Construction Financing: Needle in the Capital Haystack

In case you haven’t heard, the mantra for many real estate developers and owners this year seems to be “Stay Alive Until 2025.” And I get it: This isn’t the friendliest financing environment. Even if the Fed cuts rates, we’ll probably continue to see a more constrained lending environment with conservative underwriting to mitigate as much risk as possible. Still, capital will be available for multifamily developers that have a good track record and can tell a compelling story about their project. Also, those able to raise their own private funding will be at an advantage in this market. They will be able to move forward where others cannot.

Although I have no “secret sauce” to share for getting financing, here are four tips based on our recent mixed-use and multifamily projects in Illinois, Wisconsin and Florida.

Experience counts

Since 2022, thanks to rising interest rates and economic uncertainty, banks have tightened lending standards for all CRE, including construction loans for multifamily projects, even though demand and rents remain strong in many markets, and there is a 5 percent vacancy rate nationwide, according to CBRE. In this climate, developer experience and track record unquestionably matter as lenders and investors seek to mitigate risk. Those who have successfully developed other multifamily projects, with all that entails (from delivering on time to exceeding proforma and stabilizing assets due to the right location, design and product mix) are more likely to get capital.

Once Upon a Time…

Being able to tell a compelling story about the project can also improve the chances of obtaining funding. What’s the project’s unique selling point? Is the site in an area with population growth? Near public transit or a main commuter artery? What is the local demand for multifamily? Could diversifying the project with a mix of rental products at different price points or bringing in a mixed-use component reduce risk? What’s the NOI? Wingspan Development Group tends to spend more time – often years – doing due diligence before making a project public. We consider far more deals than we pursue and kiss a lot of frogs in the process.

The “story” of our most recent project, The Henry at Harms Woods, a 294-unit mixed-use project we’re developing in Skokie, Ill., is a good example. Just outside of Chicago, the project site, which had a functionally obsolete office building, is located across the street from a 350-acre nature preserve and less than 1 mile from Westfield Old Orchard Shopping Mall, a 100-plus-store major regional mall that began a $100 capital improvement project in 2022. The surrounding area has more than 150,000 people with an average household income of more than $158,000.

The vacancy rate in the Chicago suburbs remans at around 5 percent, according to Integra Realty Resources, despite a decade-long building boom of new multifamily development—11,000-plus units were delivered since 2020 alone. The spurt of development around The Henry at Harms Woods was particularly uneven. When the project was proposed, Skokie had not had a new Class A development in more than a decade, despite the suburb neighboring affluent North Shore towns like Wilmette and Winnetka.

The Henry story also includes a strong development partner, Tucker Development Corp., the nationally known mixed-use, multifamily and retail developer. Aaron Tucker led the design and entitlement process and crafted a unique plan, combining traditional apartments with three-story rental townhomes (something new to the area) and ground-floor retail space. After doing deep research and developing a detailed proposal, which started back in 2022, we were able to secure a $100 million construction loan, including competitive senior debt.

Partner with the locals

Depending on a neighborhood’s YIMBY appetite for new development, working with local municipalities to secure gap funding is also an option. This is especially true if a proposed project will transform an underutilized site, eliminate blight or strengthen the tax base. And if a new multifamily development passes the “but for” test in a Tax Increment Financing district, then TIF funds might also be granted to help offset project costs. The key to receiving financial support from a municipality is to work closely with local officials while also being transparent with the community to make genuine efforts to address stakeholders’ needs and concerns.    

For example, an 11.5-acre site we’re developing in Wheeling, Ill., had been vacant for years. Seeing potential in this prominent “gateway” site to the village, several developers tried to make projects work there yet failed due to soil remediation and other challenges making it too difficult and costly. But city officials really wanted to develop the lot so they could present a more vibrant face to the public. By working closely with the village and hearing their wishes and concerns, we created London Crossing, a mix of 55 townhomes, 22,000 square feet of planned retail and a state-of-the-art school administration building that’s also home to a number of local social service providers. The administration building is complete, and the townhomes are under construction. All of this work was facilitated by necessary TIF support.

Grow your own

Finally, one of the fastest-growing alternative methods to help finance a real estate project is private funding. Developers with the capacity to raise private funding obviously have an advantage in this market. Perhaps it’s no wonder then that global real estate GP-led secondary market transaction volume has tripled to $15 billion from 2017 to 2023, according to DC advisors.

NICHE, our new six-story, 251-unit luxury apartment community in Tampa’s North Hyde Park neighborhood now in pre-leasing, was funded in part by an investment from a $11.7 million GP fund we raised in 2021. Located near Tampa’s downtown, adjacent to the University of Tampa, it met all the right underwriting criteria that made our fund attractive to private investors.

In short, even if the Fed cuts interest rates in 2024, new construction loans will continue to be harder to come by this year, and those that are granted will probably be conservatively underwritten. This will create a delivery shortage in 2025 and 2026. For those who don’t want to just stay alive but thrive in 2025, it might be time to look harder at these alternative funding strategies. Not only could you find your missing needle, you can also move ahead with your planned projects while others stay on the sidelines.

Christopher Coleman is vice president, Wingspan Development Group.