Lenders keeping the lid on loans for luxury real estate

Banks are more cautious amid construction boom, slowing economic growth
March 15, 2016 05:30PM

Renderings of One Park Grove in Coconut Grove (Credit: ArX Solutions)

From the New York website: The screws keep turning tighter around the lending market, as banks are exercising more caution when it comes to financing commercial real estate, especially luxury condominiums.

Amid global market turmoil, oil prices dropping and China’s slowdown, lenders are becoming choosier about which projects to finance, and it could lead to stalled projects in New York City and Miami at the upper end of the market.

Mack Real Estate Credit Strategies is becoming more conservative about which projects it finances, Mack CEO Peter Sotoloff told Bloomberg. The investment firm has provided Related Group with $275 million for condo projects in South Florida in recent months, including $145 million to a Terra-Related joint venture for Park Grove, a luxury condominium in Coconut Grove.

Loan costs for development firms are starting to climb, which will chip away at the value of properties and increase the likelihood of default.

“If the economy continues to grow ever so slowly, demand for commercial real estate will continue to grow ever so slowly,” Wells Fargo head of commercial real estate told Bloomberg. “To the extent that the economic climate goes in the wrong direction, it’s going to have an impact on demand for commercial real estate.”

Last year, 76 percent of construction was ground-up development; three years ago, more than half of all projects were alterations and renovations.

The issuance of new commercial mortgage-backed securities has also slowed, and Bank of America analysts chopped the forecast for 2016 to $55 million. CMBS lenders provided much of the money for the construction boom.

Bloomberg reported that at the end of last year banks were instituting tighter underwriting standards for all property financing, thus already contracting credit for commercial-property owners, according to Federal Reserve’s senior loan officer survey, released in January. [Bloomberg]Dusica Sue Malesevic