The Need for Speed in Construction Lending: Q&A

Brett Forman, Executive Managing Director, Eastern U.S., Trez Capital. Image courtesy of Trez Capital

Multifamily development continues at full steam, and there is no shortage of alternatives, according to Brett Forman, executive managing director in the Eastern U.S. for Trez Capital.

The commercial mortgage lender took a step back at the outset of the health crisis and resumed activity in the fourth quarter of 2020. With a strong focus on Southeast and Southwest markets, Forman expects 2021 to be a record year for Trez Capital.

And while demand is expected to persist, certain challenges are anticipated to arise, as Forman explains in the discussion below.

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How has loan production shaped up for Trez Capital since fourth quarter last year?

Forman: It is looking like 2021 will be a record year for us, as we are projected to originate over $2 billion in loans for the year. Nearly $800 million of that output is projected to come from the Palm Beach and Atlanta offices.

This activity is certainly driven by the boom in residential construction to accommodate the intense demand for housing. We are focusing on geographies with high job growth and that is where the development activity is occurring.

What are the main trends you’re seeing in terms of in-demand debt solutions in the multifamily sector?

Forman: Given the high volume of multifamily development, there is generally a big demand for financing and no shortage of options for developers. That said, speed of execution is important. Costs are going up, so developers want to be able to lock in costs and build.

It is also fair to say that, because of land prices being escalated and commodity and labor prices rising, developers are looking for the best execution on debt to help the profitability of projects. In many cases, we offer a great option that blends both a bank loan and mezzanine financing or a preferred equity component into a one-stop-shop. For a lot of developers, the timely execution can be as important—or more important—as the ultimate cost of the debt.

Trez Capital recently restarted efforts to expand its bridge lending with plans to issue commercial real estate CLOs to finance it. What’s behind this strategy?

Forman: We did relaunch our bridge lending program, but I’m not certain we are committed to CLO execution. What we are committed to is rounding out our product offering and giving our developers a bridge loan option at the end of construction and before permanent financing can be obtained.

We have hired a great team led by Head of U.S. Markets and Managing Director Darren Esser. Right now, there is a demand for bridge lending to get a property from its construction through lease-up or value-add. That can be accomplished through a CLO or other forms of securitization.

What can you tell us about current deal terms when it comes to funding multifamily developments?

Forman: Current deal terms right now are very favorable for developers since there is such a deep supply of banks and other investors interested in the space. Bank loans are pretty aggressive for strong borrowers and preferred equity is plentiful.

Trez’s developer sponsors, however, are opting for a one-stop solution and surety and speed of execution. Plus, Trez offers more proceeds than a bank offers and mostly non-recourse.

What are some of the key markets you’re focusing on? Why these locations?

Forman: We are focusing on primary, secondary and potentially tertiary markets in the Southeast and Southwest because that’s where people want to live, and it is where job growth is occurring.

Tampa and Phoenix would be examples of primary cities we are bullish on, while secondary cities include Greenville, S.C., and Nashville, Tenn. The pandemic-inspired shift to hybrid work schedules and suburban living increases the appeal of certain secondary markets.

Going forward, what are some of the dynamics that will shape the multifamily lending industry?

Forman: On the positive side, migration to the Southeast and Southwest will create demand for both single-family and multifamily housing. Between the increasing price of land and the cost of labor and commodities, however, it is going to become more and more challenging for developers to build new construction that makes financial sense because rents can only escalate so high.