Sometimes You Have to Tighten Your Belt Before You Lose Your Pants!
2017 has shown tightening of lending standards as concerns over a wary global financial outlook continue to impact the US economy
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 over development 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. #that’sPROGRESS
CONNECT WITH PROGRESS
Kathy AndersonPresident & Founder
Kathy has more than 25 years of banking and finance lending experience. Her proficiency in originating and underwriting commercial loans with regional banks, insurance companies and investment banking firms has earned her recognition within the industry. Highly regarded by both her clients and lending sources, Kathy serves on the Board at Regal Bank, headquartered in Livingston, NJ, has been retained as an expert legal witness in commercial real estate litigation and is a featured speaker at industry conferences.
Brad DomenicoManaging Director
Brad’s background, experience and understanding of the full capital stack allows him to suggest the best financing structure which often includes senior debt, mezzanine and JV equity. Brad is well versed in credit underwriting and construction financing which has provided his clients maximize leveraged borrowing. Formerly with Neuberger Berman, Brad was an integral part of an investment team with a portfolio of $1.5 billion in assets. Brad is a graduate of Rider University and a Division I Athlete.
David CappelloVice President
David's extensive underwriting background has equipped him with the tools necessary to originate, underwrite and close loans on behalf of his clients. He specializes in multifamily, commercial and owner-occupied real estate transactions. In addition, David handles business loans, such as working capital lines of credit and term loans. Previously with a private investment bank, David underwrote and valued commercial real estate on a national scale for institutional investors, primarily non-traded REIT’s. He is a graduate of Saint Peters University where he graduated with a business management degree and played Division I Baseball.
Abe MannVice President
Abe's previous work includes underwriting and financial analysis for a large developer of retail and industrial properties throughout the United States, in addition to spearheading acquisitions of a prominent family office’s real estate division. His knowledge and experience in underwriting and acquisitions position him as an expert in commercial financing providing him the tools necessary to advise, originate and close transactions on behalf of high net worth clients. Abe is a graduate of Seton Hall University, where he graduated with an MBA in finance.