Institutional lenders have their place when it comes to commercial real estate finance. They are the primary source of loans for real estate projects and they offer a wide array of business and development-oriented services as well, all of which are definitely needed. But traditional lenders are not particularly well-suited to solving development challenges in a rapidly changing world. Large financial institutions are not nimble. They will follow, rather than lead with, change. The mess we find ourselves in today is unfortunately in large part due to the dominance of large and traditional financial institutions in the funding of the housing market.
Cookie cutter projects
If you’ve spent any time at all in the urban cores of cities like New York, Los Angeles, Seattle or Chicago, you must have noticed that new construction seems to all look the same. The same residential projects. The same commercial projects. These days larger real estate projects tend to have a floor of businesses and shops with some parking added in, topped with lots of condos or apartments. Often these projects are marketed to high-middle or upper-income tenants, and often they are built with millennials in mind with lots of studio and one-bedroom units. And these developments are a primary reason that displacement is occurring. They are homogenous, catering to one type of tenant or buyer, in a particular income range, with a particular lifestyle. Often, they are funded by the same institutional lenders, like Wells Fargo, Key Bank, and Capital One Financial, amongst others.
Large financial institutions seem to prize predictability and stable returns over all else. The welfare of local residents and the improvement of the community don’t seem to be part of the underwriting equation. There is a desire for simplicity and scalability above all, hence the same projects are appearing in cities from Portland to St. Paul, despite massive differences in the needs of each respective city or community. Housing is not and cannot be a “one size fits all” product. The root cause of many of the ills in the housing market stem from this attitude of “build, and they will come” rather than using community needs and input to craft positive housing solutions.
Scalability is perhaps the biggest reason why lenders won’t support smaller, market-specific projects. Plans to build 20 or 30 units on a small, reclaimed industrial lot in the heart of the city are less attractive than monoculture mixed-use developments that can be replicated quickly and present little risk in terms of construction or the ability to lease to tenants or sell to homeowners. These smaller projects can often be built to maximize their social, environmental, and economic impact. By using non-traditional lots, developers can save on land costs and may also save on lengthy neighborhood review processes, which are common with larger-scale developments. Despite the obvious benefits offered by small-scale development, it can be hard to fund them.
Small investors. Big returns
As institutional investors cannot or will not adapt to unique or non-traditional models, developers and investors must leverage alternative sources of funding for progressive and innovative projects. When traditional lenders choose not to fund a project, look to your own community for development capital!
Raising capital through community-based means allows developers to offer similar returns on investment to smaller, local investors, who may have a personal stake in the success or failure of the project. Rather than the returns flowing out of the community to a large financial institution, that money stays within the area, giving residents and other stakeholders a direct financial interest in their community.
A diverse investment portfolio is a healthy investment portfolio. The same can be said of housing and commercial space. Modern mixed-use, cookie-cutter developments detract from the charm, sustainability, and longevity of a neighborhood. Rather than becoming a fixture of a community, as a unique building or development might, these podium developments re-shape the communities they are built in and drive out long-term residents. We need developers who are willing to take chances on non-traditional projects and want to push urban innovation in our cities to make them better places for everyone. If we crush them, we’ll all be a little poorer, culturally, financially, and socially.
This image is license free, CC BY-2.0