Matt Fiascone, President of The Habitat Company, spoke recently about trends in apartment loan financing.

Q: Have lenders’ attitudes changed much compared to the recent pasta? And if so, why?

A: Prior to the move to a more conservative position, lenders would commonly fund 70 percent loan-to-cost construction loans with limited or no recourse. Today, in addition to higher interest rates, loan-to-costs have come down closer to 60 percent to 65 percent and are often accompanied by various levels of recourse. Reasons for the change include that bankers believe the market is becoming saturated with supply and banking regulators are imposing a decrease in construction lending.

Q: In what way are banking regulators acting to create a more cautious attitude?

A: While regulators can mandate change, they usually bring about change by increasing the cost (either financially or administratively) of a practice they want to see decreased. Recently, they have adopted policies that make construction lending more costly to banks (increased capital requirements and compliance costs). It has resulted in banks decreasing the supply of these loans.

Q: What are the pros and cons for developers/owners that come from a cautious stance by lenders?

The biggest con is that some projects won’t be built. And, ones that are built will cost more to complete. The reduced supply may support rents at higher levels than otherwise would be achieved.

Q: How would you describe the current economic cycle, and how is it affecting lenders’ attitudes?

A: It has been a long time since our last recession ended. When you step back and think objectively, you know that all cycles eventually turn. The concern is that sometimes this thinking leads to a self-fulfilling prophecy of a negative turn in the cycle.

Q: How long do you think this current state of “caution” will last, and what factors would drive it to either be less cautious—or perhaps even more cautious?

A: Nobody knows for sure, but it is reasonable to think that it can last several quarters---not several years.