Tight Construction Financing Balances Market

LOS ANGELES—Lenders are tightening underwriting standards for construction loans, according to Dekel Capital co-founder and managing principal Shlomi Ronen. The market saw tightening of construction lending and that trend is continuing into 2017. While this is true for all construction loans, it is especially true for multifamily and is part of a larger trend of banks looking to diversify into other product types, especially as we get later in the cycle.

“We are seeing tightening on the construction lending side,” Ronen tells GlobeSt.com. “That has continued from last year, and a significant part of that is that the a lot of the banks have a significant concentration in multifamily, and the regulators have put them on notice that they are concerned about the multifamily market and the amount of concentration that the banks have to multifamily developers. We have seen some tightening from the banks in terms of their underwriting.”

Loan proceeds for construction loans are down to 60% to 65% from last year's average of 65% to 70%. Banks are also changing underwriting criteria and increasing stress test levels on both debt yield requirements and debt service coverage ratios.

While this may slow multifamily starts nationwide as a result, it also is a sign of a healthy market. “This may prevent a correction from happening. Before we have a significant correction, the attitude of the market is usually, this is going to go on forever. That is far from the case today,” Ronen says. “There is quite a bit of restraint on the part of lenders that is going to create a slowdown in deliveries in the coming years, because a project that was penciling at 75% leverage is looking a lot less attractive at 65% leverage.”

Despite the pull back in construction lending, Ronen continues to have a bullish outlook on the market. “We continue to see economic growth,” he adds. “I think will still have some runway.”

LOS ANGELES—Lenders are tightening underwriting standards for construction loans, according to Dekel Capital co-founder and managing principal Shlomi Ronen. The market saw tightening of construction lending and that trend is continuing into 2017. While this is true for all construction loans, it is especially true for multifamily and is part of a larger trend of banks looking to diversify into other product types, especially as we get later in the cycle.

“We are seeing tightening on the construction lending side,” Ronen tells GlobeSt.com. “That has continued from last year, and a significant part of that is that the a lot of the banks have a significant concentration in multifamily, and the regulators have put them on notice that they are concerned about the multifamily market and the amount of concentration that the banks have to multifamily developers. We have seen some tightening from the banks in terms of their underwriting.”

Loan proceeds for construction loans are down to 60% to 65% from last year's average of 65% to 70%. Banks are also changing underwriting criteria and increasing stress test levels on both debt yield requirements and debt service coverage ratios.

While this may slow multifamily starts nationwide as a result, it also is a sign of a healthy market. “This may prevent a correction from happening. Before we have a significant correction, the attitude of the market is usually, this is going to go on forever. That is far from the case today,” Ronen says. “There is quite a bit of restraint on the part of lenders that is going to create a slowdown in deliveries in the coming years, because a project that was penciling at 75% leverage is looking a lot less attractive at 65% leverage.”

Despite the pull back in construction lending, Ronen continues to have a bullish outlook on the market. “We continue to see economic growth,” he adds. “I think will still have some runway.”