Cresset navigates tricky market for construction loans with ‘brochure-quality’ projects

The Chicago multifamily office believes that its low leverage and high-quality locations allow conservative lenders to get comfortable with the risks.

Cresset Partners is finding that insurance company and other more conservative lenders are willing to take development risk around its office and industrial projects.

The Chicago-based multifamily office typically works with large institutional partners on high-profile or well-located projects, using debt of about 50 to 60 percent loan-to-cost, Nick Parrish, partner and managing director, told Real Estate Capital USA. These metrics are part of the reason that more conservative lenders are willing to finance its activity.

“We joke that a lot of the things we’re doing are brochure-quality,” Parrish said. “A lot of our lenders tend to be insurance companies [that] like the pretty shiny building that they can put on their brochure.”

There is a definite premium emerging for high-quality assets, particularly in the office sector. Cresset has seen this with its development of Chicago Salesforce Tower, a planned 60-story tower at 333 West Wolf Point Plaza Drive that sits at the confluence of the city’s three rivers. The company is developing the property with Hines and the partners have already signed up Salesforce as the anchor tenant, with Kirkland & Ellis recently inking a lease.

Kirkland & Ellis is leaving its current building, which is just 12 years old, to take space in the tower. “They wanted collaborative space, they wanted better technology. They want people back in the office,” Parrish added.

Parrish noted that the potential upside for new development is tied to the quality of a property and its amenities. This is especially true for office, where workers need to be lured back to in-person work as the covid-19 pandemic eases.

“If you’re giving people a choice to come in the office or work from home and you’re in a downtown office building with no windows and no views, nobody is going to come in,” Parrish said. “[But if] you’ve got a great building [with] good views, a nice restaurant, cool technology [and is] convenient, people will come back to office.”

Family office investments

Parrish believes that family offices like Cresset will become larger players in the real estate development markets. This is due in part to the global wealth creation over the past 20 years and generation planning that is moving wealth from primary business to individuals and families.

“You know you’re seeing companies that have been around for 100 years getting liquidated, that capital is flowing to the family, that family that becomes a family office,” Parrish said.

Cresset’s real estate fund grew out of a single-family office and the company has tried to maintain the streamlined, less bureaucratic approach typically found in this type of investment management company. Until now, most institutional-quality real estate has been funded by large institutions, private equity firms and ultra-high-net-worth individuals, but there is demand from smaller family offices and even individual investors.

“If it’s good enough for Harvard, why is it not good enough for an average investor?” Parrish said.

As a family office, the firm can invest in developments that have a long lead time to producing cashflow. This profile can be a difficult fit for institutional investors that have strict income requirements.

“All the institutions want to own a building that has stabilized cashflow,” Parrish said. “[But] not many of them are willing to go in during development. There’s that period of time [when] you’re not earning cash and there’s development risk. And they’re just not equipped to develop. There’s a huge amount of capital that wants to buy it, but not a lot that wants to build. So if you could fill that gap, the dynamics are really, really great.”