As the housing crisis in the US rages on a full five years past the onset of the COVID-19 pandemic, a new niche of real estate investors is turning its focus to private lending: new home developers.
Since the initial rise of private lending in the real estate industry in the 2010s, one of the biggest positives for real estate investors has always been the speed at which they can get approved for funding, allowing them to purchase, renovate, and sell properties while the market conditions are just right for the fix-and-flip mindset.
But as the US sees the housing shortage grow ever wider and traditional lenders continue to raise the bar on qualifying for loans for new construction, developers are following the well-tread path of the fix-and-flip crowd and realizing there are great deals to be had in the private lending space.
Housing Crises Make for Strange Bedfellows
In the fourth quarter of 2022, Trez Capital, a Dallas-based private lender provided a $26 million construction loan to build 115 apartments in a five-story building in downtown Tacoma, Washington, with a picturesque view of Elliot Bay and neighboring Seattle. In addition to a quick underwriting and approval process, the loan covered 74% of the $35 million development cost - $15 million more than most conventional banks would be willing to provide.
Private lenders have always been more fluid and malleable than their commercial equivalents. While their higher interest rates have also been a deterrent for many developers over time, many are now seeing the value of working with private lenders.
“The majority of our loans finance infill new construction for investors and builders. They have strong track records, good credit, and sufficient capital, yet they often self-finance or turn to private lenders,” said Dustin Lauer, President of FidusFi, a Central Florida private lender known for their ground-up construction financing program. “Even when approved for bank financing, the due diligence and post-closing draw process can be arduous,” Lauer added. Experienced builders who prioritize efficiency find that the savings from a slightly lower bank rate aren’t worth the delays.
The supply chain shutdowns induced by the coronavirus half a decade ago gets most of the blame for problems in the new construction supply chain, but it’s really a further blemish on the long-felt disastrous effects of the 2008 mortgage crisis and ensuing Great Recession. The construction business largely stopped, even as the population continued to rise as it always has. American real estate developers of all sizes have been playing catch-up ever since. The triple effect of the COVID shutdowns, the mass migration of people out of the metropolitan areas and into the suburbs, and rising inflation combine to make securing traditional loans for new development projects a stringent, lengthy struggle. Traditional lenders go over a developer’s application for loans with a fine-toothed comb, often focusing heavily on the developer’s balance sheet and creditworthiness more than the project.
Many banks are also wary about giving out new loans because of the real estate debt they are already saddled with, particularly in the office sector - where COVID’s impact on the ability of employees to work remotely led to a paradigm shift in what the typical American company looks like.
Labor and Construction Costs Stifle Commercial Loans for Many Developers
The biggest hang ups for commercial lenders in giving out loans to real estate developers come from the skyrocketing cost of labor and construction materials. The out-of-sync supply/demand equation on both resources means developers have to dramatically increase their budgets for both, and commercial lenders are slow to respond to these larger amounts without immense scrutiny and higher credit requirements.
As President Donald Trump moves forward with some of his campaign initiatives, the prices of raw construction materials and labor threaten to soar even higher. While many construction materials are produced domestically, the President’s 25% expected tariff on aluminum and steel will drive construction costs higher in the immediate future.
Trump also is planning to remove a minimum of 11 million people from the country who don’t have a correct legal status. According to a 2020 report from the National Association of Home Builders (NAHB) Economics and Housing Policy Group, about 30% of all construction trade jobs in the US are done by immigrants, including several essential to building a home such as brick masons, tile installers, drywall/ceiling installers, painters, and carpenters. In border states like Texas and California, that number is closer to 40%.
In an October 2024 interview with NBC News, Brent Taylor, president of Taylor Construction Group in Tampa, Florida, said, “ Either I make half as much money or I up my prices. And who ultimately pays for that? The homeowner.”
Even without Trump’s immigration mandate, the shortage of construction workers in the US was tapped at around 279,000 according to data from US Bureau of Labor Statistics in December 2024.
Technology is Making Ground-Up Construction Loan Products Easier to Launch
The private lending industry has historically faced challenges in managing construction draws, tracking budgets, and coordinating inspections. However, recent advancements in technology are making it significantly easier for private lenders to fund and manage group-up construction loans efficiently.
Companies like 24 Hour Inspections, Land Gorilla, Sitewire, and others offering digital inspections and expedited in-person inspections have reduced the bottleneck traditionally associated with construction lending. Lenders can now rely on services that provide real-time site inspections, allowing them to approve construction draws faster and keep projects on track.
Loan Management systems like Baseline have integrated draw management functionality to help private lenders manage their draws through the same platform they use to manage their originations, servicing, and investor management. “With Baseline, our customers are able to quickly submit and edit their budgets online and review draws, online statements, and remaining funds. Their access to capital is much quicker and transparent throughout the term of their loan,” said Lauer.
These technological advancements are allowing private lenders to compete with banks not just on speed, but also on transparency and operational efficiency.
Private Lender Usage on the Rise Throughout Real Estate Industry
The housing crisis in the US is not a recent development. Current estimates put the shortage around 4.9 million units. Private lenders are already in the mix to reduce that number through products that enable investors to rehabilitate housing stock that has become outdated, convert industrial/retail properties into residential ones, and repair unsafe or unhealthy housing. Flexible financing and accelerated funding processes offer investors the opportunity to make a difference quickly and help alleviate the overcrowding occurring in cities across the country.
In the summer of 2024, Los Angeles’s Robert Wasmund and Elliott Investment Management LP partnered to launch Ascent Developer Solutions - a lender specifically geared towards financial solutions for high-end real estate developers. Wasmund, a 30-year vet in lending, investment and development, told the Mann Report in a recent issue that the launch is a direct response to conditions in the traditional financial lending landscape.
According to Wasmund, Ascent provides “customized lending solutions with speed, agility, and reliability that fulfill a natural demand for new construction and renovation investments amidst persistent housing undersupply and an aging housing stock.”
Conclusion
Traditional financial establishments appear to be playing it safe with their balance sheets and minimizing risk. In their wake, the private lending industry is seizing the opportunity to fill the financing gap. With their more agile approach, private lenders are enabling developers to build faster and capitalize on high-demand opportunities. As traditional banks hesitate, private lenders are stepping up and helping accelerate much-needed housing development across the US.
