Report: Lenders tightening purse strings on multifamily construction loans
- Multifamily construction lenders haven't cut off funding, but National Real Estate Investor reported that they are becoming much more cautious when evaluating potential deals. Part of the reason for this wariness is due to concerns over the many new apartments now under construction, new bank regulations and new cautions from bank regulators.
- According to Dave Borsos — vice president of capital markets for the National Multifamily Housing Council — the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation sent a joint letter to lenders suggesting they use caution in making construction loans, even in the face of a seemingly strong market.
- In addition, new regulations regarding how much risk commercial banks can maintain on their balance sheets have come into effect — part of the Dodd-Frank Financial Reform and Consumer Financial Protection Act in the U.S. and "Basel III" banking standards, according to NREI. Banks are also now required to hold enough capital in reserve to cover potential losses on investments like commercial real estate loans.
"Banks are beginning to feel the squeeze," Robert Hodge, senior director with real estate services firm Marcus & Millichap Capital Corp., told NREI. "But compared to a couple years ago there are still a lot of options."
Although Borsos said he hasn't seen a reduction in available financing, NREI noted that some small banks have stopped making construction loans for seniors housing.
However, for the most part, banks have not noticeably restricted loans, according to NREI. "Banks still offer loans that cover up to 80% of the cost of construction," which is more than the 70% loan to value loans from a few years ago, Borsos said. However, those levels are still lower than the pre-housing crash 90% LTV loans.
Banks might also be hesitant to loan to multifamily developers because of concerns that they will build too many apartments, resulting in increased vacancies — even in an environment of strong demand. Residential experts have predicted a slowdown in the multifamily sector for months, as many expect this year will be the first since the housing crash that single-family starts will outpace multifamily.
And rising rents continue to be a concern for multifamily developers, as some people are choosing to buy to save money. Earlier this week, Redfin reported that one in four homebuyers surveyed on its site said high rent is the primary catalyst in their decision to buy a home — up from one in five in November and one in eight last August.