Construction lending has always run through community and regional banks in most secondary and tertiary markets, gateway metros have more institutional alternatives. As those banks manage concentration limits and watch credit quality more closely, construction books in smaller markets have tightened faster than the national headline numbers suggest.
Debt funds and private construction lenders have picked up some of the volume banks aren't writing, but on different terms: lower leverage, wider spreads, and often shorter interest-only periods before conversion. It's real capacity, but it changes the math on a deal that was underwritten to bank-construction assumptions.
The equity requirement is the number that actually moves. We're seeing 25 to 40% of total project cost required as equity, with multi-family and industrial at the tighter 25-30% end and office and hospitality pushed to 35-40%. Track record sets where a sponsor lands in that range: a twenty-year developer with a clean history may clear at 25%, a first-time sponsor is more often quoted 40% or higher. Bank construction is pricing around SOFR + 275-400, debt funds SOFR + 400-550, roughly the spread premium you're paying for the leverage bank capacity no longer offers.
"The bank that would have written this construction loan two years ago is still there, they're just writing fewer of them, to sponsors they already know."
We're seeing more phased takedowns, sized to what bank capacity will still support, paired with mezz or pref equity to bridge the leverage gap rather than relying on a single construction facility at the old advance rate. It's a more expensive stack than two years ago, but it gets deals built in markets where a single-lender construction loan at the old terms may not clear anymore. CDFI and specialty construction capacity remains underused in a lot of these markets, and is worth checking before assuming the deal doesn't work at all.