Developers Are Now Becoming Lenders

Several sectors, such as multifamily, are more risky, and some developers believe in some cases that lending to others is the safe position.

The Optima Chicago Center in Chicago’s Streeterville neighborhood is one of the many new multifamily properties in the city, and many observers wonder how long such construction can go on before we hit a slowdown.

CHICAGO—The nation’s apartment market has been bursting with energy and new development, but some developers are getting a little wary. At some point the good times will either end or at least level off. And trying to figure out when has made navigating the sector’s landscape a lot more challenging. Still, in the last six months or so, an increasing number of developers have hit upon at least a partial solution.

“What many are willing to do is take a safer position, but one that also allows them to use their skill sets,” Steven F. Ginsberg of Chicago-based Ginsberg Jacobs LLC, tells GlobeSt.com. And that means getting into lending capital to other developments. “We don’t know exactly where we are, or what inning it is. We do know that prices are increasing, and we have more volatility.”

The stock market, for example, has started to undergo some striking ups and downs, and the political world keeps getting shaken by one thing after another. “There is certainly more risk than there was two years ago.”

And if things go sour on a project, a developer/lender, unlike many straight-up lenders, will have the expertise to step in and help.

Although Ginsberg has seen this trend gather strength in the multifamily industry, “it’s also happening in other asset classes that are more at risk than they were a few years ago.” That includes sectors such a student housing and hospitality. “It used to be that private equity came from private equity shops, mostly in New York. But it’s more fluid now.”

“What do you do when you have capital and know real estate? This is a natural step, and it’s a way to take some of the risk off the table while you keep your team in place.”

And from what he has seen, such developer lenders are really not waiting in the wings looking to take over projects. Instead, due to their own experience, they may be more patient with projects that hit a road bump or two. Furthermore, they “tend to be more sensitive to costs,” and will help make sure things like due diligence are other operations won’t tack on as much to the bottom line.

But even though there is some concerns about where these sectors are headed, Ginsberg says there are very good reasons to approach today’s market with confidence. Most importantly, the whole lending environment has been relatively conservative ever since the recession. Developers have become accustomed to securing mezzanine loans for 55% to 75% of total costs, as opposed to the 90% that was common ten years ago. If there is a slowdown, it will probably cause  nothing more than a soft landing, instead of a 2008-style crash.

“This is a much safer business.”