HSBC's Ron Prunesti: u201cFrom the construction side, Miami, Boston and New York are great.u201d

ORLANDO–Construction lending—a hit-or-miss proposition over the past several years—has rebounded to levels not seen in decades, said panelists here at the Mortgage Bankers Association‘s Commercial Real Estate Finance/Multifamily Housing Convention & Expo.

“I’ve been doing this for 25 years I haven’t seen this much development since I first got into the business,” said Jay Marshall, senior managing director with HFF.

Kent Daiber, senior banker with Starwood Property Trust, agreed. “A year ago we had no construction loans on the books,” he said. “By the end of last year we had a little over $1 billion and by the end of this quarter we’ll have another billion on the books.”

HSBC is another firm that likes construction lending, according to Ronald Prunesti, senior vice president. “We did about $5.5 billion last year. We like urban gateway centers and luxury condos—boutique properties with strong sponsors and stories to tell.”

Panelists agreed that they like apartment financing. But other property types get attention as well. John Waldeck, managing director with Pacific Life Insurance Co., said his firm has done some retail deals in addition to multifamily deals, “but we look at everything. We’re looking at credit-lease office buildings.”

“We would never do speculative office,” Daiber said. “We are doing some hotel and condo loans right now. We pretty much will do anything at the right basis; basis is the main driver for us. We’re open to everything.”

Of course, construction costs have increased as construction has grown—especially in major cities. “We’re definitely starting to see construction costs go up,” said Ted Starkey, senior vice president of commercial real estate with Wells Fargo. “The last couple of deals we’ve quoted on have gone out for final bid and come back with higher than expected construction costs. You need to be conscious of it. It definitely helps when you’ve got a borrower with a good track record of building over time.”

Daiber said construction costs have gone up considerably in the current building cycle. “But if a borrower comes to us and says ‘this is my real land cost, this is my hard cost to build,’ then it’s easy enough to do the math. If I like the math I like the deal, but it’s the borrower’s issue to solve to make sure that hard costs remains the hard costs.”

Prunesti said HSBC has largely focused on gateway cities. “From the construction side, Miami, Boston and New York are great,” he said. “We’re watching how things go there in the DC market; it saw a lot of ramp-up and a little stagnation last year. Miami has had very high-end luxury condo construction and San Francisco is still very good as well.”

Waldeck said Pacific Life also focuses on major markets. “We’re probably more selective now in Houston,” he said. “We’re trying to grow our exposure in Boston and in the New York area. We’re full up in Washington, DC and Seattle. For us it’s less about pure economics and more about exposure.”

“We really do our homework on new product coming on line and what new product will be coming on line when we will deliver,” said Anthony Soldi, vice president of alternative investments with Cornerstone Real Estate Advisers. “We prefer major metros. Infill locations aren’t looking as attractive anymore, so we often go out into first-tier suburbs. We like Denver for now.”

But some smaller markets have seen dramatically increased construction lending as well, Daiber said. “Last summer we chased hard [on a multifamily deal] in North Dakota because the metrics are like nothing you’ve ever seen before. People are living in cars and hotels” because of the state’s booming energy sector, he said. “You’re building to a cash-for-cash return of something like 25%.”

Reprinted with permission from MBA NewsLink and the Mortgage Bankers Association.