What do commercial real estate developers dream about?

We recently hosted two developer networking dinners in Melbourne and Sydney. The 50+ developers discussed the state of the industry with the Merricks Capital team and our Commercial Real Estate (CRE) Advisory Board.

The fascinating insights included:

1. Amending DAs to improve project economics: Several borrowers and potential borrowers with mixed-use projects, have revisited the planning approvals in order to enhance project feasibilities. This often means they sought either increased density or a more market-oriented development mix. For example, this week, a Merricks Capital funded project site, the Lindrum Hotel in Melbourne, was approved to construct a $200m commercial tower with 21 full-floor strata office and commercial levels. When the site last sold it had a permit for a 30-level mixed-use project of 77 hotel rooms and 68 residential apartments.

2. Cash on the sideline: Some developers have strong balance sheets ($100m+ of cash) having exited projects in 2021/22 and not yet redeployed the capital. These parties said they’re waiting to acquire strategic sites and think further price declines on land and existing assets will feature during 2024. We share the view that further price corrections will occur in certain subsector assets (non-income producing assets, such as short WALE B-Grade office and land subdivision) with these investments not able to pass through the increased cost of a 400bps step up in base rates.

3. Construction engagement happening earlier: there’s now more optimism around the construction outlook than there was six months ago. While construction costs are expected to remain elevated due to the rising labour component, there’s less inflationary pressure on key materials (rebar and timber). Elevated construction costs have prompted developers to engage with builders earlier, often at the planning and design stage, to manage cost proposals, and in some cases, to share the risk with builders and achieve lower contract prices.

4. Shifting sector focus: Some developers mentioned they were looking away from residential apartment construction towards other sectors where feasibilities are healthier such as industrial or affordable housing. This is consistent with our CRE opportunity pipeline which has +$500m of retirement living projects and student accommodation, up from $200m 12 months ago.

Last week, the Merricks Capital Partners Fund settled a 12 month $21m loan with an IRR of 12.5%, financing the construction of a large format retail centre in Seaford, South Australia, 30km south of Adelaide. Five out of six tenancies have been preleased to national big box tenants including Supercheap Auto and National Tiles.