The real estate industry was recently hit with a crisis as Silicon Valley Bank, Signature Bank, and First Republic Bank went bankrupt. The multifamily sector, however, does not seem to be affected by this crisis as much as other commercial asset classes because these banks only originated ten to twenty percent of first mortgage loans to multifamily borrowers over the last decade, according to research firm MSCI.
However, with tighter lending standards at regional banks after the recent bank failures, finances for developers became even more difficult to secure than it was before. Developers already had a challenging time obtaining construction loans before the bankruptcies, and now the situation is even worse as banks withdrew from the market, making it hard for developers to get construction loans. According to Ric Campo, CEO at Houston-based REIT Camden, there could be a 60% reduction in starts due to these banking issues.
Difficulties with Construction Loans
Some developers, such as Trammell Crow Residential and Alliant Strategic Development, are having trouble getting construction loans. Eddie Lorin, CEO of Alliant Strategic Development, has difficulty in getting financing for a project in Las Vegas. Campo says that regional banks are no longer funding some of the deals they thought they would, and this is affecting construction companies’ finances.
2022 Challenges Continue
The financial market tries to secure construction loans, but one of the problems it faces is the Federal Reserve’s resolution to increase interest rates in 2021. Higher interest rates, tighter debt service coverage, and the slow sales market are all factors contributing to the difficulty of securing construction loans.
Not Enough to Fill the Gap
Forman Capital, based in South Florida, is one of the private lenders who are trying to fill the gap from small and regional banks pulling from construction lending. They acquired a $24.1 million fully-performing loan this year. They are also pursuing similar opportunities to purchase and finance existing notes and provide short- and medium-term construction financing. However, their volume of loans is incomparable to what traditional lenders are offering.
FAQ
What is Construction Financing?
Construction financing refers to any funds a business, usually a real estate developer, lends to build a structure on a property.
Why is it Challenging to get Construction Loans?
Notable reasons for difficulty in obtaining construction loans include limited funds available due to the increased interest, reduced proceeds, and high debt service coverage.
What is the Effect of the Banking Failures?
The banking failures caused tighter lending standards, making it challenging for developers to secure financing. As a result of the turn of events, the number of properties that can be constructed is drastically reduced.
