Slow flow financing

The parking lot that was purchased as a building site for the 1,500-unit Metropolis condominium.
The parking lot that was purchased as a building site for the 1,500-unit Metropolis condominium.

As in many global cities, the flow of international capital is propelling Los Angeles condominium prices upward, and that has inspired some developers to switch their focus from rental apartment buildings to condos.

“They’re coming back to condos after rents cooled down significantly,” said Skylar Olsen, a senior economist at Zillow.

But it isn’t just market demand that is pushing developers to focus more on condos, said JLL Managing Director John Manning. Getting financing for multifamily projects has gotten increasingly harder — not as difficult as obtaining money to build condos, but harder than it has been in the past.

He said that lenders were only willing to finance up to 50 percent of a multifamily project’s value, and to make matters worse, only full-recourse loans were on offer — terms that he said made developing such projects almost untenable.

However, the tide might once again be turning. As builders pivot to put thousands of new luxury condos on the market, there are big questions about whether the demand will be enough to absorb all of the supply in the pipeline. And that means lenders are getting nervous.

“The luxury market for condos doesn’t necessarily tie to the market fundamentals in L.A.,” said Javier Rivera, a vice president in JLL’s capital markets group.

The condo pipeline may dry up if the landscape for construction financing becomes any rockier, said Adam Petriella, managing principal with Silverthread Capital, a mortgage brokerage that has done several commercial loan deals in the L.A. basin.

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“Construction lending and lenders are tapping the brakes, regardless of what they may be saying publicly,” Petriella said. “Overall, borrowers must come to the table with minimum 30 percent equity because banks are advancing only 70 percent loan-to-cost.”

Should L.A.’s luxury market falter, developers might start converting their existing projects to multifamily developments, which has happened with some large condo projects in Miami and New York.

Developer Robert Neman has already done just that with his proposed 131-unit condo project on Harvard and 8th Street in Koreatown, which he is now building as a multifamily project, despite have receiving approval for condos, he told TRD.

While the tough loan environment for both multifamily and condo development may leave some developers on the sidelines, experts say it might be an advantage for some cash-rich foreign builders like Greenland USA, the Chinese developer behind the city’s biggest new condo project, the 1,500-unit Metropolis.

Brian Halpern, a managing director in real estate investment banking at JLL, was hopeful that the development pipeline would continue even after many of the units come to market in the next 18 months or so.

“There are developers who can manage the restricted debt environment,” Halpern said.