Lenders losing interest in financing high-end condo projects

Lenders losing interest in financing high-end condo projects

EB-5 Visa, EB5 Visa, EB-5 Investment

Wary of a slowdown in high-end apartment sales and a potential supply glut, lenders are beginning to retreat from Manhattan’s luxury condominium market.

Many banks are either cutting down their luxury condo construction lending or stepping away from the market altogether, according to brokers and lenders interviewed by The Real Deal. Developers, however, remain bullish that their product will sell, and are trying new avenues to obtain the financing.

“Everyone’s a little worried,” said Michael Stoler, a managing director at investment firm Madison Realty Capital and head of New York Real Estate TV. “With anything at $2,500 (per square foot) or more, lenders are very cautious,” he added.

The reluctance to lend reflects broader worries over New York City’s luxury condo market. After a three-year period in which developers fell over themselves trying to raise the bar in terms of price and opulence and records were set on a regular basis, the market is showing signs of a correction. The average number of days for-sale apartments in new developments spend on the market increased by 47 percent between the fourth quarter of 2014 and the fourth quarter of 2015, according to appraisal firm Miller Samuel. Such a drop in sales velocity often precedes a slump in average prices. With thousands of new luxury condo units set to hit the market this year and next, lenders feel it may be time to buckle down.

“The biggest problem is nobody could quantify the buying pool in the high-end community,” said Adi Chugh, head of real estate debt brokerage Maverick Capital Partners. “At the end of day, only so many people in the world can afford that kind of price tag.” (The Real Deal attempted to do so in June, and concluded that there likely aren’t enough wealthy buyers out there to fill all Manhattan’s ultra-pricey condos.)

Chugh is currently working on arranging financing for two New York City condo projects, but acknowledged the environment was a challenge.

“Developers are still very optimistic and bullish, they are still stuck in a 2013 or 2014 mindset,” he said. “Lenders are in the 2016 or 2017 mindset. The challenge for us is to bridge that gap in expectations.”

At least some developers have conceded that 2016 may not be the developers’ utopia that was predicted a couple of years ago. Steve Witkoff shelved plans to convert the Park Lane Hotel on Central Park South into condos, telling Bloomberg that “the fact of the matter is, the velocity is not what it was.” Others, such as Toll Brothers City Living, are pricing their new projects to cater a lower strata of the market.

Some banks are reluctant to lend because they have already made big bets on the condo market, according to Ayush Kapahi, principal at real estate debt brokerage HKS Capital Partners.

“Because of the amount of construction that’s been done, I have noticed banks will simply say ‘I have too much exposure on this product in this area of the city’,” Kapahi said, cautioning that he hasn’t noticed a marked slowdown in condo lending over the past twelve months.

As banks step back, more developers are forced to pay a premium for debt and rely on bridge lenders, private debt funds or EB-5 investors. David Heiden, a principal at bridge lender W Financial, says a growing number of condo developers have approached him for construction financing in recent months. Bridge lenders charge higher rates than banks, meaning they are a port of last call for borrowers.

In the past, Heiden’s clients have mostly been developers who are new to the game in the city or otherwise don’t meet the criteria to secure bank loans.

“We still see those types of deals,” he said, “but now we also see high-profile borrowers looking for financing and trying us because they have some resistance from banks.”

Funding condo towers through the EB-5 program, whose investors are more focused on getting their green cards and have a higher risk tolerance than banks, is also becoming more popular. The Carlton Group, for example, is currently raising $550 million in EB-5 funds for three Manhattan condo projects.

“For quality sponsors and projects there absolutely is construction and EB-5 financing available, although there is no question that lenders and investors have become more selective over which transactions they invest in,” said Howard Michaels, CEO of the capital markets brokerage. He added that reports of condo financing are “greatly exaggerated.”

Exaggerated or not, reports of traditional lenders’ reluctance to lend on condos are hardly new. “The market for financing major condo deals has been narrow throughout the post-Great Recession period,” said Scott Singer, president of capital markets brokerage Singer & Bassuk Organization. As TRD reported last year, hedge funds or foreign lenders financed many recent high-profile condo projects, while banks have been more cautious amid stricter regulations. Still, several sources told TRD that the lending market has clammed up even more in recent months.

The tightening comes as several high-profile luxury condo projects are still hunting for construction financing. Sources said that Ziel Feldman’s HFZ Capital Group is seeking more than $1 billion to build two condo towers next to the High Line on 18th Street, and Bizzi & Partners’, Michael Shvo and Howard Lorber’s New Valley are in the market for a $500 million construction loan to build the 91-story tower 125 Greenwich Street in the Financial District. Gary Barnett’s Extell Development is yet to announce construction funding for the Central Park Tower project at 217 West 57th Street – set to become the city’s tallest building by roof height once completed.

“Developers with top reputations and enormous financial strength will continue to find lending windows open for projects that are underwritten appropriately for the realities of current supply-demand metrics,” Singer said in an email. “But it will be tough (as it usually has been, and generally should be) for weaker developers or less-well-conceived projects to gain access to those funds.”




  • New York

Securities Disclaimer

This website is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Any such offer or solicitation will be made only by means of an investment's confidential Offering Memorandum and in accordance with the terms of all applicable securities and other laws. This website does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or any invitation to offer to buy or subscribe for, any securities, nor should it or any part of it form the basis of, or be relied on in any connection with, any contract or commitment whatsoever. EB5Projects.com LLC and its affiliates expressly disclaim any and all responsibility for any direct or consequential loss or damage of any kind whatsoever arising directly or indirectly from: (i) reliance on any information contained in the website, (ii) any error, omission or inaccuracy in any such information or (iii) any action resulting therefrom.