The banking run of 2023, which saw the collapse of banks like Silicon Valley Bank, Signature Bank, First Republic Bank, and PacWest, significantly disrupted the construction lending market. These banks were previously active in issuing construction loans but faced severe financial challenges, prompting a shift in the lending landscape.

Bank Collapses and Market Exit

• First Republic Bank, Signature Bank, and others were major players in the construction loan sector. Their sudden exits from the market left a gap in available financing for construction projects​.

• PacWest Bancorp decided to sell $2.6 billion worth of real estate construction loans at a discount, further indicating the retreat of traditional banks from this sector​.

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Shift to Private and Hard Money Lenders

• With traditional banks pulling back, there has been a notable shift toward private lenders and hard money lenders. These alternative lenders are stepping in to fill the funding void left by the banks, offering more flexible but often more expensive loan options​.

• Non-bank lenders and private equity firms have become crucial in providing the necessary capital for construction projects, albeit at higher interest rates compared to traditional bank loans. Interest rates for these loans have increased significantly, sometimes reaching 9-10%, compared to the 4% rates seen a few years ago​.

Increased Borrowing Costs and Delays:

• Developers now face higher borrowing costs due to the shift to private and hard money lenders. The increased cost of capital, coupled with already high material costs and supply chain disruptions, is leading to delays and cost overruns in many construction projects​.

• The uncertainty in the lending environment is prompting some developers to delay new projects until financing conditions improve, further slowing the pace of new construction starts​.

Enhanced Scrutiny and Loan Provisions

• Banks that continue to offer construction loans have become more stringent in their lending practices. They have increased their loan loss provisions to cover potential future losses and are closely monitoring loan performance and adherence to covenants​.

• Despite these challenges, delinquency rates on construction loans have remained relatively stable, indicating that while lending has become more cautious, it has not yet led to widespread defaults​.

Summary

In summary, the collapse of several key banks in 2023 has led to a significant shift in the construction lending industry, with private and hard money lenders becoming more prominent. This shift has increased borrowing costs and introduced new challenges for developers seeking financing for construction projects.