GlobeSt.com: You recently funded constructions loans for projects totaling $100 million. How has the process of securing construction loans changed this year compared to last year?

Adeli: The process of securing construction financing has become more challenging this year when compared to the last one. Most lenders require borrowers to have substantial experience in building projects of the same size and type and to have a very large balance sheet. Lenders have been more conservative regarding underwriting rental rates, stabilized cap rates, and debt service coverage ratio (DSCR) stress rates. However, I have been successful in closing construction financing for borrowers that may not hit all the qualification points by working with lenders that have more lenient underwriting criteria with platforms specifically targeted for construction debt. As a result of the tightening construction lending market, some lenders are able to offer construction financing at higher rates and costs and borrowers have accepted this higher cost of capital in exchange to begin on their projects immediately.

GlobeSt.com: Are lenders focused on certain product types or in specific L.A. submarkets?

Adeli: Lenders have been very focused on multifamily projects and some preleased commercial developments in core submarkets. There has been a lot of activity in Hollywood, Downtown, Koreatown, and Culver City, however I have been able to place construction debt in other submarkets with strong demand and healthy market fundamentals. Lenders tend to focus on high-growth areas in general. For example, I just closed a $40 million construction loan for a 266 multifamily project in Portland, OR, which is considered one of fastest-growing cities in the nation.

GlobeSt.com: Have the nominal increases in interest rates had an impact on developers financing needs?

Adeli: Generally, we have not seen a big impact. Any rise in interest rates for construction loans has had a fractional effect on borrower costs when compared with permanent financing since borrowers are generally only charged on what they draw towards the project. Even larger increases in borrowing costs have not had a big impact since there is still significant profit to be made by building the project.

GlobeSt.com: What is your outlook for the construction lending market for the second half of the year?

Adeli: Trends in construction financing should continue throughout the second half of the year with continued tightening from many of the conventional lenders. Borrowers that have the relationship and hit all the qualification points will still be able to take advantage of the very low cost of capital for their constructions projects. However, borrowers that may not be the “perfect” candidate for a bank will continue to seek alternative funding solutions. As a result, more projects may be financed by lenders offering higher costs of capital. Generally, the outlook for the construction lending market is positive with a healthy deployment of capital for projects in high-growth submarkets.

Ultra low cap rates are creating an increased demand for construction financing. Cap rate compression has made it difficult for investors to get their required yields, and as a result, many are turning to new construction projects. The heightened demand has allowed lenders to be more selective when looking at construction financing deals. This year, Shahin Adeli, VP at CBRE, and his team secured $100 million in construction financing for clients, for industrial, retail and office properties. To find out more about activity in the construction lending market and how the process is evolving as the result of increased competition, we sat down with Adeli for an exclusive interview.

GlobeSt.com: Is construction financing beginning to pick back up?

Shahin Adeli: Yes, there has been strong demand for construction financing over the past two to three years, however lenders have become more selective, specifically over the past year. As investors often cannot attain targeted returns given the relatively low cap rate environment for new purchase opportunities, building projects have been an alternative. This large increase in demand for construction financing allows lenders to be more selective in regards to which projects they choose to finance.

GlobeSt.com: You recently funded constructions loans for projects totaling $100 million. How has the process of securing construction loans changed this year compared to last year?

Adeli: The process of securing construction financing has become more challenging this year when compared to the last one. Most lenders require borrowers to have substantial experience in building projects of the same size and type and to have a very large balance sheet. Lenders have been more conservative regarding underwriting rental rates, stabilized cap rates, and debt service coverage ratio (DSCR) stress rates. However, I have been successful in closing construction financing for borrowers that may not hit all the qualification points by working with lenders that have more lenient underwriting criteria with platforms specifically targeted for construction debt. As a result of the tightening construction lending market, some lenders are able to offer construction financing at higher rates and costs and borrowers have accepted this higher cost of capital in exchange to begin on their projects immediately.

GlobeSt.com: Are lenders focused on certain product types or in specific L.A. submarkets?

Adeli: Lenders have been very focused on multifamily projects and some preleased commercial developments in core submarkets. There has been a lot of activity in Hollywood, Downtown, Koreatown, and Culver City, however I have been able to place construction debt in other submarkets with strong demand and healthy market fundamentals. Lenders tend to focus on high-growth areas in general. For example, I just closed a $40 million construction loan for a 266 multifamily project in Portland, OR, which is considered one of fastest-growing cities in the nation.

GlobeSt.com: Have the nominal increases in interest rates had an impact on developers financing needs?

Adeli: Generally, we have not seen a big impact. Any rise in interest rates for construction loans has had a fractional effect on borrower costs when compared with permanent financing since borrowers are generally only charged on what they draw towards the project. Even larger increases in borrowing costs have not had a big impact since there is still significant profit to be made by building the project.

GlobeSt.com: What is your outlook for the construction lending market for the second half of the year?

Adeli: Trends in construction financing should continue throughout the second half of the year with continued tightening from many of the conventional lenders. Borrowers that have the relationship and hit all the qualification points will still be able to take advantage of the very low cost of capital for their constructions projects. However, borrowers that may not be the “perfect” candidate for a bank will continue to seek alternative funding solutions. As a result, more projects may be financed by lenders offering higher costs of capital. Generally, the outlook for the construction lending market is positive with a healthy deployment of capital for projects in high-growth submarkets.