The Real Estate Capital Institute®

Escalating Costs Curtail New Construction

Scaled-Down Budgets Take Effect, But Good New is on the Horizon


Chicago, IL -- (ReleaseWire) -- 09/12/2006 --A double-edge sword is cutting through the commercial and multifamily property sectors: rising costs and softening demand. While many sectors such as lodging, industrial and office properties are within a healthy supply-and-demand balance, residential and some retail properties are overshadowed with too much product online. All property types are plagued by outrageous construction cost increases.

However, not all news on the construction front is gloom-and-doom. Financing costs and spreads over various indices (e.g., LIBOR, Prime) have declined. In particular, the Fed's decision last month to freeze rate increases is significant positive news. Short-term lenders are more comfortable with tighter spreads and lower yields as the debt markets are showing signs of stability.

As of today (09/8/06), 30-day LIBOR is at 5.33%, after reaching a high of 5.42% in July. Prime remains unchanged at 8.25% since June. Based on these indices, construction loan pricing for larger projects of $20 million or more start at about 6.5% floating over LIBOR. On the higher end of the risk spectrum (e.g., hotels, spec office), pricing floating at 8% or more, is not uncommon. General terms of such construction loans include at least 20% equity, personal guarantees (including completion), a three-year term and interest-rate hedge protection.

The Real Estate Capital Institute's ('RECI') research director, Nat Zvislo, comments, "After Labor Day, gas prices and other commodities declined. Construction loan underwriting also continues to stay competitive." Zvislo adds, "We'll probably see some lower construction costs in the coming months as the markets adjust to more normal conditions."

RECI monitors commercial property construction loan indices including daily reports of Bank Prime and LIBOR. Permanent rates are also posted. Hourly updates of these indices are available by dialing the Real Estate Capital Rateline ™ at 7RE-CAPITAL (773-227-4825.) For more extensive research information, please visit