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The construction pipeline slowdown of 2024 and 2025 is actually setting up well-capitalized developers for a favorable supply dynamic. Projects breaking ground now will deliver into markets with less competing new supply in 2027 and 2028. Sponsors that can tell a differentiated story in their market will be the ones attracting the most competitive terms. The return of money-center banks has greatly increased availability of capital — in some cases directly to sponsors with top relationships, in most others via providing attractive line financing to debt funds who are getting increasingly active in the space. Construction lending has been constrained not by availability of construction debt capital, but by equity availability and fundamentals/profitability of projects. As construction costs continue to come in slightly, and asset values continue to increase, construction will make incrementally more sense.
With equity availability being a limiting factor, expect the most scrutiny on projects where the equity portion of the capital stack feels uncertain. Many projects could not pencil in 2025 when construction lenders showed up and equity backed away at the finish line, so lenders are wary of exercising themselves on projects that will not break ground in the near term.
Multifamily construction projects, especially in the Southeast, self storage in growth markets and boutique office in urban areas with credit pre-leasing will see available capital. Lenders will also target build-to-rent deals because of strong demographic tailwinds with millennials and Gen Z priced out of homeownership. Lenders see this as a hybrid multifamily play with lower density risk. Keep an eye out for data centers to see more activity as most of the new construction pipeline is already fully pre-leased. Hyperscale data center construction financing is highly active. The challenge is grid capacity, zoning and community pushback, not capital availability. Lenders will also target senior housing and student housing at select universities because of demographic driven demand with supply constraints at the right locations. Mixed-use development with pre-leased office that can show 50%+ pre-leasing on the office component could start to see construction dollars return.
Class A luxury multifamily in some oversupplied Sun Belt markets such as Austin, Charlotte, N.C., Nashville, Tenn., Denver, Phoenix and Atlanta will see some caution. A wave of projects that started in 2023 and 2024 is delivering now, with peak supply hitting 2026 and 2027, therefore rents are flat or declining in these areas. Speculative office, especially Class B and C, will be tough as vacancy is near 19% nationally. Land pre-development will also be hard to finance. Hotel projects will also be difficult, but higher rate financing options are readily available for hotels.
Coastal markets including San Francisco, New York, Seattle, Orange County, Calif., and San Diego will see available construction capital. Multifamily vacancy is tight, replacement costs are high and new supply is minimal in these areas. Midwest cities such as Indianapolis, Columbus, Ohio, Chicago and Kansas City are attracting capital for their stability, lower construction costs and positive migration trends. Major MSAs in the Sun Belt, especially in South Florida, remain some of the most attractive markets, given the amount of ongoing investment in these areas coupled with their status as employment and education centers. However, construction lenders may shy away from some markets within the Sun Belt as rents have stagnated or declined. Lenders will be more cautious in Austin, Nashville, Atlanta and Charlotte. These areas have massive pipelines delivering into flat rent growth and lenders will want to see the absorption story play out before committing new construction dollars.
Construction lenders will target experienced, financially strong borrowers/developers. Net worth in excess of the loan amount and liquidity of 15% to 20% of the loan amount, not including equity in the deal, will be targeted. Post-equity injection liquidity of 5% to 10% of loan amount will be highly desired. Lenders target a demonstrated track record of completing comparable projects on time and on budget, ideally three or more similar projects. First-time developers will need to partner with experienced operators or bring significantly more equity. Construction lenders want meaningful equity contributions, around 25% to 35%, as they want to see real dollars at risk, not creative structures that minimize sponsor exposure.
