Forming Foundations

FARMINGTON — Smaller projects, local financing and solid business plans will form the foundations for the next round of development in Northwest Arkansas, according to developers and financiers.

Ernie Penn is seeing more interest in development loans as a senior vice president at Arvest Bank in Farmington, and he’s seeing an increase in plats, plans and permits coming across his other desk as mayor there.

Jeff Collins, who tracked real estate data before jumping into the development game himself just before the crash, went back to analysis. His numbers say the residential market in particular is rebounding.

Gary Head said he and other bankers are cutting deals with developers to get foreclosed properties built out, sold and off bank books.

“There are a lot fewer developers out there than there used to be,” Head said. “We’re seeing things correct themselves out, and all Northwest Arkansas really needs is for the rest of the world to go about their business and give us time to heal ourselves. We’ll be OK here as long as the national economy doesn’t really go in the tank.”

Housing starts are picking up throughout the area, and several factors may be in play, Penn said.

“Land is cheaper, value for the dollar is increasing for both builders and buyers, and some people see real estate as a good investment as the stock market and interest rates aren’t giving great returns,” he said. “The big gains are in the starter range of $125,000 or under, and in the custom-built, $250,000 to $295,000 segment. The middle of the market isn’t moving as much yet.”

Multifamily housing, such as apartment complexes and townhomes, is also starting to pop up throughout the region, said Kathy Deck, an economics professor at the University of Arkansas.

“It’s riskier than single-family from a financing standpoint, but the need in the area is strong, and we’re seeing the market move to address that need,” she said.

Residential appears to be leading the charge in new development, while large, high-dollar commercial projects will probably be the last to recover, Deck said.

At the height of the housing boom in 2005 and 2006, loans could be had without build costs, rental or sale numbers or other fundamental information, she said.

“We needed to crash,” Deck said. “It was bad behavior. You didn’t have to make smart decisions to succeed.”

Since the crash, lending standards have changed considerably, Head said.

“It’s a tighter environment than anything I’ve seen in 30 years of banking,” he said. “Given what happened to some of the banks who got really overextended, that’s the way it’s going to be for a while.”

Local banks are more likely to approve local projects, Head said.

“We can see things, for good or for bad, about local projects that just wouldn’t translate to a Bank of America or the other big national banks,” he said. “I think we’re going to see a lot more local financing, both here and in every market.”

Northwest Arkansas’ economy didn’t fall as far as other areas of the country, and so far seems to be recovering at a better pace, making the area attractive compared to others, Collins said.

“The drivers, the things that were promoting growth before the recession, they’re still here. There’s a lot more opportunity here, whether for development, jobs or other things, than in most of the country,” Collins said. “The national situation is always a factor, particularly on the commercial side, but we’re in pretty good shape considering what’s happened in the last few years.”

Commercial development is struggling more than residential development.

“We’re doing better absorbing the excess in housing than in commercial, so there’s still a lot of space out there available,” Collins said. “From an investment standpoint, commercial is a risky proposition right now, and I don’t think we’ll see much movement there for a long time.”

Investors looking to buy commercial space can pick up good deals, if they can get financing, Deck said.

“There have been some fire-sale prices out there,” she said. “If they can sit on it for now, rent out what they can and be patient, they’ll do well long term.”

Big-ticket commercial loans will be a challenge, Penn said.

“There are still projects out there with merit, but high-end, high-profile speculative commercial developments will be few and far between for quite a while,” he said.

Smaller commercial projects do appear to be picking up, Penn said, as a new convenience store and a restaurant are already under way in Farmington.

“From a community development perspective, I’m glad to see that kind of thing,” he said. “As we bottomed out, people wondered if we’d ever see the hammers swinging again on business development.”

Almost a dozen prominent Northwest Arkansas developers contacted for this story either did not return repeated messages, or declined comment about their experiences.

Collins, after several projects and partnerships fell apart, declared bankruptcy and got out of development.

Bill Underwood, a Fayetteville jeweler who partnered with several others to build a high-rise condominium next to his Dickson Street jewelry store, sold his real estate interest to other partners and has returned to precious gems.

“We had expected it to be very profitable. It didn’t work out that way, but it’s not the end of the world. We didn’t get hurt too bad,” Underwood said. “When it comes down to it, we’re jewelers, not Realtors, and we didn’t have the time to put into that project. We do very much enjoy the apartment we have there, though.”

Head and Penn are both looking for smart ways to unload real estate so they can go back to just being bankers.

“No bank wants to own real estate. It’s not what we do,” Head said. “We’d love to get it cleared off our books.”

Underwood keeps an eye on what’s happening in Northwest Arkansas. A long-time pilot, he flies over the region at least once a week.

“Looking down from above, there’s more going on than people might think,” he said. “It’s a completely different perspective on things.”