Spotlight on Construction Financing
This month’s Spotlight focuses on multifamily construction financing. The continued maturity of the commercial real estate construction cycle has led lenders to be more careful in their construction financing decisions. Lenders are increasingly focused on the quality of projects through evaluating sponsorship, location, project site, and other factors that have resulted in reduced leverage on large construction projects and more conservative underwriting. To this point, there has been less of an impact on smaller development projects.
Additionally, internal and external speculation on the impact of the next phases of Basel III requirements continue to keep lenders in check. Basel III’s regulatory framework is intended to reinforce bank capital requirements by increasing bank liquidity and decreasing bank leverage. The impact of these regulations can commonly be felt by developers with significant land equity who are now required to secure greater cash equity prior to construction. Although FHA and other government supported programs provide construction financing on multifamily assets, developers continue to have a preference towards balance sheet lending, if available.