Forman Capital

May 10, 2023

The Fed’s interest rate hikes began squeezing the lending environment last year. But Ric Campo, CEO at REIT Camden, said he expects to see a 60% reduction in starts because of the banking crisis. Published May 8, 2023 The bank failures have made it even harder for developers to get construction loans. -slav- via Getty Images First published on On the surface, the recent collapses of Signature, First Republic and Silicon Valley Bank shouldn’t harm the multifamily sector as much as other commercial real estate asset classes. Recent data from research firm MSCI shows that local and regional banks hold a relatively small percentage of apartment loans. Over the past decade, they have made between 10% and 20% of first mortgage originations to multifamily borrowers. In comparison, the office, retail, industrial and hotel sectors all received a higher percentage of their loans from these lenders. However, with tighter lending standards at local and regional banks after the recent collapses, one type of financing is being hit especially hard. Developers had a difficult time getting construction loans before the bank failures, but the situation has not improved. “Construction debt is hard to get,” said Matt Enzler, senior managing director for the North Texas division of Dallas-based developer Trammell Crow Residential, according to the National Multifamily Housing Council. Those problems promise to curtail the number of apartments being built. Ric Campo, CEO at Houston-based REIT Camden, expects to see a 60% reduction in starts because of the banking crisis. “I just think that developers are crafty enough to keep their legacy deals in place, and that's why you haven't seen a dramatic falloff in starts,” Campo said. “But it's starting to happen, especially since the banking crisis has created, in essence, almost another 25 basis-point or 50 basis-point rate increase as a result of those banks just pulling out of the market altogether.” Making a bad situation worse For apartment developers, difficulty getting construction loans began long before the collapse of Signature and SVB in March. But the bank failures haven’t helped the situation. “Debt availability has changed even more materially in the last couple of weeks because of [the collapses],” Enzler said. Regulator scrutiny of smaller lenders has made it harder for borrowers to get financing, according to a number of developers. Eddie Lorin, CEO of Calabasas, California-based affordable builder Alliant Strategic Development, is facing difficulty getting financing for a project in Las Vegas . Ric Campo “One of our lenders told me that there’s no way they were going to fund a $100 million construction loan this year after what just happened,” Lorin said. “[We thought] they were going to be the land lender and the natural takeout as our construction lender.” On Camden’s first-quarter earnings call last month, Campo said he was recently contacted by a developer in Florida who put together a fully funded deal with roughly 40% equity invested. After the SVB collapse, the lender pulled out of the deal and the developer lost a significant amount of money in the process. “When I talk to my friends at regional banks, I mean, they're not funding deals that they thought they would fund in the future,” Campo said. 2022 challenges continue Like many problems in the financial market today, multifamily borrowers can trace their issues securing construction loans to the Federal Reserve’s decision to increase interest rates last year. “The banking debt availability [problems] for construction loans really started to tighten as early as last summer,” Enzler said. Eddie Lorin Higher interest rates and tighter debt service coverage started to limit proceeds last year, Enzler said. On top of that, banks lent a lot of money for apartment development in 2020, 2021 and 2022 with the expectation that the developers would sell projects. But when the sales market slowed, builders suddenly had to hold their developments and banks were stuck with the loans. “The regional banks and big money-center banks have way more construction loans [on their books] than they expected,” Enzler said. “They expected a runoff and that runoff was not happening. Therefore, they can't make any more construction loans or they are going to be very selective and only do certain loans with their best clients.” Jay Parsons, senior vice president and chief economist at RealPage, said the lending slowdown has “more to do with allocation caps, given the large volume already under way, than it does bank liquidity,” according to a recent Linkedin post. Right now, only established or bigger developers may be able to get financing. “But it's certainly not like it was the last few years before things started slowing last year,” Enzler said. Not enough to fill the gap As small and regional banks pull back from construction lending, some private lenders are trying to fill the gap. Forman Capital, a direct lender based in South Florida, recently acquired a $24.1 million fully performing loan secured by a 7.3-acre development site in Miami to be developed by Neology Life Development Group, led by CEO Lissette Calderon. Brett Forman After the original lender pulled out of the deal, one of the development partners financed the project before selling that loan to Forman. The company is pursuing similar opportunities to purchase and finance existing notes and provide short- and medium-term construction financing. “We're seeing a tremendous need for construction lending and we actively are pursuing construction lending,” said Brett Forman, owner of Forman Capital. While these other sources of capital may stimulate some new development, the volume of loans that they can originate pales in comparison to what traditional lenders were providing. And ultimately, that means fewer new apartments will open up down the road. “Apartment developers are reporting much more difficulty getting construction loans this year, and that's a big reason why new starts will drop off materially from 2022 levels,” Parsons said.