More developers across the Midwest are seeking construction loans today. And when they hunt for these loans? More often they are turning to alternative lenders.
Just ask Kevin Farrell, senior director of originations, and Mike Belliissimo, chief operating officer, at national lender Acres Capital. The two lending pros have seen a big increase in requests for commercial construction loans across the Midwest.
There are plenty of reasons for this: The multifamily market, of course, continues to boom, and developers across the region are seeking construction loans to build apartment projects in the center of Midwest cities. At the same time, banks and more conventional lenders are struggling with new federal regulations, making it more difficult for them to originate construction loans.
It’s all added up to more business for alternative lenders such as Acres Capital, a private investment firm that provides debt capital to the commercial real estate industry.
“More of your conventional lenders, your banks, are facing significant changes in their regulatory environment,” Farrell said. “Because of this, they’re not as interested in originating construction loans as they might have been in the past. The alternative lending market is seeing more construction-lending opportunities in the market today. I do attribute a lot of this to the new regulations that banks are facing.”
When developers do approach lenders such as Acres Capital for loan dollars, what do they have to bring to the table to earn an approval? Farrell said that his company looks at several factors. One of the keys, though, is the experience of the sponsor.
“We look at their familiarity with the product type and the market they are hoping to build in,” Farrell said. “We look at their experience. Have they been successful with this product type in the past?”
But that’s just the start of what Acres looks at. The company also considers the particular market in which a developer wants to build. Is the market strong? Is it overbuilt with the type of property that the developer wants to build?
Then there’s the story that surrounds the project. Farrell says that Acres wants to hear from borrowers about why a particular building is needed in a specific market. To finalize their decision, Acres officials will consider market studies and feasibility analyses.
“It is an ever-changing market that we are facing here, in all of the markets in which we lend,” Farrell said. “We need to stay on top of how these markets are evolving.”
Bellissimo said that there is no rubber-stamp process at Acres. The company looks at every funding request as a unique one, he said.
“Our lending programs are always customized for each transaction,” Bellissimo said. “There are many moving parts to each deal. For instance, right now when we look at New York City for condominiums, that market is so overheated. We probably, no matter who the borrower was, would pass on a condo transaction in New York City right now. It is on us to understand and know all the different markets. We have to weigh all the variables carefully.”
Developers today are coming to Acres more frequently to find funding for hotel construction. This, Bellissimo says, can be a challenging commercial sector for a lender. When the economy goes into a slowdown, hotels are often hit first, faced with rising vacancies and falling revenues. It can be a bit nerve-wracking, then, for lenders to loan their dollars to support hotel projects, Bellissimo said.
Acres is seeing, too, plenty of construction-loan requests for multifamily rental properties and condominiums, Bellissimo said. Another particularly strong market? Many developers are ready to jump into the assisted-living seniors housing market, a market that Bellissimo said is strong in all the regions in which Acres does business.
Certain Midwest markets are particularly hot today when it comes to requests for construction loans. Farrell works out of Acres’ Cleveland office, and he says that this particular market is especially strong today. Construction lending is on the rise in Chicago and St. Louis, too, Farrell said.
Many Midwest markets are seeing an uptick in adaptive re-use projects, in which developers turn an existing structure, say an outdated office building, and turn it into something that will perform better in today’s market, such as a multifamily property.
Bellissimo said that these types of project have become especially popular in Detroit, St. Louis and Chicago.
“I call these wedding cakes,” Bellissimo said. “You have a retail use on the ground level, or maybe a hotel use on the ground level. Then you have an apartment or condo use on top of that. It is interesting to do those types of transactions. They can get complicated. They will often have historical tax credits involved. Other grants might be involved.”
Bellissimo said that he expects to see even more financing requests for adaptive re-uses in the near future.
“A lot of Midwest municipalities are dealing with very old buildings that have an important place on that city’s skyline but that are no longer a good fit for today’s end users,” he said. “They are properties that everyone knows and remembers from their glory years. But today, they don’t have a modern, functional use without a complete gut rehab to make those economics work.”