Construction loans will be much easier to obtain this year, and it is a great time to be a borrower because of ample liquidity in the market and index compression. There is an increase in viable lenders — including the banks — that are getting more aggressive as the year continues. Banks, life companies, private money and debt funds have started the year offering much more competitive pricing. The biggest change will be a reversion to better pricing and more capital being readily available for construction projects.
Anticipate that lenders will underwrite more aggressively than in the last few years, resulting in the availability of higher LTC/LTV loan options at reasonable rates. Exit cap rate assumptions remain elevated, as the future of cap rates is still uncertain. Additionally, utility and insurance expense increases remain prevalent, eating into much of the operational profit developers were projecting several years ago. This has essentially become the new normal, so lower rates are helping lenders size to higher loan amounts despite these persistent problems.
The market has pulled back from the 75% to 80% LTC that was common pre-2022. Count on 60% to 70% LTC as the standard range for most institutional quality construction deals, with leverage constrained by the lesser of LTC, LTV (on stabilized value) and debt yield tests.
Sponsors should expect to bring 25% to 35% equity after accounting for all sizing constraints. Rates will start at SOFR+ 350 basis points. All-in rates will be 6.5% to 12%+ depending on the lender type. A lot will depend on the borrowers’ risk profile and the type of terms they are willing to take. Borrowers seeking SOFR+ 280 to 350 basis point pricing will get 55% to 65% LTC. Those at SOFR+ 400 to 550 basis points can obtain up to 75% to 80% LTC.
Banks are back actively looking for deals. As long as the asset class, submarket and sponsor are strong/appealing enough, banks will compete. Wells Fargo, Bank OZK, Goldman Sachs, Chase, Truist Bank, City National Bank, Regions, M&T Bank, Western Alliance Bank, CIBC, BMO Harris, Cathay Bank, East West Bank, Axos Bank, Valley Bank, Santander, PNC Bank, United Bank, Comerica, First Bank, Veritex Bank, Texas State Bank, First Horizon Bank, Columbia Bank and Texas Capital Bank will strive to compete. Banks will hand out 65% LTC. Rates will start at SOFR+ mid-200 basis points. U.S. Bank, who has been on the sidelines, will re-enter the market this year and select life companies such as New York Life will also fund construction.
Debt fund and private money lenders such as Blackstone, Starwood, Madison Realty Capital, ORIX, KKR, Apollo, Ares, Brookfield, TPG Real Estate, Canyon Partners Real Estate, ACORE Capital, MF1 Capital, Arbor Realty Trust, Ladder Capital, Mesa West, Greystone, 3650 Capital, Thorofare Capital, Benefit Street Partners, Dwight Capital, Affinius Capital, Invictus Real Estate Partners, Genesis Capital, Pearlmark, Post Road Group, Freedom Financial Funds, Trez Capital, Parkview Financial, Obra Real Estate, Pinnacle Financial Partners, AVANA Capital, BridgeInvest, Artes Capital, Seattle Funding Group, INCA Capital and Forman Capital will be extremely active. LTC can reach 70%, maybe even higher for the right deals. Borrowers will see rates start at SOFR+ 400 to 500 basis points. Private lenders are pivoting specifically to mezz and construction financing as bridge/value-add competition intensifies. Many new bridge lenders entered the market recently, creating bidding wars for well-conceived projects with strong sponsors.
Underwriting has gotten materially more conservative and will stay that way throughout the year, though with some selective loosening. Lenders have moved from using a 6% exit rate to a 7% or higher exit rate when sizing loans, paired with a 1.25x DSC — up from 1.15x. This meaningfully reduces proceeds. A line-by-line construction budget review is now standard. GMP contracts are strongly preferred. Lenders are stress-testing cost overrun scenarios more aggressively. Lenders are underwriting to today’s rents rather than projecting two to three years of rent growth. Anticipate more emphasis on track record of completing comparable projects on time and on budget, not just total experience. Lenders want to see operational competence, not just a long resume. Full-term interest reserves are required. Lenders are sizing reserves based on current rates, not assuming rate declines.
