The improving construction debt market offers yet another indication of just how quickly the lending industry has moved from fear to exuberance.

A year ago, lenders were quoting spreads of at least 325 basis points (bps) over the benchmark LIBOR, and were often instituting interest rate floors. Today, spreads are around 210 bps and falling for top sponsors, and those floors have all but disappeared.

“It’s like night and day from even six months ago—we’re even starting to see some quotes under 200 bps,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential, which has about 5,000 units in its development pipeline. “We keep thinking that next year we’re not going to be talking about a 20 bps LIBOR, but here we are.”

Indeed, the continued ultra-low LIBOR has certainly helped floating rate construction loans to achieve this pricing. The one-month LIBOR was at 22 bps, and the three-month LIBOR was at 36 bps as of Sept. 20, and it hasn’t swayed much from those figures for the last 18 months.

But what’s really driving the lower pricing is increased competition, as more banks emerge from the recession with much healthier balance sheets and a renewed vigor.

FHA: Not the Only Game in Town
Although the Federal Housing Administration dominated the construction market over the last three years, that trend is ending.

Nearly half of multifamily developers plan to use traditional bank construction financing, and another 10 percent anticipate tapping life insurance companies over the next year, according to a survey of 138 multifamily senior-level finance professionals conducted by Apartment Finance Today in August. Only 24 percent of respondents anticipate using the FHA over the next year.

Some of today’s active construction lenders include traditional players like Wells Fargo, US Bank, PNC, JPMorgan Chase, and Capital One. And some insurance companies, including PacLife, Northwestern Mutual, Nationwide and Prudential are also offering construction-to-perm programs to long-term holders as a way to capture more permanent loan business.

FHA lenders also continue to win construction-to-perm deals through the Sec. 221(d)(4) program. The program offers nonrecourse 40-year debt that stretches up to 83.3 percent loan-to-cost (LTC), and quotes are currently around 5 percent. While those rates and terms are tough to beat, it could take a year to get that FHA loan closed, and that timeline is a nonstarter for many developers.

Pulling the Lever
A year ago, finding a construction loan that ventured beyond 60 percent LTC was a tough search. But leverage levels continue to inch up a little bit every month, and are now beyond 70 percent, with many industry watchers believing that 80 percent isn’t far behind.

But this offer of greater leverage is often turned down by the larger developers, which is one of the reasons many of them are still around. “We’re really trying to maintain discipline in terms of the leverage points,” Hiemenz says. “We’re just more comfortable playing the cycles with 60 percent debt, rather than 80 percent.”

And the way that larger developers approach LTC levels often varies depending on the market—and the associated projected yield on the development. For instance, Atlanta-based Wood Partners started 2,000 units last year, and has nearly doubled that figure in 2011. The company will be at 55 percent to 60 percent LTC for deals in high-barrier markets like Washington, D.C., where yields are lower. But that leverage level can ratchet up to 70 percent in states such as Georgia, Texas, and the Carolinas, where deals are higher yielding going in, and generally have lower construction budgets.