High Scrutiny Pushes Lenders to Change Their Market Perspective

Commercial Construction Loan

 

Dubai and China will soon have some of the tallest skyscrapers in the world.

 

The US isn’t behind either.

 

Standing at 1,428-foot, New York’s111 West 57th Street will be among the tallest buildings in the US. Similarly, Seattle and Chicago will boast mega-skyscrapers 4/C and Wolf Point South Tower, respectively.

 

These facts suggest that the building boom will only get stronger with time. Or is it so?

 

Revised regulations

 

Recently, increased scrutiny and revised regulations related to loans are transforming how construction deals are done.

 

The newly introduced rules need the lenders to rethink their ways of dealing with high volatility commercial real estate or HVCRE. These new rules have altered not only financial benchmarks but also a lender’s modus operandi regarding:

 

  • How the money will be lent for future acquisitions?
  • How commercial buildings will be developed?

 

For example, as part of the new rules, the lenders will have to meet the risk weight requirement of a whopping150 percent and the equity requirement of15 percent.

 

Besides, a federal analysis discovered that financial institutions have a growing tendency toward making underwriting policy exceptions and toward reviewing inconsistently. Resultantly, US’s leading banking regulators are advising lenders to expect an additional degree of scrutiny.

 

Owning to the revised regulations, the regulators will particularly give their attention to those banks engaged in expanding commercial realty lending activities. Besides, other financial institutions operating big-ticket construction projects can expect to draw attention from regulators.

 

Why these regulations

 

These new, stringent regulations come in the wake of the shift taking place in today’s geopolitical landscape. For example, the US–China trade war, the volatile nature of oil prices, and the like are changing the geopolitical climate of the world at large.

 

To top it all off, banks have become more conservative with their lending model. Why? According to real estate experts, it is because of the perceived late point happening in the existing real estate cycle. Owing to this factor, most lenders are forced to change their focus or reduce their activity centered on HVCRE loans.

 

The aftermath

 

The excessive scrutiny and regulations have forced lenders to focus more on term loans instead of construction lending.

 

The existing market conditions have even allowed some of the lenders to fill the yawning gap by populating their balance sheet by writing high-value commercial construction loans.

 

That way, these alternative financial institutions are receiving premium pricing on every closed deal. These alternative set of lenders generally deal in private equity, debt funds, and hedge funds.

 

The silver lining

 

Although rigid, these regulations are broad enough to be subject to different interpretations by different lending institutions.

 

That means developers have to find how different financial institutions are working with regulators to disburse funds on completing construction projects.

 

The newly introduced structure triggers HVCRE in different ways. One solid negative impact of the revised regulations can be on pricing. However, if a developer is in complete control of its leverage, things will not be too difficult to manage.

 

How this regulatory shift will affect the big-building business in the long run remains to be seen, though.

 

In a way, these regulations have brought with them a new level of caution for lenders. Just last year these lenders were giving away money for building big real estate projects. But, now, they have become conservative and cautious. Today, a lender is more concerned about allocating funds keeping in mind the risk-return basis; now, a lender views resources as a scarce quantity.

 

Real estate pundits, too, believe that the developers who are optimistic about the slow but steady growth of US employment will even believe that the interest will stay low. That particular mindset will even want the developers to believe that the real estate will continue to drive growth in the coming time.

 

For deriving more information about different varieties of real estate financing options available to developers at such trying times, browse through Park West Capital’s offerings. In case you do not know where to start, contact one of our representatives who will happy to help.