ATLANTA—The market for construction loans fluctuates more than almost any other commercial real estate lending market. However, the underlying construction development industry has traditionally been far slower to react to both internal and external market forces. This difference creates increased risk and necessitates additional oversight and problem solving from prudent and agile lenders or their servicers. Here's what lenders need to know to successfully navigate the market and protect their investments:
Capital Market Changes. Construction loans can be a great source of quick growth and a return booster for lenders in times of general economic expansion, but they are typically the first to cease production in times of distress or uncertainty. This, combined with the highly technical and specialized nature of the investments, makes lenders reluctant to staff up and maintain full-time internal departments over the long term.
For example, the first lenders to supply capital to satisfy the pent up demand from developers after the most recent recession were the traditional lenders (national and regional banks and institutional lenders). All but one or a few of these lenders generally ran out of powder over the past three to five years, from a desire not to immediately overcommit their balance sheet to a single type of investment again or from actual High-Volatility Commercial Real Estate (HVCRE) regulation limits.
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