Post COVID Impacts on the Construction Loan Market

Four Trends Impacting Construction Financing Post-Pandemic

Post COVID Impacts on the Construction Loan Market

The construction industry is experiencing one of the strongest returns since the pandemic has begun to subside. Demand for multifamily housing is now exceeding pre-pandemic levels on a national basis and as the vaccine has continued to roll out across the U.S., we are seeing signs of a new normal that is emerging. As we continue to track the industry’s bounceback, here are four trends that are largely impacting construction lending.


Increased Demand for Housing in the Southeast


Since the onset of the pandemic, there has been a market-wide rethinking of strategy when choosing locations for new developments. Traditional conventions have been uprooted with the massive adoption of work-from-home practices, which has allowed consumers to access housing markets that they might not have considered in the past. The high cost of urban living, coupled with the renewed focus on increased space (both indoor and outdoor) has caused a population shift to many secondary markets and suburban locales.

The explosion of construction projects in the Southeast is indicative of how the real estate industry is capitalizing on this trend of southern migration to produce value in a time of market uncertainty. An unprecedented level of freedom has allowed the market to flourish in places like Florida, Georgia and the Carolinas, and construction projects in these markets are showing no signs of slowing down.


Build-to-Rent on the Rise


While Southeastern migration had a strong demographic among Baby Boomers, who already saw the value of retiring in the relatively inexpensive Southern region, the pandemic also cleared the way for a general rethinking of which property types will be most stable — both in the short and long term. Among the most popular asset trends is the explosive growth of build-to-rent and single family rentals, which saw $7.9B in investment just halfway through 2021 according to
These asset classes have benefited from the widespread adoption of work from home due to the pandemic and the relatively low cost of real estate in Southern markets, making high quality, less expensive rentals available to an increasingly mobile labor pool.

We recently helped secure financing for a data from Trepp. 71.5M build-to-rent project in Brandon, FL that includes 660 apartments and 75,000 square-feet of commercial space, a prime example of the growing appetite for this type of product. Widespread demand for developments such as the Brandon Town Center have also incentivized many firms to follow their talent to the suburbs, by adopting satellite office spaces in the suburbs or relocating their corporate headquarters altogether, something we have witnessed increasingly in the Florida market.


Competitive Terms for Construction Loans


Developers and owners taking advantage of the momentum in the market are finding a very competitive financing landscape. With interest rates on recourse construction loans as low as LIBOR plus 275 and with leverage of 75% LTC, many are taking calculated risks and advancing projects that might have been put on hold just a few months prior.

Similarly, for non-recourse construction, interest rates currently range from 6% to 9%. We have also seen mezzanine financing options available for construction with interest rates on that tranche of 9-12%. With rates at historical lows and with the economy expected to growat a 6% or faster rate for the remainder of the year, we’re likely to see a flood of new projects that will meet with the demand for more housing units, especially in the Southeast region


Labor Shortages and Construction Costs

Developers and owners embarking on new projects have still had to contend with a number of challenges brought on by the pandemic. While there has been record-breaking demand for new products in suburban, secondary and some tertiary markets, we have seen major concerns sourcing labor for construction projects, especially in key metropolitan markets such as New York. It is possible that concerns with the Delta variant could worsen these conditions, especially in Southeastern markets.

Another major roadblock has been unusual fluctuations in the cost of raw materials. For many months, the cost of lumber rose exponentially and while this particular phenomenon has subsided for the time being, one could observe a similar circumstance in the rising cost of steel with the potential for other material costs to inflate as well.

What Lies Ahead?


Overall, despite the challenges that exist today, there’s tremendous potential to capitalize on favorable pricing, interest rates and increased competition that bring our industry forward. This presents a prime opportunity for advisory firms to help clients identify the best financing options that will allow them to achieve their business goals. The TrueRate team sees vast potential in this construction boom and we can help steer your project on the path to success in a way that traditional financing cannot.

Want to learn more about TrueRate and the value we bring to the table? Get in touch with us today at https://www.truerateservices.com/capital-markets