Why You're Better Off If You Haven't Worked With Many Lenders This Cycle
Last week, Related Midwest closed on a $240M construction loan for One Bennett Park—the largest post-recession construction loan in Chicago. Its size and timing are surprising—banks have responded to pressure from the Fed and tightened commercial lending. So why do some players seem to have no trouble landing eight-, nine- and even 10-figure construction loans?
Stricter lending requirements are a nationwide trend, and yet these massive deals are popping up around the country. While Related's $240M loan for One Bennett Park (pictured) makes the head spin, the amount is a pittance compared to the $2.3B in construction financing GID Development and Dhabi Investment Authority secured for their Waterline Square project along the Hudson River in New York, or the $1.2B HFZ Capital Group is close to landing for the Eleventh in Chelsea.
Associated Bank SVP Greg Warsek says the Related Midwest deal is an example of the types of relationships banks are prioritizing now that lending has tightened. Banks are looking at a developer's record on past deals. How many have they done? How did they handle themselves in the previous downturn? Do they have the liquidity to stand behind a construction loan in case of cost overruns or slow lease-ups? Related Midwest's success with its Streeterville multifamily projects and 111 West Wacker, and being part of a larger parent company, make it easier for lenders to embrace a project. Greg says it's an A-plus sponsor in terms of expertise and risk reduction, and One Bennett Park is a project Greg says he would have sponsored.
A value on existing relationships matters beyond the rare air of the Related Midwests of the commercial real estate world. Borrowers who spent the salad days of the recovery in hit-and-run mode, casting a wide net of lenders for their projects, are feeling the impact of not nurturing those early relationships. Lenders are looking to reduce their risk as much, if not more, as builders. Greg says construction loans are being sponsored anywhere from 60% to 80% loan to cost, depending on the asset class, while the loan to value ranges between 50% and 70%. Projects like hotels and spec industrial are at the low end of that range. Pre-leased office, industrial and retail are at the other end of the spectrum.
Lenders are also diversifying their construction lending across markets. Greg says he doesn't want all of Associated's lending to be weighted in a market like Chicago's CBD, where luxury apartment construction threatens to be oversupplied. He's looking for solid sponsorship opportunities for TOD apartment projects along train lines and in outer markets. That said, Greg may overweight his lending in markets and asset classes where the fundamentals are strong. Greg has developed preferences for infill retail and booming industrial markets.