Look for lenders to become more competitive on recourse and proceeds this year.  The money center banks, including Wells Fargo, BofA, JP Morgan Chase and Citigroup will look at construction loans with little to no recourse.  Many of the larger regional banks will follow suit in the second half of the year.  It’s very likely that Union Bank, US Bank, BBVA Compass, Bank of the West and BB&T will be among the regional banks lowering or eliminating recourse for multifamily construction deals. 

Lenders will favor core markets and stronger institutional developers for non-recourse loans during the next few months.  As the year progresses, expect to see lenders break on recourse for a wider variety of borrowers.  Leverage will range from 65% to 80%, depending on strength of buyer and the location.  

Due to the lack of forward commitments for takeout financing, many lenders will be careful when sizing loans.  While the government tries to keep rates low, there will be no certainty.  Many lenders will scrutinize projected cash flow and will insist that rents be based off current rates not including inflation.  Deals for projects in coastal markets will be carefully sized to be sure the loan will not be too large for takeout financing in two to four years.  Many lenders will look hard at the appraised NOI using a projected 6% or 6.5% interest rate with a 1.15x DSC.  This will allow lenders to be certain the loan will qualify for a refi. 

Many developers will choose to use HUD loans, which go up to 83.3% leverage with a 1.20x DSC.Â
These loans may take longer, but will be worth the wait.  The HUD program will provide the construction loan, as well as a 40-year, fixed-rate takeout loan.  Expect to see HUD favor projects with some aspect of affordability.  HUD will be careful not to cannibalize loans it has already made, so don’t expect to see numerous HUD loans in one market. 

More projects will break ground this year and cap rates for existing product will be roughly 4% to 5% for Class A product.  Timing begins to favor developers who will be able to build projects at 7% to 7.5% cap rates.  Lenders will keep a watchful eye on cap rates.  With caps so low, there is concern that a multifamily bubble could occur.  Bankers will be cautious when underwriting with this on their minds.