Waiting for the Construction Finance Comeback

WASHINGTON, DC-We reported this morning that SunTrust Bank provided a $112 million loan to California State Teachers' Retirement System for Lincoln Place. JLL's Wes Boatright, who was on the team that brokered the loan, explained why banks like SunTrust were moving away from construction financing, or at least diversifying their lending operations. His points made complete sense but we wondered: will construction finance ever return to robust health? After all, other forms of commercial real estate financing have improved, in some markets quite dramatically.

The National Association of Realtors, for example, just reported that national banks, which retreated from commercial markets in the wake of the recession, have been finding conditions favorable and re-entering the market. During 2012, national banks made up 16% of the market, a 4% increase from 2011, according to data from Real Capital Analytics. "Regional banks also added to their portfolio of commercial real estate loans, spelling good news for properties and deals in secondary and tertiary markets," NAR said.

But construction financing specifically? NAR didn't delve into too much detail about that. However, in a report released the same day we heard about the SunTrust loan, Chandan Economics takes a look at where this segment of the lending market is trending. And the news is good.

It says that construction lending is at "an inflection point." Banks have cut their exposure to construction lending for the last 20 consecutive quarters, but now, the report predicts, "commitments to development projects will push net construction lending in 2013 higher for the first time in more than five years. Competition is pushing some banks to reopen the construction lending window sooner than they otherwise would have."

There is still risk with these loans. Even though the construction default rate is less than half its peak, construction loan default rates remain elevated, according to the report. "Dollar for dollar, losses on defaulted construction loans have exceeded losses for stabilized multifamily and commercial real estate."

Still, it concluded, construction lending for multifamily is slowing and banks are on the prowl for yield.

None of this is to say that construction lending is or has been entirely dormant. Certainly much depends on the market in question. Even in markets like Washington DC, where the speculative pipeline has been sparse, good deals have been able to secure lending. Earlier this year, to cite one example, a joint venture between MRP Realty and Rockpoint Group secured a $65 million non-recourse revolving construction loan for 7940 Jones Branch Dr., a 307,000-square-foot office development in Tysons Corner.