Banks Slow Construction Lending

Shlomi Ronen is the managing principal and founder of Dekel Capital.

LOS ANGELES—If abundance of capital was the running commercial real estate theme for the last two years, limited capital may be the theme of 2016. According to Shlomi Ronen , managing principal and founder of Dekel Capital , banks are slowing construction lending this year in response to both market shifts and new regulations. This news comes after an announcement that CMBS lenders are also pulling back, with the expectation that they will do only half of last year’s volume. To find out why construction lending in also seeing a slow down, what developers can do to land financing and what this means for the market, we sat down with Ronen for an exclusive interview. GlobeSt.com: Why are banks beginning to pump the breaks on construction lending? Shlomi Ronen: The background is twofold. From an exit scenario, with CMBS lending slowing down, construction loans are staying on bankbooks longer than I think developers originally anticipated. That is taking up some capacity. Secondly, there is additional regulatory oversight and scrutiny of exposure to commercial real estate. Given the new regulations plus concern from the regulators coming in and reviewing the books are making banks take a pause. We aren’t seeing banks stop lending. We are seeing banks revaluating and being mindful. Some people think that we are getting long in the tooth in the real estate cycle, so credit is being more conservative in what they are willing to do in terms of approval. It is a confluence of events happening that are causing lenders to slow down. Some have said that they are full, and we are not lending for the time being, where others have some capacity but are reserving that for existing clientele. GlobeSt.com: So, is this more of a regulatory issue or is this more indicative of an economic shift? Ronen: I think it is a balance. It is really multiple events coming together and creating this. On the demand side, economic fundamentals have been good, and developers are still generally optimistic and trying to put deals together. I think the demand has stayed stable or has continued to grow over the years for construction lending. GlobeSt.com: For those lenders that do have some capacity, what types of deals are getting done? Ronen: We are seeing lenders asking what kind of relationship the borrower can bring to the bank. For example, do you have money sitting in another bank that you can now deposit with this bank to make it more of a two-way conversation. Banks are saying to the developer, are you substantial enough; do you have accounts somewhere else; do you have private wealth management with another institution that you can bring over to our bank? There has to be a bigger story that can be established with the institution to make it interesting for them. It is less product-type focused and more sponsor-focused. GlobeSt.com: Do you think that these increased regulations are a positive movement in the market following the last financial crisis, or do you think they are too restrictive? Ronen: My opinion is mixed. From a credit standpoint, we really have not seen banks getting aggressive in the way that they did before the downturn. In a way, I think that is because the last downturn is still so fresh in everyone’s mind, especially on the credit side. I think that the underwriting standards have pulled back and are pulling back even without the new regulatory oversight that is coming into play. They are taking time for all of the banks to really digest and implement all of this new regulation, even though some of these requirements came into play a year ago. People are going through a number of audits with the regulators, and it is taking a while for that to come into play. Even if those regulations weren’t in place, I think the banks themselves are pulling back on lending. On the positive side, it isn’t a bad thing for supply to slow down a little bit and let the market absorb, so that we don’t get too far ahead of ourselves as an industry. That is less of an issue in urban markets because you have other constraints on supply from a zoning and procedural standpoint and lack of available developable land, as we see in Los Angeles. It becomes more of an issue when you look at some of the secondary markets throughout the country and in other states. Texas, for example, comes to mind, where it is generally easy to develop. GlobeSt.com: For the last two years, the abundance of capital has been this overarching theme in the market. Do you think the theme this year is the limited access to capital? Ronen: I think that is going to be the theme for 2016. Good sponsors, good projects, good positioning will still get financed in 2016. It is going to take more work to get it done, but we are still getting stuff through the process. This is where our lender relationships really add a lot of value to our clients. Our clients are focused don being developers, and by working with us, we allow them to continue to focus on being real estate developers and we handle the financing and the lender relationships, and leverage those relationships for their benefit. If it is hard for us, it is even harder for them to get it done.