Yet it isn't sagging demand that's driving developers to hold orcancel projects. Just like in the stalled sales market, the lack offinancing is one of the main factors in keeping starts down. Andgiven market conditions, new starts should continue to dwindle,says Sharon Dworkin Bell, senior staff vice president formultifamily at the National Association of Home Builders. "We'rehearing anecdotally from our members that the lack of financing ishaving a substantial impact on starts, but it really hasn't beganto show up in a meaningful way in the national numbers," shestates. "The impact will probably be more noticeable in thethird-quarter figures because developers are canceling or notmoving forward with planned projects due to the financingsituation."

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Commercial banks, which have typically provided debt forconstruction, have tightened their lending criteria significantly,and that's severely restricted cash flow. "There are still dealsgetting financed, it's just more difficult," says Bell. "In thepast, developers would solicit maybe a handful of banks to getfinancing. Now they have to go out to 10 times as many institutionsto get money."

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In addition to the slower pace of new starts, the type ofproduct that is being built has changed. Bell observes thatdevelopers, due to the higher cost of concrete and steel, areincreasingly opting to construct smaller, low to mid-risecommunities, rather than high-rise properties.

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The credit crunch isn't only impacting market-rate communities;projects utilizing low-income housing tax credits are also having amore difficult time securing the equity needed to support thosedeals. Equity for those projects comes from the proceeds from thesale of tax credits primarily to financial services companies."Those firms buy the credits because it's an investment in theindustry and it helps to offset their profit for the year," saysBell. "But a lot of the financial services companies are eithergoing out of business or not showing the same profits as they were,so their appetite for tax credits is waning. With fewer companiesbuying tax credits, it translates into less equity available fordeals. That means a great many LIHTC properties will not get builtthis year."

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Developers are trying to find other companies to buy the taxcredits and invest equity, but it's a long learning curve, saysBell. "We've also been in touch with the new regulator of FannieMae and Freddie Mac, which were the two major buyers of taxcredits, to let them know how important it is that they continue tohold onto the credits they already own in order to not furtherdepress the market," she says.

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The financial rescue package, she adds, will be "instrumental inhelping to break the logjam and get capital flowing again" for bothmarket-rate and affordable residences. "That should release a lotof pressure on the debt side of the equation, help stabilize thefinancial services companies and banks, and increase their appetitefor buying tax credits."

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