The vicious cycle

I read a story about the stalled Spire in Crain's today that just reminded me why it is so important to get lending moving -- and hopefully the plan announced today that should have been announced in November or on January 21 will do so.

It is, of course, that old domino effect. A project is on hole, people lose jobs and cut, and so on:

"If there's no buildings going up, what do you do?" said James Connolly, a Laborers' union manager. "Prepare yourself because it's going to get worse before it gets better."

Construction workers are accustomed to boom-and-bust cycles but this downturn appears deeper and longer. The impact of lost wages of $35 to $40 an hour ripples through the economy.

"People out of work, people lose their homes, people lose their hospitalization, people lose all their benefits," said Tom Villanova, president of the Chicago and Cook County Building Trades, which covers 100,000 construction workers.

"It's as bad as I've ever seen it, and I've been around for 30 years," he said.

Dublin, Ireland-based Shelbourne Development Group has so far failed to get financing for the $1-billion Chicago Spire . Now, construction unions are negotiating to invest their pension funds to kickstart the project. The Spire would provide 1 million paydays for ironworkers, carpenters and others.

Union pension funds? Sounds like the good old days of the 1970s, but that was the Teamsters and casinos and...oh, never mind. Why go there?

In the good news department -- I am seeing construction work, even my neighborhood where Metra Market is finally moving along. I want to see more.

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(Residential) construction loans in the tank

Reports are that 8.1% of new construction loans are currently delinquent. (And no, that term is not an oxymoron.) That number is even higher in Chicago, where the mark is 10.8%.

What's driving this? Too many empty condos and subdivisions. The residential market's troubled, so that's where we stand.

A good tidbit was in the last paragraph: commercial delinquencies are only 4.1%. We don't know the local number. Hopefully this means we're not in for a bloodbath on that side of the world.

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Deal snags - the latest example

Just when you think a deal's going to close, another snag hits. This happens all the time. I know a deal that was supposed to close in June that is just going at turtle speed when it shouldn't be.

Case in point: Waterview Tower. Last month I mentioned that Teng & Associates had apparently plunked down ~$170 million in cash on the future Shangri-La Hotel and condos, but that they were confident they'd get a loan in place soon.

Enter the snag. In this case, the lender's usual carrier for trade credit insurance decides that something (either the market, or perhaps something else) makes this deal too risky to underwrite. So, it's off to Lloyd's and elsewhere to find a company willing to do the deal -- for the right price.

Let's recap. Now you are looking at a huge project at a standstill, probably no policy (or closing) in place until October, the possibility of bringing in a JV partner (which could slow things down again or speed them up if there's enough cash in the game). This is a dirt lawyer's dream -- or nightmare.

So watch for a closing in 45 days, unless there's another snag.

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Ready to roll the dice?

Because Las Vegas has apparently rolled snake eyes. The story will tell you all about the woes of CRE in Lost Wages.

You might be able to make a killing if you buy at the right price from a lender and can hold out long enough for things to turn, flip the deal or sell and lease at lower prices because you are all in for less money than the first guy. LV is not the Rust Belt, after all.

Legal stuff? Think about mechanics' liens, title insurance and survey issues, zoning, liquor license and related issues. I won't even venture to think about gaming.

Oh, one last thing that may sound silly. Water rights. They keep saying there's not enough water to go around, and how would you like to be in after the camel's back is broken?

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Construction loan delinquencies rising

Construction loans, as we all know, can be very risky. That is even more so in a softer market. Condos and single family residential appear to be the big, big culprit here (13.6% and 10.8% respectively), but even commercial deals have risen, albeit from a really low 2.2% to 3.6%. Here the Crain's story by Eddie Baeb. I don't know if Eddie is Corfman's protege but he's doing a nice job writing about our market. (Full Disclosure Department: he has written complimentary things in the past about some clients.)

Why the discrepancy? Again, I go back to Father Guido Sarducci's Five Minute University. Supply -- demand. Next subject.

Single family and condo product overbuilt, big time. And some developers got into product they now admit was wrong. KB Homes building mini-mansions is a great example of this. They are finding their way again. Others won't be so lucky.

Generally speaking, commercial product does not suffer from the same phenomenon. As I've said before, they learned that lesson in the 80s and 90s. It is not being repeated here, at least from what I see.

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