Developers hoping to get in on the boom rolling across Northern New Jersey may have a tougher go with lenders than they did a couple of years ago.
While the spigot for loans is still open, especially from balance-sheet organizations like banks and insurance companies, it’s gotten tougher in recent months to lock down financing, according to developers, real estate brokers and loan brokers.
Some industry insiders blame turmoil in the stock market — which can affect the value of securitized loans — for the retrenchment. Others say a surge in the number of borrowers hunting for capital is posing stiff competition. They add that the rapid addition of so many new apartment buildings in the region has some lenders worried about oversupply.
“There’s just so much in the pipeline right now,” said Thomas Didio, a senior managing director with Holliday Fenoglio Fowler, a real estate services company known as HFF that frequently lines up funding for New Jersey developments. Lenders “just want to get some of their construction loans paid off. Then they will be back in the market working on the next deal.”
When it comes to sources of financing, New Jersey’s development deals for new offices, condos or rental buildings have historically followed a pattern. First, equity is often contributed by the real estate families that tend to dominate the state, like the Kushners, of Kushner Real Estate Group and Kushner Companies; the Barrys, of Ironstate Development; and the Pantirers, of BNE Real Estate Group. They’re often joined by large institutional investors like insurance companies. Prudential Real Estate Advisors, based in Newark, is a frequent investor in Northern New Jersey development projects.
In this way, New Jersey differs from New York, which attracts a more diverse pool of commercial real estate investors — such as private equity funds and deep-pocketed individuals — who pool their capital in what industry insiders refer to as a project’s “capital stack.” In recent years, though, rising price tags for many of the state’s biggest projects have pushed developers to attract new investors, such as UBS Realty Investors, JP Morgan Chase and an affiliate, JP Morgan Investment Management.
Typically, up to three-quarters of the stack has traditionally been covered by a construction loan, which in New Jersey is often provided by large commercial banks with a strong local presence, such as the Pittsburgh-based PNC Bank, which after a string of acquisitions in New Jersey in the last decade has a considerable toehold in the state. Commercial banks generally keep loans on their balance sheets instead of bundling them with other loans and selling them to investors as bonds.
In recent years, commercial banks have financed a shorter portion of the capital stack. Industry experts say the banks want to see more equity in the deals. For example, a new residential building in Northern New Jersey that might have received a construction loan covering 75 to 80 percent of its financing needs a few years ago might only get a loan for 50 percent today.
“Construction loans dried up last fall and really died through the winter,” said Enrique Alonso, a senior vice president with SJP Properties, which is developing The Modern, a twin-towered rental complex in Fort Lee, New Jersey, right next to the George Washington Bridge.
The Modern, for example, had a mix of insurance companies, private equity firms and wealthy investors in the equity portion of the financing. The first 47-story tower in this complex opened in 2014, with a second tower breaking ground in 2016. Once the project is completed, the two towers will have 900 rental units ranging from studios to three-bedroom apartments. Amenities include a dog run, an outdoor swimming pool and an outdoor movie theater.
The project’s equity partners include Prudential Real Estate Investors, Northwestern Mutual Life Insurance Company, long-time local developer James Demetrakis and the private equity firm Palisades Financial. On the debt side, Wells Fargo and PNC Bank provided construction loans for both towers.
Caution among lenders
Recent stock market volatility may be one of the reasons why some financiers are playing it safe, said Aaron Appel, a managing director of Jones Lang LaSalle, who places debt and equity for development projects, including in New Jersey.
But there’s also a lot of housing coming to market in New Jersey, particularly in the multi-family category, at a pace that seems ahead of what the market can bear, he said. “The underwriting standards have tightened and will stay where they are for two years,” Appel said, though he added that after the lull, he expects lenders to “ramp up” again.
And sources of capital, even for huge projects, exist. This winter, Appel helped secure a $24.5 million loan from Santander Bank to refinance debt for the land for One Journal Square, a planned mixed-use mega-development in Jersey City from Kushner Companies, KABR Group and WeWork.
While private equity firms have nosed into the market in recent years, unions are also interested in equity partnerships. Bijou Properties, a Hoboken-based developer, turned to Intercontinental Real Estate to help fund its $83 million Vine, a new 11-story luxury rental at 900 Monroe Street in Hoboken. The Boston-based Intercontinental, which invests bundled union pension funds, also worked with Bijou on Park + Garden, a 212-unit rental that opened last summer at 1450 Garden Street in Hoboken.
Intercontinental has teamed with other New Jersey landlords, too. In 2015, it partnered with Ivy Realty, a Montvale firm, to purchase Morris Corporate Center Four, a 345,000-square-foot office complex built in 2000.
“Union pension funds have to create money somewhere, but it’s also about creating jobs,” which is a win-win for the unions, said Daniel Sudler, Bijou’s development manager. Besides, “you can usually get a better deal than with private equity pooling.”
Still, the market feels different. Construction costs are climbing, and Bijou is now being forced to hire brokers to track down financing — something they didn’t need to do for years — as competition heats up, Sudler added. “You can kind of see why people think the cycle is nearing an end,” he said.
In the case of Vine, construction financing came from HSBC, which was locked down in 2013, before the current softening. Lenders usually view rentals more favorably than condos, Sudler said, because they’re typically always able to produce revenue in any market conditions.
What hasn’t made a major impact in New Jersey is EB-5 financing, unlike in New York. Sure, $50 million in EB-5 funds, which largely come from Chinese investors, underwrote Trump Bay Street, a 50-story rental from Kushner Companies and KABR Group in Jersey City. That chunk of overseas capital was about a quarter of the development cost of the building, which is scheduled to open in the middle of 2016. But in general in New Jersey, developers have shied away from the EB-5 program because its requirement that they create a certain amount of local jobs is too hard to meet.
After a project opens, and developers have a tangible asset, they typically seek out permanent financing with more favorable terms. For example, 70 Columbus, a 545-unit rental in Jersey City built by Ironstate Development and the family-owned Panepinto Properties, took that route. It received a $170 million, 10-year loan from Northwestern Mutual Real Estate in April 2016 to pay down the construction debt held by PNC Bank.
Deals of that size suggest any slowdown may be temporary, and hardly across the board. “It doesn’t mean projects won’t be financed,” said Didio, who worked on the 70 Columbus deal. “Lenders are just a little hesitant to make more commitments right now.”