Courtesy Pixabay/pony96
Courtesy Pixabay/pony96

While banks are still the largest financier and loan originator in the apartment construction market, they're unwilling to lend as much now as they have been in the past compared with the value of the property, according to National Real Estate Investor’s Bendix Anderson.

Banks that once made loans that covered up to 75% of the cost of a development may now only cover 65%, and interest rates have risen to 275 to 325 basis points (bps) over LIBOR, up from the low 200 bps point range earlier in the recovery.

New regulations, such as Bassel II and Dodd-Frank, account for some of this hesitation to lend, Anderson notes, given that banks are now required to keep cash in reserve to offset their investments.

Lenders of all types are also growing more cautious as more new apartments open and vacancy rates begin to climb in many markets. Many lenders already have construction loans that are not performing as well as expected.

“Absorption is more challenging,” says Mitchell Kiffe, senior managing director with CBRE Capital Markets. “Pro forma estimates are maybe not being achieved. Lenders are looking carefully at all their new loan applications.”

Alternative funding sources include life company lenders, private equity funds, and FHA programs.

Read more >