Signs are beginning to show that the market for construction loans has a pulse again, the New York Times reported. An increasing amount of lenders are eyeing new condominium, office, hotel and retail developments.
“There is plenty of debt capital available and as we bid on transactions there is a lot more competition than there was 12 months ago, and certainly more than 24 hours ago,” Bill Cotter, the northeast division manager at Wells Fargo Commercial Real Estate, told the Times.
Land prices are on the upswing, meaning that borrowers are paying back their loans and lenders are now offering up new loans, the Times said. Commitments for construction loans are also increasing, pointing to a broader scope of properties that lenders want to fund and, for strong borrowers in New York City, eased lending terms.
Generally, these loans are seen as risky by lenders — if a project falls through, the lender is left with a partially finished building without a revenue stream — which is why interest rates are higher.
“Interest rates are generally so low that lenders are focused on how they can improve yields, and construction lending usually has higher yields, so it is a way to improve their return on funds deployed,” Andrew Lance, partner at law firm Gibson, Dunn & Crutcher, told the Times.
Still, underwriting standards are still strict, including completion guarantees and maximum price contracts — an agreement stipulating construction will not surpass a given maximum, for example. [NYT] –Zachary Kussin