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VOL. 6 | NO. 20 | Saturday, May 11, 2013

Construction Lending Still Facing Tepid Improvement

By Michael Waddell

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As the economy starts to rebound, local lenders like Magna Bank, First Tennessee Bank and Renasant Bank are seeing moderate improvement in activity for new commercial and residential construction projects, and competition is intensifying to land deals.

“We want to make loans – construction loans, bridge loans and mini-perm loans – on commercial and multifamily projects, and we are actively pursuing that business,” said Frank Stallworth, president of the commercial and multifamily division for Magna Bank.

Stallworth said he believes Magna has a very good pipeline in place, with three large multifamily construction loans in process that total more than $15 million apiece and another three that average $15 million each in Tennessee, Arkansas and Mississippi.

“Last year was our second-best year out of the past 20 years,” he said. “Typical terms were 10-year terms, 30-year amortization, 3 percent to 3.5 percent interest rates and 65 percent LTV (loan to value).”

Last year Magna made 60 commercial and multifamily loans totaling $250 million.

“The markets are much calmer,” Stallworth said. “Lenders have gotten most of their problems either solved or identified. Everyone is seeking new business. All of the lenders are still looking for good deals, but we are not back to the levels of 2006 and 2007. It’s still a controlled lending market.”

While activity has picked up this year, so has the competition among banks to make loans. Magna is seeing twice as much competition now compared to the same time last year.

Hotels are one sector of commercial construction that is seeing improvement over the past 12 to 18 months.

“Hotels are continuing to improve,” Stallworth said. “They are still somewhat challenging to get approved, but instead of 50 percent down, it might take only 30 percent down now. Required equity for multifamily projects has dropped to 20 percent to 25 percent, so we are really getting back in line with historical lending parameters.”

The market is not seeing much new construction for retail but existing properties are leasing back up, making them prime candidates for refinancing.

A lack of new jobs is also keeping new construction for office buildings in check.

“Memphis needs to create more jobs for commercial activity to pick up,” said Rick Hall, executive vice president and senior loan officer at Renasant Bank handling commercial and residential lending. “We are always interested in well-conceived projects in good locations, but overall there is not a lot of new commercial construction activity in the market right now.”

Renasant is not getting many requests for retail or office projects, and smaller flex space industrial projects totaling 15,000 square feet to 20,000 square feet are also stagnant due to lingering vacancies. Activity has increased somewhat for larger, bulk space industrial projects in Southeast Memphis and Desoto County.

Hall has also seen an uptick in residential construction loans during the past six months, especially in hotter areas like Collierville and DeSoto County, with good pre-sale activity as well as some spec housing.

“Lot prices have come down so much, and the houses that are being sold pretty quickly,” said Hall, who describes the Memphis market as still in a period of slow growth following the recession.

He expects to see continued improvement through the rest of this year.

“Banks have plenty of money to lend right now, and rates and terms are as good as they’ve ever been,” he said. “I think there has been a settling down in the economy, and people are a little more secure than a few years ago.”

Multifamily is also the current standout of commercial real estate for Lee Hunter, senior vice president managing the commercial real estate department at First Tennessee Bank.

“There are five different apartment projects totaling more than 1,000 units that will all be under construction at the same time and it looks like they will hit the market within the same six- to 12-month span in Southeast Memphis, including Germantown and Collierville,” he said.

Downtown also remains a very strong submarket for new multifamily construction.

“Downtown has the highest rental rates in Memphis,” said Hunter, who sees a large segment of the out-of-college to mid-30s demographic moving Downtown over the past several years. “There are so many great things happening Downtown. It has such a positive energy that people just want to be a part of it.”

Hunter is seeing limited new office construction on tap for the Poplar corridor of East Memphis east of Interstate 240, including the Ridgeway Center along with the fourth tower for International Paper.

Retail construction is also very limited right now, with the focus being on freestanding single-tenant buildings like Dollar General stores, Dollar Trees, Walgreens and CVS pharmacies.

“The Memphis industrial market has really come back strong, so much so that we are seeing some new construction, primarily in DeSoto County,” Hunter said. “Some of the larger developers are even doing spec projects.”

Hunter thinks “best in class” projects with strong developers will continue to be in high demand, while second-tier projects could struggle to find funding.

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