Multifamily industry developers nationwide are starting to experience a more cautious approach to construction lending offered by both national and regional lenders. This is resulting in higher rates, lower proceeds, more demanding completion guarantees and, in some instances, an outright turndown of a loan request. Banks are citing the need to be more cautious because some areas of the country have experienced slowdowns in the lease up of newly delivered apartments as building is slowly catching up with demand. While not widespread across all markets, it is a growing concern among lenders as the long term run up in the apartment market reaches its seventh year.
A more common reason for this change cited by lenders is the increasingly complex regulatory environment as certain banking rules, such as High Volatility Commercial Real Estate loans, are in place or about to kick-in, that relate to Dodd-Frank and Basel III. Additionally, a cautionary letter issued by banking regulators in December 2015 is influencing lenders’ appetites for increasing exposure to multifamily construction loans.
The ongoing changes in the regulatory regime is increasing the cost of capital for all banks both large and small. As a result, banks are raising rates to cover the cost of capital, lowering leverage and taking a hard look at profitability across all their business lines.
Looking forward, as the current book of construction loans reach maturity, and markets show they can absorb the demand, more lending capacity should be created. Given the long lead time on construction and delivery this will likely mean that the slow-down in lending may continue for a while. On the other hand, the litany of regulatory changes will likely only get more severe, which may result in continuing limitations for construction lending.
The bottom-line is that the multifamily market faces headwinds in accessing construction capital from their traditional sources in order to help meet the continuing demand for apartments.
NMHC/NAA have been working with regulators to ensure that the impact of banking rules are fair, reasonable and minimize undue burden on the industry.