Published on Monday, May 3, 2021

Still, one observer doesn’t see flashing red lights.


While banks can get very aggressive with their underwriting for stabilized apartment assets, they’re typically more cautious with new construction. Since there are any number of risks that could delay or even halt development, including securing entitlements, labor or materials, they understandably require more from borrowers on ground-up development.

But in this market, where multiple players are offering debt for apartment projects, lenders have to get a little more competitive.

“Typically banks’ construction lending is usually at 60%, 65% or maybe 70% , says Steve Rosenberg, CEO of Greystone. “However, a borrower just came to us looking for 90% construction financing. They got it. It wasn’t from us, but they got it. We’ve almost never seen that before.”

Looking at that one anecdote, it might appear that developers need to put less skin in the game to build new apartment projects. But that doesn’t mean lenders are necessarily making irrational decisions.

Despite an increase in new groups coming in and providing debt, Rosenberg doesn’t see any flashing red lights in multifamily lending—in construction or other forms of debt.

“I am not seeing anyone doing anything where I shake my head and say, ‘Well, this is really idiotic,” Rosenberg says. “I’m not seeing that, but you can see where lenders are pushing the envelope. Do I see a yellow light there? I don’t know. It doesn’t feel like it. I’m not seeing unsafe lending. I’m not seeing anything like we saw in the subprime market.”

Still, there are some concerns about development costs that could threaten projects.

“They are putting some of the properties that were going to be constructed on the sidelines,” Rosenberg says. “So no question about it. Costs are going up and the equity may not be able to achieve the yields that it needs to in order to move ahead.”

The issue may be even more critical on affordable housing projects where margins are already tight. “We even see it on the affordable side,” Rosenberg says. “Those deals are pretty tight, and with the increase in construction costs, we definitely see some projects that don’t work now.”

Rosenberg is excited about some construction financing products out there, particularly loans from the Commercial Property Assessed Clean Energy (C-PACE) program. These loans help commercial real estate owners make energy efficient, water conservation and renewable energy improvements to their buildings. Greystone is launching a C-PACE division for these loans.

“I’m very excited about that because obviously, we want to promote energy efficiency and green investments,” Rosenberg says. “I like the idea of the C-PACE where a property owner can assess themselves a tax and essentially finance it because it has a priority lien in front of the first mortgage. You can raise capital at a relatively low cost of funds. And C-PACE can be used for potentially 20% to 30% of the capital stack on new construction.”