point increase in office vacancies in 2008, to 14.7 percent, and a 50 basis point increase in retail vacancies, to 7.7 percent, according to the national brokerage firm Marcus & Millichap Real Estate Investment Services.
Related Cos. did not return calls for comment.
Similar problems plague both the Atlantic Yards and Moynihan Station. Atlantic Yards, for example, calls for 336,000 square feet of office space, 247,000 square feet of retail space and 6.4 million square feet of residential space, in addition to the 850,000-square-foot sports and entertainment arena, which will serve as the centerpiece of the project. With the Nets basketball team already lined up as the main tenant for the arena, construction on that portion of the development started moving ahead in February 2007.
But Forest City Ratner has yet to secure an office tenant for its Miss Brooklyn office tower and it worries about waning demand in the residential sector. Meanwhile, lenders' requirements for office, residential and retail pre-leasing and pre-sales levels have gone up from about 50 percent at the beginning of the year to more than 70 percent currently, according to Lynn. Add to that the fact that Forest City was planning to fund the project with bonds issued by Goldman Sachs rather than a traditional line of credit, and it seems unlikely it will be able to get financing anytime soon. As a result, the firm is postponing construction on the office and residential sections for an unspecified period of time.
Forest City Ratner did not return calls for comment.
"In today's financing market, doing a speculative deal is hard," says David E. Ross, managing director with Tremont Realty Capital, LLC, a Boston-based real estate investment and advisory firm. "And on top of that, lenders and mezzanine providers and even equity providers are projecting that cap rates are going to go up, and if cap rates are going to go up, these projects won't work. So you have a combination of leasing problems and lower values."
Still, with the initial phases of CityNorth and Atlantic Yards already in construction, these projects are more likely to proceed than Moynihan Station, which has just lost its only committed tenant.
But should we take this as a foreshadowing of things to come? "I would say yes," says Ross. "The issue is that mixed-use sounds good, but every component has to work and that's really tough right now."
On the flip side, firms in recent weeks have been able to land financing commitments for some retail-only projects. Vornado, for example, in March lined up a three-year $290 million interest-only loan at LIBOR plus 150 basis points for the redevelopment of 950,000 square feet of space at Bergen Town Center in Paramus, N.J. And Cleveland-based Developers Diversified Realty in late March got a three-year $71 million construction loan at LIBOR plus 120 basis points for a development in Homestead, Fla.