The construction debt market is heating up, though much of the activity is concentrated on a continued “flight to safety” by financiers.

The largest banks, such as Wells Fargo, PNC, JPMorgan Chase, US Bank, and Bank of America, have grown more active over the past year, as have many regional banks. And some life companies, like Prudential and Northwestern Mutual, are out in the market with a construction-to-perm program, looking to capture some long-term business.

“There’s a lot of competition right now—it didn’t take people long to put some of the noise behind them and get active again,” says Mike McAfee, Southwest division manager for San Francisco–based Wells Fargo. “When we talk to somebody about a project in one of our Texas markets, they usually get anywhere from three to five term-sheets.”

Developers are growing anxious to break ground and ride the current wave of occupancy and rent growth—there’s a palpable sense that if you don’t start your project now, you may have already missed the cycle. But the capital markets are serving as the brake pedals, as the lessons of the last downturn inform the investment decisions of the current upturn.

Holliday Fenoglio Fowler (HFF) is currently pricing about $1.7 billion in multifamily construction loans in its pipeline right now, yet much of the activity is focused on core markets.

“Everyone is taking a conservative approach—if you have a core deal, you’re going to have a flood of capital to it, and a dramatic falloff of interest if you go outside the strike zone and into a secondary market,” says Charles Halladay, a director in the Irvine, Calif., office of HFF. “We’ve got large pension fund advisers saying they would rather accept a 5.5 percent return on cost in L.A. or San Francisco than a 7.5 percent return on cost [in a secondary market].”

Construction loans are generally pricing around 200 basis points (bps) to 275 bps over the benchmark LIBOR, and for nonrecourse loans, the pricing goes up about 100 bps. The Federal Housing Administration’s (FHA's) Sec. 221(d)(4) loans are pricing with all-in rates in the low– to mid–4 percent range. And life companies are generally pricing in the mid–4 percent to 5 percent range for seven- to 15-year terms at 65 percent to 75 percent leverage.

With the recession not too far in the rearview mirror, borrower scrutiny remains at an all-time high. While many large institutional lenders like Wells Fargo have kept their credit standards consistent through the years, the recession served as a sort of proving ground.

“The client base was put through a pretty significant stress test,” says McAfee. “Our standards haven’t changed, but we have a better view now into who has the right model, who will survive, and how people will behave when they have some challenges to work through.”

Even the FHA—whose programs stayed the same for decades—has made some changes of late in the way it assesses borrowers.

“HUD became much more prescriptive as to who the principals were that they want you to look at, and the information they want you to collect,” says Ed Tellings, senior managing director and FHA chief underwriter for Columbus, Ohio–based Red Mortgage Capital. “In the old days, you wouldn’t be collecting REO schedules, and you are today. And HUD also began to shift their loan parameters for larger loans and establish some new liquidity requirements of those principals.”