San Diego Developers Talk Competition and Spec Lending

The trio discussed factors impacting the financing of commercial projects and also how smaller developers can stay ahead of their competitors.

Arduino attributed her company’s success to its expertise in the industrial market and its strong track record. Murphy Development Company—which specializes in the creation of corporate industrial and technology parks—has built more than 10 million square feet of projects throughout San Diego County. “Redevelopment and owning land at a good basis is where we see the opportunity these days,” she told the audience.

LeBeau said the trick is in “Recognizing where there is a good opportunity and getting a great architect in to figure out what the market wants.”

Indeed, tenants are getting picky in terms of what they seek in a property. “Amenities have gotten crazy, people are putting yoga classes in and hiring yoga instructors for the property,” he said. “They’re really thinking outside of the box to create value.”

And in a time of heightened leasing competition, it’s not just the tenants who are being somewhat demanding: Brokers are also getting a little cheeky, said Arduino.

“We’re seeing very aggressive proposals from tenant-representative brokers. They want an open-book policy and want to know our returns [to base their own pricing on].” That’s not happening, however, she said.

With regard to financing challenges, LeBeau said that a lot of tenants these days don’t want leases that stretch beyond 5 years and often want termination options. “The days of a 10-year lease are dwindling,” he said, adding that financial firms often won’t sign up for more than 7 years and tech companies “don’t know where they’ll be in 2 years let alone 10. It’s very challenging.”

On the plus side, technology tenants are speedier to sign a lease, said LeBeau, while traditional Fortune 500 companies are much slower. The tech market [tenant] says “I need a 5,000-square-foot office tomorrow. They’re growing like crazy and not as focused on the real estate so they make decisions quickly.”

Murphy Development recently opened a 121,970-square-foot industrial speculative building in Otay Mesa, and when the conversation turned to speculative lending all panelists agreed that it isn’t greeted with the warmest reception by the lending community. “Spec [lending] is still a four letter word,” LeBeau said.

Kenny chimed in, and described spec lending as equity risk, not debt risk and said that Bank of America has shied away from it. “We’ve shied away from nonrecourse construction lending in general,” he said. “After the downturn we tried to protect our balance sheet even more.”

Arduino said that in her own experience, the big banks such as Wells Fargo and Bank of America are still generally focused on big loans and big guarantors. “We wish the bench was a little deeper with banks—we’ve traditionally gone to smaller and regional banks. We think we are great clients, we just wish we had the attention of more banks.”

Kenny said that, from his perspective, the deals banks are willing to take on are often a function of scale for that particular client and the risk associated with individual transaction. “As risk is increased the availability is compressed,” he said.

Ending on a positive note and addressing what’s next for the conference city, Arduino said, “San Diego and Southern California have few more years on the runway. The industrial market is really picking up steam, everyone is excited about ecommerce. The fundamentals are different than last time because we didn’t overbuild. We’re excited about the next few years.”