Apartment developers in gateway markets will be able to fetch 75% to 80% leverage on new construction loans by year’s end. Infill deals in New York, San Francisco, Washington, D.C., and Boston will receive the highest LTC. Look for vacant land originally approved for condo development in major markets to be recycled and reentered into the markets as apartment sites. Other coastal cities will likely see leverage in the 70% range. National lenders, including HSBC, Wells Fargo, KeyBank, BofA and JP Morgan Chase shop around for the best multifamily development deals.
Regional banks such as Capital One, Citizens, Sovereign Bank, BBVA Compass and Amegy Bank also get active with construction lending. Borrowers in the Midwest and South should expect LTC to increase from the low 60% range up to 70% in the next couple months. Watch for most construction loan terms to be for two to three years with one- to two-year extensions. Location within a market will be more important than the market itself. Infill projects will see the most lender attention. The economics of the deal will be important when underwriting. Lenders will initially look at projected rents to make sure they support the project cost.
Look for a few life companies to ink construction loans in the next year, including Pacific Life and Northwestern. Principal used to do these loans but has pulled out of this sector. There were many more active in the sector when the market was hot. Many LCs backed off construction loans. These loans take large staffs to manage.
Borrowers need to come up with about 25% of the project’s cost. Equity financing will be preferred when the borrower has an institutional investment partner. Many institutional investors with pension fund clients look to deploy capital in core commercial real estate with an emphasis on apartments. Borrowers without partners need to possess a stellar track record, proven experience in similar markets and high net worth. Watch for money to be available for experienced local and regional developers that have built up portfolios and want to build their next project. Relationship lending will help get these deals done. Bankers will ink deals with new clients if there is a chance to build a relationship.
Borrowers without partners who are not well capitalized will have the toughest time inking financing for development. These players will have the best odds if they can find institutional equity to fill the void.