CEO: "I Talked To 48 Lenders About Debt For A New Apartment Project. Zero Came Back With A Bid"

Less than two months ago, we conveyed an anecdote from One River Asset Management CIO Eric Peters, which showed just how challenging it has become to obtain debt funding, to wit:

“Credit started tightening six to nine months ago,” said the developer, a close friend, entrepreneur, with large residential projects across the nation. “It started with the money center banks,” he continued. “This pushed us to regional banks for our latest projects, but then SVB happened.” The market froze.

“The lender for our latest 30-story project in a tier-one city backed out, so we scrambled, and spoke with well over 100 banks. Not one will provide financing.” His firm is a leader in their market niche. A strong track record.

Confirming just how tight credit has become, and the dire observations from the Senior Loan Officers Survey that took place not long after and which showed that it is now next to impossible for even quality borrowers to obtain new credit, today Bloomberg writes that even Howard Hughes Corp., a Texas-based real estate developer that counts hedge fund manager Bill Ackman as its chairman, is struggling to find viable financing for new apartment projects as lenders pull back.

Chief Executive Officer David O’Reilly said he reached out to dozens of lenders with a pitch for a new project in The Woodlands, a master-planned community in the Houston area.

"Zero showed up and gave me a bid,” he said. “I talked to 48 of them."

Howard Hughes owns and develops various commercial real estate properties ranging from master-planned communities to offices and retail spaces. Its developments include condominiums in Hawaii and buildings in the Seaport area of Manhattan. Pershing Square Capital Management, the investment manager founded by Bill Ackman, owns about a third of Howard Hughes’s stock. Expect Bill to soon post an (unnecessarily wordy) tweet in which the billionaire cries (literally, most likely) about the (non-existent) state of CRE lending.

As we discussed in April, property developers and owners - but really everyone else too - are grappling with a financing market that’s freezing up as concerns mount about commercial real estate. Owners, particularly of office buildings, are struggling to pay debt as borrowing costs surged, leading to defaults and negotiations with lenders.

Other developers including billionaire Ross Perot Jr. have warned that it’s getting harder for real estate firms to get construction loans.

While the pressure has been most acute on the office sector, the pain is extending to apartment landlords, who have benefited from a surge in rent growth during the pandemic. Now, many owners are seeing high borrowing costs and a surge in expenses erase their profits. Meanwhile, prices for apartment buildings have dropped 21% over the past year, according to Green Street. And ironically, as developers remain credit-strapped, there is just not enough rental supply which means that rents across the country keep on rising in a time where nobody can afford a 7% mortgage.

Lenders are also focused on working out existing loans, while shying away from providing any new ones. That’s complicating apartment projects for developers such as Howard Hughes, even as the firm sees strong demand from renters. The already built part of its Woodlands community is more than 96% leased with double-digit rent growth.

The rent growth “sounds good, except I’m upset because it means I didn’t build the next building fast enough,” O’Reilly said.