Construction Financing Still Going Strong

Interest rates may have skyrocketed putting pressure on new builds but lenders are still ready to write you a check for a construction loan. 

In what seems like a confounding contradiction, lenders are still quite anxious to issue financing for new construction even as the overall building market continues to be impacted by high-interest rates, near-empty commercial properties due to the work-from-home trend, and frozen sales of existing homes across the country. 

The reasons why seem to come down to two key factors: loan rates and timing. Lenders are reporting that they are charging higher interest rates on new construction loans, making them more attractive on their balance sheets. They are also asking for terms more advantageous to themselves and in some cases, equity positions in any new construction project.  

The other factor is timing. Any loan made now is not likely to result in a finished project until at least 12 to 18 months – at least – and they are reasoning that by that time interest rates will have begun to come down making homes and commercial properties more affordable. 

Of course, everything is relative, and this construction financing trend needs to be taken in the context of the rest of the building market. Newmark, the real estate advisory and services firm, reports there have been $209 billion worth of construction loans issued in the first half of 2023 compared to $421 billion in the same period a year ago. But this compares to $150 billion worth of refinances and $38 billion worth of acquisition loans for investment sales so far this year. So, getting the money to build is not necessarily the problem as the economy stumbles around this year. Getting buyers and tenants for those new structures may be an entirely different story. 

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