Thinking Outside The Bank

June 29, 2015

As more markets show signs of stable economic growth, more construction crews and cranes are on the job. However, a boom in development isn’t necessarily translating to a boom in bank-funded projects. In fact, just as the construction figures are rising, regulatory restrictions are causing traditional lenders to step back and make room for alternative financing options.

According to Dodge Data & Analytics, a leading provider of data serving the North American construction industry, new construction starts through April totaled $208.2 billion for the year. This number represents a 24 percent improvement from 2014 figures, and yet many banks are backing away from commercial lending as a result of new regulations.

Capital requirements for high volatility commercial real estate (HVCRE) loans – including construction loans – used to dictate that banks hold 8 percent. Now, that requirement has risen by 50 percent, and many banks aren’t willing to hold 12 percent capital against HVCRE loans. Requirements like these clearly incentivize traditional lenders to stay away from commercial lending.

This trend is making room for non-bank financial institutions, such as mortgage REITs, private equity funds and foreign capital, to become more active in construction lending, particularly for higher leverage deals. Even life insurance companies are expanding construction lending pipelines.

One such example is Prudential Mortgage Capital Company, which has seen a rise in construction lending through FHA, Fannie Mae and Freddie Mac programs. According to an interview with National Real Estate Investor, Prudential’s FHA program alone has experienced a 20 percent loan volume jump for construction or refinancing loans in the past year.

With greater diversity in the lending market, the best borrowers and properties are still able to be selective with financing, and competition among lenders may help to keep costs down. Intelica CRE can help commercial real estate developers find the right lending option and make the most of an expanding environment. Contact us today to learn more.