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A New Light Starting to Shine on Construction Loans and Lenders

A New Light Starting to Shine on Construction Loans and Lenders

During the recession, construction in New York State slowed down tremendously and there was no known end in sight. However, finally, signs of light are starting to shine through on the construction loan market and are breathing new life into the industry.

Not only has lending for multifamily rental buildings, with its steady income flow, been popular for the last 12 to 18 months, but a growing number of lenders are intrigued by and are looking at condominium projects, hotel developments and certain office and retail buildings. Until recently condo projects were seen by lenders as risky bets because of consumers' difficulty in securing mortgages and an excess of unsold inventory in some areas of the city.

As the real estate market continues its recovery, land prices have been rising, enabling borrowers to pay back their construction loans or refinance. That has pushed down the default rate and spurred more lenders to issue new loans. The default rate on construction loans is the lowest it has been since the end of 2008, according to Chandan Economics, a research firm.

With default rates declining and the market improving, competition among lenders to make construction loans is intensifying. In New York City, more projects are being financed, and for the strongest borrowers, the equity requirements and other terms are softening. Helping to drive the trend is the limited amount of construction in recent years, which has led lenders to believe there is sufficient demand for more building.

Many lenders have been actively participating in the rejuvenated construction loan sector. However, just as the progress of the market is slow paced, so is the lending. Many construction lenders are lending to people who have "done it before," so to speak, in an attempt to ease back into the process. Lending to novices is slowly coming back to life but not at the pace of experienced developers.

With experienced developers, more lenders are looking to issue construction loans and the types of properties they are willing to finance have expanded. Hotel development, for example, is typically considered a riskier property type but is nonetheless being financed at a fast clip.

As competition continues to increase, it is likely that some lenders will begin to become less and less conservative and bring the industry back to what it was prior to the 2008 financial crisis and recession. 

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