Commercial Real Estate Industry - Is the Condo Craze Over, or Just Gaining Steam

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Over the last two years there has been so much condo activity that many
commercial real estate lenders are starting to express concern over the future stability of condo markets. Some lenders have recently found themselves over allocated in condominiums as a result of the recent activity and have therefore become wary of all but the best opportunities.

While the best opportunities (typically in Florida, Southern California and select
destination markets) are still attractive, developers in smaller markets are finding
condos much more difficult to finance in recent months.

The reality is that many of the lenders expressing concern over the current state of
affairs in the condo market are the lenders that have been the least active and have
less knowledge about the asset class. Lenders familiar with the condo market are
not as concerned about the opinions of their peers, but rather with the
fundamentals of the projects and sponsors they underwrite.


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Projects that demonstrate that they underwrite according to the following guidelines
should be able to find financing even with the caution currently being expressed by
some in the lending community:


Sponsor Suitability: Sponsors that have a successful trackrecord of
developing other condo projects will be looked upon more favorably than those who
are building their first project. Having net worth and liquidity in reasonable
proportion to the project size always helps as well.

Capital Structure: Projects that have a sufficient sponsor equity
contribution will receive more interest
than those projects looking to move aggressively up the leverage curve.

Entitlements: Projects that are fully entitled and permit ready will
attract more interest than early stage projects.

Market Feasability: How many units are you building vs. how many
competitive units are currently available for sale. How many competitive units are
coming online during the time period that your project is being built and how many
units does the market absorp each year? What are your per square foot sales prices,
how do they compare to the market, and is your location, construction quality and
ammenity package in line with that of comparably priced projects?

Marketing: Who is going to sell your units and do they have a strong
track record of selling condos within the market you are building in?

Presales: What type of presales have you been able to generate? The
higher the percentage of presales, the more are lender interest you will attract.


The bottom line is that good projects from good sponsors will always receive
interest from the capital markets.



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