Lenders’ Interest in Construction Builds With Market Confidence

As confidence returns to the housing market, financial institutions are treading back into the waters of lending on construction and development projects in metros like Miami, San Francisco, Chicago and Manhattan. The loans are primarily for multifamily and residential projects by some of the biggest builders in the country; and the capital is largely flowing from regional banks, not their larger counterparts. Consider a few headline-making loans just from this month:

  • Sabal Financial Group closed four construction loans amounting to $50 million for new home construction projects in northern California.
  • HFF arranged construction financing for a mixed use project in the Fenway area of Boston.
  • NorthMarq Chicago arranged construction loan financing of $20 million for the adaptive re-use of a former hospital property into luxury apartments.
  •  GeorgeSmith arranged a $12 million non-recourse construction loan for a condo project in LA.
  • NorthMarq San Francisco arranged a construction loan with a regional bank for the development of a residential community in San Mateo.
  • Major homebuilder Lennar received an influx of capital for a major development on a blighted 750-acre former naval shipyard.

The trend is consistent with the results from EDR Insight’s 1Q13 Quarterly Benchmarking Survey of Financial Institutions. For the 7th straight quarter, developers sat at the top of the list of sectors driving demand for Phase I environmental site assessments (followed by new originations from regional/community banks and large national/international institutions). Builders are looking to lock in properties and capital to break ground on new projects as property fundamentals continue to improve and construction costs are still relatively low.

Construction Lending Drivers

Although the total amount of construction and development loans on banks’ books at the end of 1Q13 was relatively flat compared to 4Q12, a significant 42% of the nation’s banks reported increases in these types of loans, according to CoStar analysis of FDIC numbers. This second, more promising statistic suggests that more lenders are moving into C&D lending, a trend that is likely to continue in coming quarters. Part of what is driving interest is a surge in new home project finance deals, which is moving builders off the sidelines, eager to get the capital needed to get projects off the ground and market-ready while barometers are still strong. Also contributing to a more favorable climate of construction lending are the steady increases in appraisal rates for property collateral.
This does not mean that construction loans are easy to come by; they’re not. In the case of NorthMarq’s Chicago loan, the borrower reportedly fought long and hard to get the support, approval and due diligence required. Phase II ESA recommendations are not uncommon to address any potential risks identified during the Phase I investigation.

Lender-Construction---TableThe LA project was largely hailed as a “turning point” for the metro’s multifamily market. There is renewed confidence in the housing market and a shift away from greenfields and toward urban infill development. The strongest levels of new construction in the United States are primarily driven by residential and multifamily projects led by the New York City MSA as well as Dallas, Houston, DC and Atlanta (see accompanying table).

Lennar, Tishman Speyer Properties, KB Homes and other builders are extremely bullish about new construction in the coming years. Just at the San Francisco shipyard site, construction of as many as 10,500 residences, commercial buildings, job-training centers, parks, trails and open space is envisioned over two decades. Loans for residential and multifamily construction projects are particularly strong in metros like San Francisco that have seen strong appreciation in home prices of late, as well as those like Dallas, Seattle and Houston that are seeing robust growth in employment related to the technology, health care and hospitality sectors. These higher-growth metros are also extremely attractive to foreign investors shopping around for properties.

Large Regional Banks Active

The majority of recent activity was dominated by larger regional banks, while smaller regional and community banks seek to reduce their concentrations of commercial real estate loans. The fastest-growing lenders in this space of late according to CoStar’s analysis are:

  • PNC Bank;
  • Manufacturers and Traders Trust;
  • Trustmark;
  • Comerica.

Others looking to grow in this space in coming quarters include First Financial Bancorp and Zions Bancorp.


Expect to see continued strength in construction and development lending, barring any upset in the housing and commercial real estate recovery. Much of the interest is likely to stay focused on residential/multifamily and healthcare projects in areas that have the strong underlying fundamentals to support project interest. The intense emphasis by regulators on thoughtful risk management and underwriting will ensure that any lenders looking to ramp up construction lending will likely be disciplined and selective as they keep one eye on risk concentration limits.


NOTE TO READERS: EDR Insight is grateful to Mark Heschmeyer at CoStar for his input on this brief.