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Financing Requires lots of equity, according to NAIOP panel

Financing requires lots of equity, according to NAIOP panel


Rendering courtesy of The CoStar Group


BioMed Realty was able to command a favorable lease transaction at its new 300,000-square-foot i3 development under construction in University Towne Centre. Illumina signed a 10-year lease for the entire building earlier this spring.


By Thor Kamban Biberman

Friday, May 6, 2016


While speculative development has returned in the office, life sciences, industrial and retail sectors, obtaining sufficient financing isn't easy, according to an NAIOP panel Thursday.


R. Michael Murphy, president of Murphy Development, said financing is available for firms like his, but lenders are requiring huge amounts of equity.


"It's a case of the haves and the have-nots," said Murphy, during the "Development Today" panel held at the Marriott Del Mar in Carmel Valley. "We have a good lender... but on our last transaction, we got 35 percent loan-to-value ratio. We had to put up the rest."


Murphy has planned and developed more than 9 million square feet, much of it in Otay Mesa. He was a pioneer in the early 1980s, when he built a 350,000-square-foot building for Sanyo on Otay Mesa.


Coast Income Properties founder and president Tom Blake, whose firm is developing the 160,000-square-foot Village at Pacific Highlands Ranch retail center, said getting decent loan-to-value ratios is very challenging.


"Finding financing isn't too bad, but the equity requirements are really high," he said. "Luckily I've been doing this for 35 years. For those who have been five or fewer years in the (development) business, it's almost impossible. Even if you have the experience, it's going to be challenging."


Brian Russell, an Eastdil Secured senior vice president who moderated the program, said while the economy has improved, lenders aren't always receptive.


"Banks really don't like to lend for development," Russell said.


Blake also said the Pacific Highlands Ranch experience taught him that it takes two to three years working with the city to amend a community plan.


Jamas Gwilliam, a Kilroy Realty Corp. (NYSE: KRC) senior vice president, agreed it can be a challenge. Kilroy has struggled to get its One Paseo mixed-use development off the ground.


"It's difficult to spend money until we get clarity in the process," Gwilliam said.


Blake said the good news is there wasn't a blitz of construction immediately prior to the recession as in past decades.


"We severely overbuilt then, but we don't have that situation today," Blake said.


Real estate investment trusts, like Kilroy, have access to huge lines of credit. Gwilliam said even a firm as large as his has found it necessary to sell a significant number of assets to improve its balance sheet.


While the REIT owned more than 5 million square feet of primarily office real estate in San Diego County four years ago, the figure is closer to half that today.


One of those sold assets is the 465,000-square-foot Santa Fe Summit, development fully occupied by tax software firm Intuit (Nasdaq: INTU), which earlier this year paid about $262 million for the complex it has inhabited since the complex was constructed in the mid-2000s.


While Kilroy may have sold off a lot of office buildings, it will continue to be a major player here. Although its One Paseo development has been scaled back, it still calls for a 1.1 million-square-foot buildout, instead of 1.45 million square feet. The nearly 500,000 square feet of office space in the old plan has been cut to 280,000 square feet.


The amount of retail space at One Paseo has also been slashed from 199,000 square feet to 95,000 square feet. Approximately 600 residential units remain in the plan. Each of these figures could be amended, however.


Rancho-Bernardo-based BioMed Realty Corp., -- now a subsidiary of The Blackstone Group (NYSE: BX) -- is heavily invested in San Diego County with millions of square feet of property.


Tracy Murphy, a BioMed senior vice president, said while her firm has long been in acquisition mode, it didn't make sense to develop until fairly recently.


"We spent almost a decade with $2 rents," she said. "It's a much different situation when you can go in front of a lender with $4 rents."


"The only (office building) you can build has to have $4 rents," said Eastdil's Russell.


Gwilliam, the Kilroy executive, said while there are exceptions, rents are still generally not sufficiently high to justify new construction.


"We haven't seen the same rewards for costs," he said.


Phil Monroe, president of Locale Advisors, said properties like BioMed's i3 development and his company's San Diego Tech Center succeed because they set themselves apart.


"You're not going to develop the standard issue office building in this environment," Monroe said.


Both Michael Murphy and Tracy Murphy said the companies in their business parks are scrambling to find enough skilled workers to fill the open positions.


"We are in a race for talent," Tracy Murphy said. "You have people come in and they want outlets for their phone chargers everywhere."


Tracy Murphy, the BioMed senior vice president, said she has also learned that "one size does not fit all."



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