Public Private Partnerships…What are They Good For?

By Duke Dennis Over its 25-year operating history, Metropolitan Capital Advisors (MCA) has worked on numerous Public Private Partnership (PPP) transaction financings. PPPs have increasingly Read more

The Power of RECA (Real Estate Capital Alliance)

By: Scott Lynn and Andrew Hanzl Metropolitan Capital Advisors (“MCA”) is a member of the Real Estate Capital Alliance ("RECA"), a professional association of 18 Read more

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and Read more

Private Lenders: Filling the Void

by Roger Wyche There will be approximately $96 billion of CMBS loan expirations during 2017. CMBS lenders, therefore, have been counting on refinancing  Borrowers to Read more

A Bridge (Loan) to Everywhere

By Charley Babb Do you remember John McCain’s famous “Bridge to Nowhere” speech from 2005? As the Arizona Senator, and then later as the Republican Read more

Limited Service Hotels are, well…limited!

By Todd McNeill In recent times, the Limited Service Hotel sector’s reputation has steadily declined in the eyes of the finance industry. Once the darling Read more

TrumpCare and the Effect on Healthcare Commercial Real Estate Market

By Kevan McCormack Since Donald Trump has taken office as President of the United States, he has been very busy “making good” on his campaign Read more

What is the TRUMP Effect on Commercial Real Estate? 4 Key Points

— By Sunny Sajnani There is no doubt that Donald J. Trump in the White House is a game changer for the real estate industry. Read more

Whither CRE Construction Lending?

By: Justin Laub The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: Read more

The Good, the Bad, the Texas High-Speed Rail Line

By Duke Dennis Brady Redwine of Texas Central Partners (TCP) recently addressed a group of Texas A&M real estate professionals about the high-speed rail line Read more

UT Ranked #1 in Commercial Real Estate Yardage

-By Scott Lynn Every fall season, the University of Texas at Austin McCombs Real Estate Finance & Investment Center (REFIC) sponsors the National Real Estate Read more

2017: Not a Forecast (Just Some Thoughts to Ponder) for the CRE Market

By Brandon Wilhite Accurately forecasting the commercial real estate market’s performance is a nearly impossible task. There are far too many variables to assess and Read more

What is PACE Financing?

By Andrew Hanzl Global warming is now a widely accepted concern. As real estate professionals, what role can we play to ensure environmental sustainability? One Read more

Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently Read more

Risk Retention in CMBS Starting to “Sink” in

By Todd McNeill The early signals of Risk Retention are reverberating through the commercial real estate capital markets.  Several conduit shops, including MC Five Mile Read more

Risk Retention, Risky Business?

By Scott Lynn Basel III, HVCRE…all these new lending regulations that mean lenders are loaning me less and charging me more. Good grief!!! And now, Read more

It’s Senior Living Not Senior Dying

By Kevan McCormack Everything in life and real estate evolves.  Static retail shopping centers evolved into vibrant entertainment venues where a family could spend an Read more

Metropolitan Capital Advisors Arranges $5,512,000 Acquisition Loan For A 9.77- Acre Lot In Frisco

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a land acquisition loan for a 9.77-acre tract located in Frisco, Texas at the northeast corner of Read more

Metropolitan Capital Advisors Arranges A $4,700,000 Construction Loan For UC Health Emergency Room (Arvada)

Metropolitan Capital Advisors, Ltd. (“MCA”) has arranged a $4,700,000 construction loan for UC Health Emergency Room, located in Arvada, Colorado. The 0.69-acre site is Read more

Ground Leases-Friend or Foe?

On the surface, a ground lease seems like a simple concept: a landowner grants permission for a tenant to use their land in exchange Read more

What Do Baby Boomers and Millennials Have In Common & Why It's Important in Commercial Real Estate

By Charley Babb What do Baby Boomers and Millennials have in common? They both like to spend money. While they may spend their money on Read more

The Economic Benefits of Walkability

By: Brandon Wilhite Starting with the Federal-Aid Highway Act of 1956, the way cities were developed in the United States began changing. Although it was Read more

Brexit – Immediate Effect on Commercial Real Estate?

— By Sunny Sajnani In late June 2016, a historic referendum was voted on approving the British withdrawal from the European Union (EU).  The immediate Read more

Hotels: What Inning Are We In?

By: Justin Laub I recently returned from the Urban Land Institute’s national conference on hotels and resorts. The last time ULI held this event was Read more

Choppy CMBS Market Hoping For Resurgence

By Charley Babb CMBS issuance for the first quarter of 2016 was roughly half of the production for the same period in 2015. This has Read more

apartment construction

Banks Reign in Leverage in Effort to Curb Apartment Construction

By Charley Babb

My real estate career spans over three decades. Yet for the very first time, I have witnessed lenders exercise prudence and consequently slow down new construction supply. As the majority of local and national multifamily investors have realized, Denver has been one of the most robust and successful national markets to emerge after the Great Recession. It appears that the experience of the lending community in Denver is typical of most major markets across the United States.

Apartment absorption is keeping pace with new supply delivery.  The Denver vacancy rate of 5 percent suggests a quite stable market. This market could potentially accommodate the additional supply needed to meet the strong demand for multifamily units in the metropolitan area. Coupled with the expected growth in jobs to forty three thousand per year and population growth of fifty two thousand people per year indicates that demand will remain strong. Rents will continue to grow, albeit at a slower pace year after year. However concessions are still largely non-existent.

apartment-construction

Yet despite these encouraging trends, lenders are cautiously considering whether to fund new multifamily construction loans. While the door isn’t completely shut, many banks are reserving their balance sheet for their most reliable customers. Others have reduced loans to no more than 60-65 percent of the total approved cost of the project. In addition, non-recourse for any portion of the loan has become extremely rare.

Construction costs are on a upward climb but at a stable, steady pace. A relaxation in the commodities markets has further abetted the situation. However labor shortages remain and they are a challenging component of the equation.

Without a commensurate reduction in land and constructions costs, the obvious (and likely intended) outcome is that the lower leverage places exert pressure on and therefore constrain equity returns. Thus, the risk-reward dynamics will be put out of equilibrium, slowing down development. The slowing development will give the market a fighting chance to absorb the delivery of new units in the existing pipeline. This will preferably reduce the potential over supply. These so-called “soft landing” reaps benefits for both developers and lenders alike. However these have rarely happened in our economic history. Rather, developers continue to take on debt as long as banks are willing provide it and thus all contribute to their own loss.

So this time around, as we approach the likely end of this expansion cycle, businesses will exercise more prudence. But what does one do if their project really should be built due to the submarket metrics? We have been able to assist our clients by procuring a tranche of preferred equity to offset the reduction of loan proceeds from construction lenders in the overall capital stack.

For example, we recently closed a transaction where the total project cost was $40 million. The senior construction loan was limited to sixty five percent of the cost or $26 million. The sponsor was able to replace the $4 million reduction from their proforma debt level with preferred equity that carried a 12% coupon that accrues throughout the construction period and is repaid upon refinancing at stabilization. While the weighted cost of debt is somewhat higher, the resulting leverage can provide for an economically viable project and garner acceptable returns for the equity investors.

For more information on how Metropolitan Capital Advisors can assist you with capitalizing your next development project or property acquisition, contact Charley Babb in our Denver office at 303.647.1122 or e-mail Charley at cbabb@metcapital.com .

The Author, Charley Babb, is a Senior Director and Principal in the Denver office of Metropolitan Capital Advisors

Posted on by admin in Commercial Real Estate Finance, CRE Market Comments Off on Banks Reign in Leverage in Effort to Curb Apartment Construction