Multifamily developers are optimistic about bringing new product online, and rightfully so. The lack of new supply produced over the past three years, combined with a rising level of demand, presents a clear argument for new construction.

The problem has been that lenders haven’t exhibited the same level of enthusiasm. But since the beginning of the year, construction debt providers are increasingly catching the fever. Wells Fargo, JPMorgan Chase, PNC, and US Bank are among a growing list of banks with a healthy appetite for development loans, and that competitive pressure is driving some great borrowing opportunities.

“Pricing is coming down, leverage is getting more aggressive, and I feel like it’s changing everyday,” says Joe Griffith, who leads the commercial real estate business in the south and southeast for New York-based JPMorgan Chase.

Around this time last year, Chase originated a multifamily development loan at 50 percent leverage, priced nearly 400 basis points (bps) over LIBOR. That same transaction today would probably be around 70 percent leverage, priced at 225 to 250 bps over LIBOR, Griffith says.

“Last year, there wasn’t anybody else interested in that deal,” Griffith says. “But today there would be at least four or five banks making a bid.”

Shift in the Tides
Indeed, a year ago, many construction loans were pricing at more than 300 bps over LIBOR, and most lenders had instituted interest rate floors of 1 percent or 2 percent. “Today, those floors seem to have all but gone away,” says Timothy Jordan, senior managing director of HFF’s Dallas office. “And we’re seeing about 275 bps over, on average.”

Wells Fargo has been perhaps the most prolific construction lender so far this year. The company is doubling down on its appetite for construction debt in the early phases of this recovery. “It’s gotten competitive really quickly,” says Wendel Pardue, senior vice president of middle market real estate for San Francisco-based Wells Fargo. “Wells definitely believes in the cyclical concept of real estate, and the guys running the bank are all real estate people. So, we’re real busy right now,”

The company is typically going up to 70 percent to 72 percent loan-to-cost, though it has recently stretched as high as 78 percent, Pardue says.

And it’s not just banks—life insurance companies are entering the fray in increasing numbers as well. PacLife, Northwestern Mutual, Nationwide, and Prudential are also out on the market offering construction capital, usually targeting long-term holders as a way to capture the permanent loan business.

“The life companies are looking for ways to get multifamily business, to beat the agencies,” Jordan says. “They tend to do those projects because it’s product they want to hold.”

As the private sector steps up, the Federal Housing Administration (FHA) is trying to calm things down. The FHA is still offering great rates on its construction-to-perm program—Sec. 221(d)(4) deals were quoting all-in rates of 5.25 percent in April. And the agency will most likely have the biggest construction debt volume level in its history in Fiscal Year 2011.

But try getting a deal done these days. According to FHA lenders, some deals have been lingering, unopened, at regional offices for five or six months. In fact, the agency recently began refunding applications that it has yet to process as more developers lose their patience.

“The mandate came down to purge things rather than keep the pipeline artificially high,” says Phil Melton, senior vice president at Charlotte, N.C.-based Grandbridge Real Estate Capital. “They have deals that are just sitting on the shelves.”

And the FHA is considering changing the non-recourse status of its 221(d)(4) program, especially for larger loans. “I think we’re going to start seeing changes to recourse, or increases to operating deficit reserves or working capital or debt service reserves,” Melton says. “So there may still be non-recourse, but there may be additional cash requirements.”

The FHA is also mulling some changes in leverage levels and debt service coverage on 221(d)(4) loans.