Drop in commercial, construction loan rates never arrived

The commercial and construction lending market is currently going through an interesting time as interest rates remain stable, local lending experts say.

The expectation was that interest rates would continue to come down, and obviously they have not, said Daniel Diaz Leyva, chair of Day Pitney’s Florida real estate practice and co-chair of the firm’s LatAm practice.

“There was not a rate cut as a lot of people expected there to be, and obviously, given the geopolitical situation, and potential for inflation as a result of inflationary pressures with oil, I don’t see the Fed cutting rates any further,” he explained. “There’s a lot of talk of even potentially raising interest rates. Within that backdrop, it’s obviously affecting the lending market.”

Lending interest rates are landing somewhere between 5% to 8% through a commercial loan, he said, and it really depends on what kind of a loan it is, the loan-to-value, the loan-to-cost of the sponsor, and the amount of liquidity.

In the past 30 days, Mr. Diaz Leyva said, he has seen an appetite to lend and an uptick in transactions on the lending side, which was the intention at the beginning of this year.
“I think we’re starting to see that, although, again, in the same interest rate environment that we saw towards the tail end of last year.

We’ve not seen a material change in interest rates, but there is an increase in activity.”

Now, all sorts of new deals are going on that understand that this is the reality of the world we live in right now, and they are priced accordingly, added Alexandra Lehson, a partner with Bilzin Sumberg who specializes in commercial real estate transactions, including complex commercial financing on behalf of borrowers and lenders.

“Rates could be impacted more as oil becomes more of an issue, because that starts trickling down to shipping costs for materials,” she added. “The tariffs probably had a bigger impact, again, because that impacts shipping construction materials, but in South Florida, particularly, we’re very fortunate. We’re in a beautiful little bubble, and actually we’ve been the beneficiary. A lot of people are coming from other countries because it’s such a great place to live, and we are seeing construction loans after construction loans for luxury condominium products closing right now.”

A lot of the construction loans that are being closed are massive construction loans for condo projects, Mr. Diaz Leyva agreed.

“Condo projects are financed a little differently, considering that they typically use deposits to fund a significant portion of the construction budget, which is why those deals are getting funded,” he said. “From a multi-family perspective, very few deals are getting funded but the ones that tend to be top of class, with best-in-class sponsors and developers, and very well-funded. Otherwise, those projects are simply not getting financed.”

A lot of private lenders are also getting a lot more flexible, Ms. Lehson added.
“We have opportunities to do a lot more craft equity or different ways to make the economics work,” she said. “It’s fantastic that there really is a focus, in addition to the ultra-luxury, we have Live, Local Act projects that are actually getting construction financing and being built to provide affordable housing in South Florida.”

The market is strong from a valuation perspective, Mr. Diaz Leyva explained.
“We are still seeing migration and investment in the market, but there’s definitely a lot of headwinds and a lot of uncertainty,” he continued. “One of the things that’s sustaining and supporting us through all these challenges is our growth, and that’s definitely not happening in other markets. They’re seeing the complete opposite.”