Sometimes you have to either tighten your belt or you’ll lose your pants!
2017 has shown tightening of lending standards as concerns over a wary global financial outlook continue to impact the US economy. In the Mid-Atlantic Region, banks are scaling back on high leverage construction loans, particularly in the multifamily sector, as the last three quarters have seen vacancy rates climb despite record leasing numbers throughout metro NYC, NJ and Philadelphia. With 70,000 units in metro NYC and 10,000 units in Metro Philadelphia coming to market, there is concern rental rates may drop as concessions increase to make Class A luxury properties more attractive. To date these concessions have kept both NYC, the Gold Coast and Philly metro pricing stable with NYC metro posting a .5% increase and Philly metro posting near flat in comparative rental rates. Concerned they’ll “lose their pants” if CRE valuations decrease as a result of expanding inventory, banks are tightening their belts until vacancy and rental rates show stronger signs of growth through the next year. A survey by the Federal Reserve of senior loan officers released May 7th, suggested 32.4% of banks sighted having tightened standards for CRE lending as a whole while 36.1% said they have tightened considerably on multifamily lending particularly in urban markets. Those willing to lend are more selective - financing projects with supportable projections or unique marketable amenities. While this tightening could be perceived as a negative, it’s actually the market working as it should, preventing overdevelopment while maintaining prices from dropping drastically. While this doesn’t make it easier for you to finance your next development, there are alternatives to consider. The best bet for construction/development financing through 2018 is to look beyond banks to less traditional sources. Certain owners/developers of CRE looking to reduce their own exposure are putting more and more money into financing projects. For the second year in a row, we see a shift to these private lenders in the marketplace providing senior and mezzanine financing often accompanied by higher rates with a greater return on investment – known as peer to peer lending. These lenders are looking to diversify their investments by selling assets and reallocating capital into bridge and construction loans at yields of 6% to 10%. This creates a lender/borrower relationship wherein the lender can determine their risk based on their own industry insight while being uniquely equipped to take over the project should a borrower default. Bank relationships will continue to be vital while keeping abreast of the changing regulations and addressing tenant demands will be critical in making developments more financially attractive. At Progress Capital Advisors, we pride ourselves on our ability to identify and summarize our client’s objectives, ultimately matching them with the appropriate type of loan/capital source to finance their commercial assets. Our network of lenders and expertise in the industry can greatly improve your ability to get funding via banks with favorable terms. Over the past two years, Progress has also increased its direct lending platform offering a) CRE owners an alternative to traditional bank financing and b) high net worth individuals an ability to receive above market returns secured by real estate. Contact us if you have any questions about your financing needs or how you can invest in our direct lending platform. #thatsPROGRESS Kathy Anderson is president and founder of Progress Capital Advisors.