Look Who’s Financing Construction

GlobeSt.com has been exploring in depth some of the insights into capital markets by MSCI, including the current complexity of CRE debt financing, the state of CRE debt, and the latest on CRE lending sources.

The overall report also had information on an important aspect of development, construction financing. The pace in the first half of 2023 dropped by 38% from the pace in the same period of 2022. “Lending activity hit a high point early in 2022 with still-low interest rates and a hunger for yield driving investors to move forward on development projects,” MSCI wrote.

Then again, 2021 and 2022 were extraordinarily active, setting a high baseline. Any drop could be a revision toward something more historically normal. Maybe the pace in the first half of the year wasn’t that bad.

“Bank lenders of all scale were still the most important source of construction financing in the first half of 2023, accounting for 60% of all financing activity,” MSCI wrote. ”The regional/local banks captured the largest share of the market and were behind 31% of all new lending.”

But then, there was a slowdown between first and second quarters, with banks taking a 32% share in Q1 but slowing to 29% in Q2.

International banks showed the opposite pattern. They were behind 10% of construction loans, averaging out in the first half, but were 12% in the second quarter. “These large loans were mostly financing apartment development, but one CBD office development in Atlanta was financed as well,” they wrote. “Overall, these lenders were behind 13% more loans in the first half of 2023 than in the same period a year earlier.”

There were some other interesting patterns. One was the pull-back of national banks, which were 33% of loans on average, from 2015 to 2019. But then in 2022 they were 22%, and that dropped to 20% in the first half of 2023.

In 2023, multifamily was the most evenly split across different lender types — 14% inventor-driven, 11% government agency, under 10% insurance, 12% international bank, 24% national banks, and 31% local or regional banks.

Office financing was largely split into three parts: 43% investor-driven, 11% insurance, and 35% local and regional banks. Hotels were 48% investor-driven and 41% regional and local banks. Industrial was 65% investor-driven and 22% local and regional banks, with the balance split between insurance and national banks. Student housing was purely 51% investor-led and 49% national banks. But senior housing was almost all local and regional bank, 74%, and 14% insurance.