The construction debt market for affordable housing deals remains relatively constant in price, though underwriting terms are beginning to get a little more generous as competition heats up.
Back in 2009, when lending virtually shut down for all real estate types, lender spreads over the benchmark rates were, naturally, extremely wide.
But now, seven years later conditions are starting to soften “… and spreads have contracted in places like Chicago, San Francisco, Miami, and D.C., where there are a lot of institutions vying for Community Reinvestment Act (CRA),” says Richard Gerwitz, managing director and co-head of Citi Community Capital.
While most national and regional banks have held firm on standard loan-to-cost levels, underwriting has been affected in the demand for longer amortization periods on construction-to-perm executions.
But developers are becoming more aggressive as lender competition has heated up, demanding more aggressive underwriting, particularly with regard to mixed-income projects, where rent trending is often expected on the market-rate portion of the development.
Somewhere Over the Benchmark
While the big money-center metropolitan areas see heated competition for CRA deals, recent capital market volatility on a global perspective—and new banking regulations domestically—has caused spreads over the benchmark LIBOR and SIFMA rates to rise.
This pricing trend is particularly true in areas that aren’t densely populated by CRA-motivated banks. That all-in rate volatility is driven partially by regulatory changes that banks are dealing with in the wake of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010.
The recent bump in pricing is also a reflection of an investor perception of where we are in the market cycle.
“We are seeing pricing change as a result of changing capital requirements associated with regulatory requirements, especially for letters of credit,” says Sindy Spivak, a senior vice president of community development banking at Bank of America Merrill Lynch. “The additional capital costs has influenced and will continue to influence pricing of construction financing.”
Still, both Citi Community Capital and Bank of America expect to lend about as much volume to affordable housing deals—construction and perm—as they did last year. Citi Community Capital dominated Affordable Housing Finance’s Top Lenders list with more than $4.8 billion in loans last year, while Bank of America was close at No. 3 with more than $2.5 billion—an increase of more than $750 million over the year before.
Bank of America touts its expertise and success with the Rental Assistance Demonstration program (RAD), as well as its experience in serving particular populations, as helping to drive its volume this year.
It was selected by the city and San Francisco Housing Authority to help transform 1,700 public housing units under the RAD program, providing several community development partners with access to approximately $770 million in financing—one of the bank’s largest community development deals ever.