Sunday Summary: Construction Is King

Sunday Summary: Construction Is King Is it us, or have there been some real interesting (read: large) deals crossing the finish line of late? This seemed most blatantly apparent in Southern California last week. First up, in Santa Clarita (about 36 miles northwest of Downtown Los Angeles), the Dallas-based Centennial Real Estate just [shelled out $199 million]( for a 1.1 million-square-foot mall, the Westfield Valencia Town Center. And, while, yes, the property traded at a discount, it was a relatively modest one. (When it was appraised in 2022 the mall was valued at $205 million.) But, OK, we’ve been hearing about retail’s [recent upswing](, so we can see a firm flush with cash wanting to make a play. Maybe a shopping mall isn’t the best example. (Neither is housing, but we still couldn’t help but be somewhat ensnared in this fascinating list of [the top multifamily landlords]( of Los Angeles.) What was perhaps even more interesting was JPMorgan Asset Management’s admirably bold play on office. The firm [purchased a fully leased, Class A office]( in Santa Monica from CalSTRS for around $165.5 million — which works out to an impressive $745 per square foot. Yes, we know that there’s plenty of bad news ringing in the background for office. (WeWork had [a very significant “Uh-oh”](moment last week. Foot traffic has been [falling for six straight weeks](. And [the latest COVID spike]( should be at least a little worrying for return-to-office promoters, even though it hasn’t really been.) But the JPMorgan purchase should have lightened everyone’s heart, at least a little. And, as bad as office is nationally, there is still demand for premium properties among tenants. For example, internet provider Pilot Fiber NY is [taking additional space]( at 1 World Trade Center, bringing it up to 12,456 square feet. (The building also saw smaller renewals from pharmacy benefits planner Capital Rx, Fractal Analytics, alternative assets manager OnyxPoint Global, data security firm RQD* Clearing, and fintech firm LMAX Group.) A couple of blocks away Tower Research Capital signed [a monster 121,903-square-foot lease]( at 120 Broadway. (120 Broadway’s owner, Silverstein Properties, might even like office a little better than an asset class with a better track record — Silverstein just decided to [sell its stake]( in Hudson Research Center, a life sciences property on the Far West Side.) And the big leases were signed in other gateway cities, too; in Miami, white shoe law firm Greenberg Traurig[renewed its 128,450-square-foot lease]( at the Wells Fargo Center. This is all very welcome news because a lot of loans for a lot of different properties in a lot of different asset classes are [hitting the market]( in a very big way. [Show me the money!]( If properties are trading, banks and other lenders are financing them. … Right? That remains a somewhat murkier question, with everything dependent on the property involved. While lending in general is [way, way down]( in 2023, and even financially sensible ideas like, say, [passive housing]( are largely ignored by lenders, an iconic property like the New Yorker Hotel can still command big bucks for its debt — which it did when Yellowstone Real Estate Investments [purchased a $106 million note]( from M&T secured by the 1.1 million-square-foot property. Also, last week we learned that Worthe Real Estate Group and Stockbridge[landed a $480 million loan]( from Athene Annuity and Life Company for the purchase and redevelopment of the Warner Bros. Ranch in Burbank, Calif. And, even though we wiped away a few boozy tears when we learned that [Jimmy Buffett had passed away]( at the beginning of the month, his name still means something to the money men, because the Margaritaville Hollywood Beach Resort managed to secure [$140 million in refinancing](. But one thing we would note about lending right now — the area that seems to be weathering the environment best has been [construction lending.]( This might seem counterintuitive when you consider that so many projects sputter and never quite achieve what their developer had in mind, and also when you consider how expensive construction has become. “There’s definitely a sticker shock at the cost of capital for construction lending and the lack of funding available,” said Eric Cohen of Affinius Capital. “The loans are lower leverage, coupons are higher, which makes it difficult for a lot of deals to pencil from an equity perspective today.” That being said, this has had the effect of focusing the mind. When it’s do or die, borrowers become more serious. Moreover, they’re willing to spend more for their capital when they have no choice but to finish. “There’s so much value creation because every dollar used in construction can yield a dollar and half in value,” said Madison Capital Realty’s Josh Zegen. “But there’s more execution risk. However, once a building is built there’s more margin, and it can be less risky from a basis standpoint when lending is executed with depth and experience.” Last week CO spoke to one of the great figures in construction lending, Brannon Hamblen, president of Bank OZK, about the state of lending and more. Should make for a [nice Sunday read](. See you next week! 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