Development industry responding to the times with 'fat-free' products.
In the 1980's, before the crash, developers were "ego-driven." Propelled by their own theories, developers based projects on their interpretation of a market. It was risky but it worked. Back then, a developer had an idea, turned it into a conceptual product on paper, financed its production, and took the product to market.
That was speculative destruction as we once knew it. Today, there is a different scheme. Once a developer forms a concept for a new facility, he must secure tenants and financing before taking the next step. No longer allowed the freedom to initiate projects at will, developers have sought to service tenants and financial interests.
For this reason, speculative construction, once a significant player in the real estate market, is now almost non-existent.
Today, on average, developers need to secure a pre-development occupancy of 60 to 70 percent to gain financing before beginning production. This level of commitment and credit tenancy has proven to stimulate financing interest. As a result, a trend has emerged: partnerships between tenants, financiers and developers.
These partnerships have been successful over the past year. During 1995, there was a significant amount of activity in New York and New Jersey, albeit not much new construction. "Redevelopment" of office space was the mode of choice. Buildings once passed-by were given new life. Any office space that was well-located, particularly product close to mass transportation, was purchased well below replacement cost and redeveloped to compete with Class A space. Based on the fact that buying and rehabilitation cost less than building new, financiers and developers were eager to recycle space and achieve substantial occupancy savings.
With last year's healthy economy, excess Class A office space was absorbed by value-conscious tenants. For the first time in at least five years, demand began to exceed supply, and corporations were forced to turn to other options. As a result, we are beginning to see a resurgence of build-to-suit construction, since quality Class B and C space does not meet the operating specifications of many corporations.
In 1996, the key to success for developers will be to attract credit tenants and meet their unique operational needs. Productive developers will work together with the tenant and financier, as we recently did with success at 101 Hudson Street, the first building of the Colgate Center on the waterfront of New Jersey.
As developer, LCOR began from the onset of the project by focusing its marketing efforts on the Wall Street/financial industry. We secured Meryll Lynch as the anchor tenant for a 1.2 million square-foot office tower. Meryll Lynch leased 600,000 square feet, and we were able to finance an additional 600,000 square feet of spec space on top of that. At every stage of the process, LCOR consulted its partners, Meryll Lynch and 101 Hudson's investors.
Over the past few years, developing a building with less than a 90 percent pre-lease commitment was difficult, if not unachievable. Today, due to looser underwriting and stronger markets, a developer needs 60 to 70 percent pre-leasing before going forward in a sturdy market. In other words, success in the future will depend on the "partnership" and strong commitment between tenants, financiers and developers.
The development industry has undergone change, just as every other customer-oriented business in the 1990's. The food industry recently stepped-up to respond to health-conscious eaters demanding healthy foods with fat-free, yet tasty products. Similarly, developers have refocused their efforts to meet the needs of prospective tenants. No longer able to create speculative projects, today we are creating our own version of "fat-free" - new products to meet the cost and operational objectives of credit tenants that will attract a conservative, discriminating capital market.
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|Title Annotation:||Annual Review and Forecast; real estate developers|
|Publication:||Real Estate Weekly|
|Date:||Jan 31, 1996|
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