Lenders Open Up to Phoenix Construction Deals

Article originally posted on Globe St. on July 12, 2019

A few years ago, securing construction debt was a challenge in Phoenix, but today, lenders are actively chasing deals. The capital markets appetite illustrates the evolution of the Phoenix market. Scott Meredith of George Smith Partners recently secured a $67.3 million construction loan for the development of a 254-unit 14-story multifamily property in Phoenix. The non-bank lender deal is a great example of the capital activity in the market.

“The market is diverse,” Meredith, an SVP at George Smith Partners, tells GlobeSt.com. “It is not just big money center banks or life companies looking for class-A deals in gateway cities. It isn’t that confined. It is a more varied appetite from the capital markets with everything from high net worth individuals entering the construction lending space to insurance companies and money center banks and everything in between. The beauty of this capital markets today is that there is capital for a broad range of transactions.”

The ample capital for construction deals is a new trend. During the recession, certainly, lenders were not active in the market. However, just a few years ago, lenders were still skeptical. “At the bottom of the recession, this would not be the case,” says Meredith. “Four years ago, for example, I worked on a ground-up multifamily deal in Phoenix around the corner from this project, and that was a challenge. Phoenix had a reputation as a boom-bust city, and some lenders had been hurt by that. Today, we had much more open minds and those lenders are willing to go back.”

On this most recent deal, the unnamed borrower secured a non-recourse loan at 80% loan to cost through a non-bank lender. “Banks were regarded as inflexible and incapable of providing the sponsor’s desired terms,” says Meredith. “Specifically, banks were unwilling to offer the leverage or non-recourse structure that the sponsor desired.  Furthermore, once the deal closed, the developer wanted a capital partner that acted more like a partner than a highly regulated bank.”

While Phoenix has once been regarded as a secondary market, Meredith says that today, he would call the city an emerging primary market. That evolution has helped attract a diverse pool of lenders to the market. “It is an insulated, diverse economic region, and you see a lot of tech and finance moving there,” he says. ‘The capital markets recognized that diversity now. We see Downtown areas gentrifying everywhere, and Phoenix is part of that trend.”

Looking ahead, Meredith is bullish on Phoenix, and he doesn’t expect the activity to wane anytime soon. “Similar to other emerging primary markets in the West, we see continued demand for the capital needed on new projects coming down the pipeline through the end of 2019 and into 2020,” he says.

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