The building boom seems stronger than ever, but recently revised regulations and increased scrutiny around loans are changing how-and if-these deals are done. Here's why…
According to a recent article in Commercial Observer, the U.S. is seeing a skyscraper renaissance. New York City's 111 West 57th Street is slated to be one of the tallest buildings in the country, at over 1,400 feet. In Seattle, the mega-skyscraper Fourth and Columbia is on its way up; and the Chicago skyline will soon welcome Wolf Point South, one of the biggest construction projects in the city's history.
For lenders, winds of change are picking up as new rules pertaining to high volatility commercial real estate (HVCRE) loans (money lent for the acquisition, development and construction of commercial buildings) have altered financing benchmarks; lenders must now meet, among other things, a 15 percent equity requirement on loans, or be subject to a 150 percent risk weight requirement.
In addition, a federal analysis recently revealed banks' increasing tendency toward underwriting policy exceptions and a general lack of consistent oversight. As a result, top banking regulators in the U.S. advised all lenders to expect additional scrutiny. This has forced lenders to either reduce activity, particularly around HVCRE loans, or change their focus.
How this shift in lending will affect the big picture of big building in the long term remains to be seen, but lenders know that things can change quickly-and sometimes for the better.
Matthew Galligan, President of
CIT Real Estate Finance, said this period of hesitancy is positive, as we would have otherwise overbuilt the market without it.
"Last year, a lot of lenders were giving the money away, now they are concerned...and it has caused them to look at their lending as more of a scarce resource and therefore allocate more carefully on a risk-return basis," Mr. Galligan said. "If [developers] believe that [employment growth] will continue on a slow and steady basis, and interest rates will stay relatively low, then I think they can count on real estate continuing to grow."
To read the full article, "Under Increased Scrutiny, Lenders Adjust to Market Changes," go to the Knowledge Center on CIT.com. If you enjoyed this blog post, please consider sharing it with your social media networks and invite them to register for our