Michael Gigliotti knows a good construction deal when he sees one. And he's seeing more and more of them these days.
Competition among banks for construction loans is heating up for the strongest deals, says Gigliotti, a director of debt placement for commercial real estate brokerage HFF.
“A traditional bank lender can get you 65 up to 75 percent depending on the deal in the market,” he says.
In late March, Gigliotti reported seeing prices at 200 bps over LIBOR for relationship deals (that is, for long-time clients), a rate that a life company wouldn’t be able to match.
Steve Orchard, a senior vice president at Houston-based Transwestern, says brokers are watching as banks are trending up on their loan-to-cost ratios.
“Where it was 65 percent in the end of 2012,” Orchard says, “in the beginning of 2013, I think we’ve received quotes up to 80 percent loan-to-cost for bank financing in multifamily.”
Wells Fargo, one of the largest commercial real estate lenders, is looking to grow, says Ted Starkey, a senior vice president in commercial real estate.
“We’re looking to expand that base, but I preface it to say we’re highly focused on well capitalized projects and qualified sponsored developers with good track records,” he says.
Banks are still the largest player in the construction loan space and will continue to hedge their bets with developers who have already earned their stripes.
“It’d be a case-by-case basis, but generally speaking our focus is on experienced developers who have experience in the multifamily product type and sector,” he says. “Just too many things can go wrong with construction.”
The average loan size for Wells Fargo is currently hovering between $15 million and $20 million for projects of about 200 units, he says.
And although banks can be selective, they expect to see a little more pressure to be competitive this year because of outside lenders trying to strike a good deal. The biggest competition banks face are from other banks, who are looking for long-term business, the ability to put permanent debt on a stabilized deal..
“We like to keep loans on the books that are performing well,” Starkey says. “Any time we can have a construction loan that can stick around on a good performing project, that’s a bonus for us.”
M&T Bank plans to take a slice of the construction deal pie by also catering to past clients. Peter D’Arcy, regional president, M&T Bank, feels that standing relationships sway banks to consider a deal more carefully.They’re looking for deals with people they know, particularly owners who have a good, stabilized cash-flow portfolio, as opposed to merchant builders, D’Arcy says.
“Problems happen because construction has risk in it,” D’Arcy says. “We are looking for someone who can absorb the risk.”
And the relationship works both ways. Developers should be more apt to look into working with a bank based on their historical reputations. “We’re known as one of the most consistent types of capital,” D’Arcy says. “People want to deal with us in good times so they will have a seeded relationship when things get rocky.”
D’Arcy feels the best deals are most available in the biggest cities such as New York and Washington, D.C. “The number of banks that have returned to the market to them has increased dramatically,” he says.
Experts don’t predict a construction boom this year, but rather a steady pace on par with last year. Volume may even fall as construction costs continue to rise, D’Arcy says.
“If you were out there buying land and locking up construction costs today versus two years ago or three years ago, there’s a lot more vetted risk…because of land prices and the volume of other product being built and because of construction costs,” he says.
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.