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What’s Driving Developers?

By Matt Goyer December 1, 2008

Some of you are still buying condos (a reader emailed me today letting me they’re closing on a new construction unit this week) and others are waiting for depression 2.0. While a few developers are going apartments with their condo projects others are sticking to their original plan.

This week I’m meeting with an investment manager for a large pacific north west developer to hear about the data they’re looking at that’s driving their decision making. As well I’ll be attending the Institute of Real Estate Management 2008 Forecast Breakfast.

What questions would you ask?

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24 responses to “What’s Driving Developers?”

marksparky says:

December 1, 2008 at 11:37 pm

If they’re willing to level with you, I’d be curious about how their development loan terms from their financers have changed over the past 9-12 months.
marksparky says:

December 1, 2008 at 4:37 pm

If they’re willing to level with you, I’d be curious about how their development loan terms from their financers have changed over the past 9-12 months.
Dan C says:

December 2, 2008 at 12:09 am

What do you mean “looking at the data”? Are they asking YOU what you are looking for, or are you interviewing them? I don’t understand…
Dan C says:

December 1, 2008 at 5:09 pm

What do you mean “looking at the data”? Are they asking YOU what you are looking for, or are you interviewing them? I don’t understand…
nitsuj says:

December 2, 2008 at 4:49 am

I’d like to know what are the primary metrics they look at when making their decision to move forward v. not. Also, how far back do they look at historical norms when comparing today’s numbers to the past when making those decisions.
nitsuj says:

December 1, 2008 at 9:49 pm

I’d like to know what are the primary metrics they look at when making their decision to move forward v. not. Also, how far back do they look at historical norms when comparing today’s numbers to the past when making those decisions.
mattgoyer says:

December 2, 2008 at 5:03 am

@DanC: Me interview them. I certainly know nothing!
Matt says:

December 1, 2008 at 10:03 pm

@DanC: Me interview them. I certainly know nothing!
Dan C says:

December 2, 2008 at 2:35 pm

I would wonder what their plans are if they have to convert to apartments, which may be a violation of loan covenants. Give the building back to the bank? Firesale?
Dan C says:

December 2, 2008 at 7:35 am

I would wonder what their plans are if they have to convert to apartments, which may be a violation of loan covenants. Give the building back to the bank? Firesale?
Dan C says:

December 2, 2008 at 2:38 pm

EDIT: I meant developers who are near completion or completed right now with crappy sales numbers.
Dan C says:

December 2, 2008 at 7:38 am

EDIT: I meant developers who are near completion or completed right now with crappy sales numbers.
Ben says:

December 2, 2008 at 7:15 pm

I would want to ask why developers act like they are in denial in this market.

Any developer who tries to tell me that there is no downturn or that “Seattle is different” or some other line is just dishonest at this point. I refuse to believe that somebody in the industry really believes that anymore.
Ben says:

December 2, 2008 at 12:15 pm

I would want to ask why developers act like they are in denial in this market.

Any developer who tries to tell me that there is no downturn or that “Seattle is different” or some other line is just dishonest at this point. I refuse to believe that somebody in the industry really believes that anymore.
Dan C says:

December 2, 2008 at 7:59 pm

Ben, I fully agree with you, but if you ask a hairstylist if you need a haircut, what do they say?
If you go to a car dealer and ask if you need a new car, what do they say?

RE Agents and developers are paid to be optimistic, and like politicians, they bend the truth a lot.
Dan C says:

December 2, 2008 at 12:59 pm

Ben, I fully agree with you, but if you ask a hairstylist if you need a haircut, what do they say?
If you go to a car dealer and ask if you need a new car, what do they say?

RE Agents and developers are paid to be optimistic, and like politicians, they bend the truth a lot.
The MD says:

December 2, 2008 at 10:36 pm

Ben, RE Agents and Developers do know the market has taken a shift downward, but they are definitely in denial about two things. 1. Just how much the market has already shifted downward. Most still think values have only dropped 7-10%. That’s a joke as we all know its much deeper than that. 2. How long the market will remain in a “slump.” Most RE Agents and Developers believe this is going to correct itself in a quarter or two. That’s a joke. The market will bottom about third quarter of next year, and then it will remain flat for a couple of years after that with minimal, if any, appreciation in home values.

So, I actually do believe they are in denial on the entire housing market. These agents really don’t have the capacity to understand economics. Hell, most of them barely understand the dynamics of a loan and that BANKS ultimately have the last word which way this market will head.

Well, last time we all checked, the banks’ credit taps were shut off. Without credit, consumers can’t buy at ridiculously high prices. Only well-capitalized developers will be able to hang on to prices of yesteryear. But, then again, the competition from the smaller guys lowering their prices will force the big guys to lower as well.

I’m sitting back with my bucket of popcorn and getting ready to watch the bloodbath that will ensue in the downtown condo market. Its going to get ugly and interesting.
The MD says:

December 2, 2008 at 3:36 pm

Ben, RE Agents and Developers do know the market has taken a shift downward, but they are definitely in denial about two things. 1. Just how much the market has already shifted downward. Most still think values have only dropped 7-10%. That’s a joke as we all know its much deeper than that. 2. How long the market will remain in a “slump.” Most RE Agents and Developers believe this is going to correct itself in a quarter or two. That’s a joke. The market will bottom about third quarter of next year, and then it will remain flat for a couple of years after that with minimal, if any, appreciation in home values.

So, I actually do believe they are in denial on the entire housing market. These agents really don’t have the capacity to understand economics. Hell, most of them barely understand the dynamics of a loan and that BANKS ultimately have the last word which way this market will head.

Well, last time we all checked, the banks’ credit taps were shut off. Without credit, consumers can’t buy at ridiculously high prices. Only well-capitalized developers will be able to hang on to prices of yesteryear. But, then again, the competition from the smaller guys lowering their prices will force the big guys to lower as well.

I’m sitting back with my bucket of popcorn and getting ready to watch the bloodbath that will ensue in the downtown condo market. Its going to get ugly and interesting.
ADS says:

December 3, 2008 at 5:10 am

Completely agree with the MD
ADS says:

December 2, 2008 at 10:10 pm

Completely agree with the MD
Chris says:

December 3, 2008 at 5:17 pm

Ask them what they think the capitalized value of a square foot of rental property should be relative to value/SF for a for-sale product. 100%, 90%, etc….

That assumption then leads to a projection of future values based upon where the rental market is headed. The rental market is presently much easier to value than the for-sale market.

If they don’t use that metric, ask they if they use projections from the rental market to project trends for the for-sale market in some form.
Chris says:

December 3, 2008 at 10:17 am

Ask them what they think the capitalized value of a square foot of rental property should be relative to value/SF for a for-sale product. 100%, 90%, etc….

That assumption then leads to a projection of future values based upon where the rental market is headed. The rental market is presently much easier to value than the for-sale market.

If they don’t use that metric, ask they if they use projections from the rental market to project trends for the for-sale market in some form.
Chris says:

December 3, 2008 at 5:19 pm

Ask them what they think condo absorption will stabilize at (units/yr) within the City of Seattle when the credit markets settle down, and what their key assumptions are to make this projection.
Chris says:

December 3, 2008 at 10:19 am

Ask them what they think condo absorption will stabilize at (units/yr) within the City of Seattle when the credit markets settle down, and what their key assumptions are to make this projection.

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