In Construction Lending, It’s a Good Time to Be the Right Borrower

ew U.S. residential construction declined in August in one of the weakest monthly performances since the pandemic, with housing starts overall down 2.6 percent and multifamily starts plummeting nearly 22 percent, according to First American Financial Corporation data

Housing completions, meanwhile, dropped nearly 12 percent, reaching what Bloomberg described as “the slowest pace since the end of 2018.”

Concurrently, as of late August, commercial real estate debt funds held a record $56 billion in dry powder with about $16 billion raised in the first half of 2026, according to CRE Daily, citing Green Street data. Private credit funds, it noted, have “grown their CRE books by roughly $104 billion since 2019.”

In short, commercial real estate lenders have greater capital than ever before for funding projects, while — as the housing data illustrates — fewer projects qualify for that funding, making this a fantastic time for projects from developers with solid reputations and a deep pool of resources.

“The market’s flush with capital from banks, private lenders and others who all want to be in construction, including banks that had been on the sidelines,” said Eric Cohen, managing director and co-head of debt origination for Affinius Capital. “A rising tide lifts all boats in that there’s a lot of capital raised. If a project is viable, there’s usually a competitive market around that deal, and plenty of capital available to support construction.”

Jeffrey Rosenfeld, founder and principal of North River Partners, noted that the starkest challenges in construction financing are currently on the equity side, making projects with a successful equity raise even more desirable than normal for lenders.

“Starts and permits are undeniably down — there are fewer shovels in the ground,” said Rosenfeld. “With fewer projects able to raise sufficient equity to actually execute on construction, you have an expanded pool of lenders chasing a smaller pool of deals.”

PitchBook noted in early September that private capital fundraising overall is “on track for its fifth consecutive annual decline,” with private debt being the exception as “the only strategy with year-to-date fundraising up year over year.”    

Given all this, underwriting standards for the right residential construction projects have been loosening — to an extent.

“If you’re a well-capitalized borrower that either has discretionary capital or is capable of finding a project that pencils to the extent it can raise money, you are going to have a lot of options when you go out for a construction loan,” said Rosenfeld. “The environment is going to be fiercely competitive.”

In a Federal Reserve bank lending survey from April 2026 that asked banks about changes in CRE lending policies, banks reported having “eased or left basically unchanged” most CRE loan terms, with the most widely reported changes being “higher maximum loan sizes, narrower spreads of loan rates over the bank’s cost of funds, and longer interest-only payment periods.” 

The most commonly cited reason for this, according to “major net shares of banks,” was “more aggressive competition from other banks or nonbank lenders.” 

Given the reduction in construction starts and the increased challenges in raising equity, though, both a reason behind this and an ironic counterpoint to it is that fewer projects can meet the well-capitalized standards.

“There is a smaller subset of developers that are actually able to even get to the point now where they can close a construction loan,” said Rosenfeld. “But, if you’re one of those lucky few, you are in a privileged position.”

Brent Gilfedder, a partner in the Real Estate & Funds practice at King & Spalding, agreed that while there is much capital waiting to be deployed, the challenge of getting deals to work means fewer projects are qualifying for that financing.

“It is very hard to get a development deal to pencil given the overall real estate environment,” said Gilfedder. “You have deals where you’ll have equity capital but can’t find construction financing, or have construction financing but can’t find equity capital.”

Gilfedder, who refers to this as an “odd scenario,” attributes it in part to both the current rate environment and rising construction costs.

“Given the higher cost of construction, a lot of deals just don’t make sense even with the presence of capital in the marketplace, because the question a lot of people ask is, ‘Can I go out and buy something for cheaper than the replacement cost?’” said Gilfedder. “A lot of times, the answer in multifamily is yes. There’s not a lot of appetite for development deals given that.”

So, as they seek to put ample dry powder to work, lenders are pining for stronger projects while also balancing the significance of current economic factors.

Jay Neveloff, partner and chair of U.S. real estate for the law firm HSF Kramer, said that given the Federal Reserve’s recent rate increase, some lenders he’s spoken to are approaching new projects with a sense of unease.

“There are lenders who are getting skittish,” said Neveloff. “There’s a lot of retrenching by capital sources, and some I’ve spoken to are concerned that rates are going to go up. They’re saying that the 10-Year Treasury is higher than it’s been in a while, and they’re concerned with the after-effects of a rate hike.”

Still, for those with the capital to unleash into the marketplace and the willingness to do so, Rosenfeld considers the current lending environment a “tale of two markets,” with lenders rolling out the red carpet for the shrinking pool of projects that can meet the ever-more challenging goal of penciling out.

“It sort of rhymes with what we’re seeing throughout the American economy,” said Rosenfeld. “If you’re a well-established developer with a strong track record, the ability to get a really compelling construction loan hasn’t been better in recent memory. And, if you’re someone with unreliable capital, most of your deals will not be executed on right now.”

Larry Getlen can be reached at lgetlen@commercialobserver.com.