Accessing construction financing in a tumultuous market

Finding attractive financing for commercial real estate is no walk in the park, as borrowers realized all too well in 2022. Particularly for those seeking construction loans, it was more like a hike up a mountain.

Here's a look at the challenging terrain, along with some tips on how to overcome the challenges successfully in 2023.

A challenging time for construction lending

After a strong first half of 2022, rising interest and cap rates began to affect deal volume. Total CRE loan originations decreased 13 percent in the third quarter of 2022 compared to a year earlier, according to the Mortgage Bankers Association’s Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations.

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Construction lending has been particularly challenging. With many of the larger banks (the traditional lenders on construction projects) pulling back, even sponsors with very strong banking relationships found themselves with limited options.

While frustrating for borrowers, the need to replace traditional sources of construction debt has also created opportunities. At Walker & Dunlop, we’ve seen our advisory work on construction lending increase 40 percent from 2021 for the third quarter of 2022, and demand for construction financing activity has continued into the fourth quarter. As a result, new relationships have been formed between sponsors and a larger group of lenders.

Exploring additional construction financing sources

Walker & Dunlop’s success can be attributed to our extensive network for accessing capital and deep relationships with more than 350 capital providers across the country. These include banks, insurance companies, debt funds, as well as financing programs through the U.S. Department of Housing and Urban Development (HUD).

As an advisor and intermediary, we cast a wide net to various capital providers, which allows us to obtain the best possible terms for our clients and facilitate new relationships.

HUD construction financing benefits

In addition to accessing third-party capital, Walker & Dunlop is the #1 lender in HUD new construction nationwide. In its mission to meet the need for quality affordable rental homes, the U.S. Department of Housing and Urban Development provides stable financing during countercyclical times. This includes the HUD 221(d)(4) multifamily construction loan.

“The FHA product offers terms that are hard to beat in the industry: high-leverage, low-cost, non-recourse, and a fixed rate,” said Dana Wade, Chief Production Officer, FHA Finance.

Breakdown of benefits: HUD 221(d)(4)

• Higher leverage: Up to 90% loan-to-cost
• Lower debt service coverage: As low as 1.11x
• Stability and cash flow: 40-year loan term, fixed-rate, non-recourse loan, interest-only during the construction period
• Construction-friendly timeline: This product offers a smooth transition to permanent financing and more flexibility in changing market conditions. Loans are fully assumable, with no need to source a construction-to-permanent debt option. They allow for seamless interest rate reductions when interest rates fall, with virtually no net transaction costs.

Interested in taking the next step?

For additional questions about construction financing or to learn more about HUD construction lending programs, reach out to a member of our team.