Funding your project: Available, but expensive, in many ways - by Daniel Calano

How many of you remember real estate development in the late 1980s? Project sourcing was difficult, until it wasn’t. Into the 90’s, a few years after, banks and other financial institutions were very happy to fund projects. Money was relatively inexpensive, and understandably everybody wanted in on those glorious years. Companies were expanding and needed space. Some were renting well into the future; developments were building to accommodate future growth.

 At some point, to be brief, the future companies lost some of their need, and did not fill the space, and properties were either not needed or filled, and banks started to foreclose properties. Banks were being watched by much larger institutions, such as the FDIC, RTF, RECALL, and others, and banks failed just as the developers had. To simplify, it was a blood bath. In retrospect, it was companies not calculating their growth needs; developers miscalculating demand, but supply was well underway. A very large miscalculation of demand/supply. 

There have been many books, and some film documenting the disaster. But, this brief article does not compare; nor is it written to compare. This article is about a simple question with a worrisome comparison. It is documented as PC “private credit” different from banks, but will likely become a major source of real estate financing.

As wealth grows, and business investors look to accumulate funds to fund or purchase property, potentially funding more than typical banking, private credit has already grown to $2-3 trillion, and projected as $5 trillion by 2029. By itself, this is good for many, but as discussed above, can fund projects potentially with “easier” funds, perhaps with lower guard-rails than banks potentially, thus, lowering analysis and regulations.

Banks are based on regulations, balance sheet pressure, and slower processes than the competition which is taking higher risk perhaps, lower scrutiny faster funding, potentially over supplying supply needs.

Banks still dominate, but private credit is growing exponentially. On the more positive outcomes,banks and PC are starting to work together. There has been more joint funding, thus benefiting total lending, and thus projects are being funded more, clearly needed, such as more affordable housing, medical facilities, on-shoring manufacturing, etc. Time will tell, and hopefully we will remember/consider the “sins of the past.” We hope it will help all of us!

Daniel Calano, CRE, is managing partner and principal of Prospectus, LLC, Cambridge, Mass.