SAN JOSE — A trio of proposed housing towers in downtown San Jose could face a tricky quest for construction financing due to an increasingly uncertain economy.
Preliminary plans have been formally filed for two new housing high-rises to replace a proposed office tower at the corner of North Fourth Street and East Santa Clara Street in San Jose near City Hall.
Street-level nighttime view of a 600-unit residential complex at 147 East Santa Clara Street in downtown San Jose, concept.(BDE Architects) (BDE Architects)
The housing towers could accommodate 600 to 700 residential units, although the realistic number is more like 650 apartments, according to Erik Hayden, founder of Urban Catalyst, the real estate firm leading the project’s development.
Separately, an adjacent housing tower just down the block that’s been approved at North Fourth Street and East St. John Street could begin construction in about a year or so, according to Hayden, whose Urban Catalyst firm is also heading up the development at that site.
But all three of these housing towers face a problem that is becoming more widespread by the day in commercial real estate.
Landing financing for new construction — even apartments, despite the housing crisis — has become trickier than ever.
Lenders demand financing models that oblige developers to come up with at least half — sometimes more — of the cost of building a new housing tower.
Put another way, if a housing project costs $200 million to build, a construction lender at present would insist that the loan would cover no more than $100 million of the cost, with the developer and its equity partners covering the remaining $100 million.
Evening view of a 600-unit complex of residential towers at 147 East Santa Clara Street in downtown San Jose, concept. (BDE Architects)
“In recent years starting around 2008, 2009, 2010, lenders were requiring a loan-to-cost ratio of 65%,” Hayden said.
That means for the same $200 million housing complex, lenders were willing to finance $130 million of the cost, while developers and their partners would provide $70 million of the construction cost.
“Now, they prefer a loan-to-cost ratio of 45% to 50%,” Hayden said. “Sometimes it’s as low as 40%.”
That means developers and partners are obliged to cough up $100 million to $110 million for the same hypothetical housing high-rise — sometimes as much as $120 million of the $200 million overall construction expenditure.
As a result, residential towers simply aren’t getting constructed in many instances, even with a flurry of proposals and an obvious shortage of housing, affordable or market-rate.
The housing project called Echo, which would be built at North Fourth Street and East St. John Street, would accommodate 389 residences.
The Echo tower could begin construction in roughly a year, depending on when the city approves the project’s final design as well as formal building permits, Hayden estimated.
The two Icon housing high-rises down the block at East Santa Clara Street and North Fourth Street are just getting into the preliminary project review phase, during which the developers will seek formal feedback from city staffers.
“We are looking for non-traditional sources of financing” for the two new Icon housing towers, Hayden said.
Urban Catalyst has begun to scout for an insurance package that would guarantee the operating income for the housing towers. The guaranteed income flow could make the project more attractive to construction lenders.
These new Icon towers would be built in phases of perhaps 300 units at a time, depending on how many units would be allocated to each of the two residential high-rises.
Urban Catalyst decided to convert the office project to a housing development because of the brutal market for office buildings, which are facing fast-rising vacancy levels.
Even if the city approves the housing development that would replace the original office tower at 147 East Santa Clara Street, it’s possible that the revamped development could still face considerable obstacles.
“Lenders are risk-averse,” Hayden said. “They are increasing the hurdles to get construction financing.”
