Canyon Partners is seeing increasing value in the construction lending space compared to acquiring existing assets and is betting its experience in this part of the market gives it an edge due to the complex nature of these transactions.
“One of the areas we have been most active in has been construction lending as well as bridge and transitional lending,” said Robin Potts, co-head of real estate investments and director of acquisitions. “We are able to win opportunities and differentiate dealflow [within the construction space], and it is an area we are very excited about.”
Canyon’s debt strategies focus on sponsors who have assets where there is a complex business plan, including repositioning, a lease-up play or a new development.
A key consideration in this space, however, is construction costs.
“Depending on the geography, there has been up to [a] 15 percent construction costs increase, and they are continuing to escalate,” said Potts. “It really requires a granular understanding market by market of the depth of demand, the rental growth trajectory of a particular asset that you are underwriting, and to be able to determine that with today’s construction costs, it makes sense to create a new project.”
For certain property types, Canyon has seen rent growth surpass construction cost escalation, with Maria Stamolis, co-head of real estate investments and director of asset management at Canyon, citing the multifamily sector.
“There has also been cap rate compression,” said Stamolis. “It’s very market-specific in terms of whether it makes sense to move forward with a new project, as a multifamily deal would look very different from a new hotel or retail deal.”
A strong presence is also important, particularly when it comes to construction lending.
“Sponsors and developers want to know they have an experienced lender who can work through budget or schedule changes or adjustments to business plans along the way, which can happen in the construction space,” said Stamolis.
There continues to be substantial appetite for real estate debt that is being matched by the growth of debt funds, Potts said.
“From a financing perspective, the major difference coming out of [the pandemic] versus the GFC was the amount of distressed sales,” Potts said. During this time “the banks essentially stopped lending, resulting in a substantial loss of liquidity, whereas post-covid traditional lenders pulled back and immediately there were private lenders to fill in the gaps and keep liquidity going.”
The immediate aftermath from the pandemic has caused a bifurcation across property types in terms of where borrowers can access efficient financing solutions, with multifamily and industrial being the most highly desired property types, with greater uncertainty around hotel, retail and office, which were more challenged.
“Rolling forward 18 months, the haves and have-nots have merged back together, and those lines have become less stark where people are seeing through the other side,” said Potts. “Even if a hotel is not performing to its pre-pandemic numbers, there’s more visibility now in terms of the reopening path and re-stabilization. The lending market has compressed significantly, especially for hospitality and office, as this line of sight becomes clearer, with much more certainty and stronger liquidity.”