No Quick Fixes

It will be a long recession for commercial development and real estate. That's the prognosis that Michael Horst, senior vice president, Urban Land Institute (ULI), delivered at the ULI's annual Emerging Trends in Real Estate presentation Wednesday, Dec. 3.

"This is the worst period for commercial real estate probably since way before 1991-92," Horst told a lunch-time audience at the Moto Museum near Grand Center. And it will go on awhile. A slow recovery will not start to take hold until 2011, he said. Befoe then, "We're going to see a dramatic drop in values and a sharp increase in delinquencies and foreclosures," he said.

Prospects are particularly dim for secondary cities, such as St. Louis, Horst said, but even in gloomy times, there are some bright spots. "Watch for the return to the urban core to continue," he said. "Infill is the big thing and we're entering a new vertical wave in development."

Bob Clark, chairman of Clayco, agreed with the ULI"s assessment. "I think we're at the beginning of what is going to be a very bad cycle," he said. "Anything requiring financing will be negatively affected. I think it will be a very, very bad construction market here in the next couple of years."

A panel discussion at the ULI seminar was geared to focus on opportunities that remaining.

Mary Campbell, senior vice president of Bank of America, said her bank is still financing deals, they just have to be smaller, with a larger equity investment, and the bank is charging more to finance them. Tax credits, however, no longer work as well as a tool for raising the equity, and for one simple reason: tax credit investors have disappeared.

Jack Sheradano, senior vice president at Gershman Mortgage, said deals for subsidized rental housing are going strong, all because developers have rediscovered the magic formula expressed in two simple words: "think HUD," he said. People who used to go elsewhere for financing are now going back to HUD and "going back to contractors to see if they can build it for just a little bit less," he said.

Amos Harris, president of Brady Capital, said he remains bullish on downtown. "A year ago we had a thousand condos for sale downtown. Now there are 100. Why? Because they were all converted to rental and they rented," he said. "There is room for more high-end rental downtown," he added, and the growing number of downtown residents is generating more interest in opening retail downtown. Even layoffs could be good for downtown, he said. "There are people getting laid-off who want to try going out on their own, so we're seeing an uptick in short leases in office suite units in class B buildings," he said.

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