In capital markets, brakes are beginning to be applied to the freewheeling commercial lending that has driven development for several years.

Projects with good financials, prime locations and developers with good résumés are still getting loans, developers and lenders say. But lenders are tightening their standards and being more careful in their decisions concerning big projects.

“Large commercial real estate loans are a big question mark right now,” said Noel Johnson, vice president at Killian Pacific, the developer of 240 Clay and the Hudson Building in Vancouver, Wash.

In part, the more cautious pace seen this quarter is a reaction to the free flow of money lent out in recent years. Major banks “don’t have a ton of excess money to lend because they’ve already put so much out,” Johnson said.

Financing for major commercial real estate projects is a complex mix of banks, savings and loan institutions, pension funds, life insurance companies and commercial mortgage-backed securities. And while they may be increasingly cautious, lenders say there’s still plenty of money for attractive investments.

“Certainly, there’s plenty of capital out there for deserving projects still, and I expect there will continue to be,” said John Petersen, president of Melvin Mark Capital Group.

Still, some evidence suggests lending growth is due to slow. Fewer commercial mortgage-backed securities are being issued, reducing the amount of money available for lending. Issuance of the securities in the U.S. fell nearly 30 percent to $19 billion during the first quarter compared to a year earlier, according to Commercial Mortgage Alert.

“That’s a big component of our market, and CMBS issuance is down this year significantly,” Johnson said.

Life insurance companies still have money to lend, but they’re being more selective, Johnson said.

“It sounds like capital markets are starting to take a breath, mostly on the construction side,” said Nick Fritel, chief financial officer at TMT Development. “They’re starting to really scrutinize ground-up multi-floor development, which has been pretty much a no-brainer the last two to three years.”

Few industry insiders expect any major market corrections in 2016. Next year and 2018 are a different story.

“We are very much closing in on the top of the cycle,” said Tom Wiley, administrative vice president at M&T Bank in Portland, where he manages lending in the local market as well as Seattle and Denver offices.

“It still looks as though we have a one-to-two-year run in multifamily, and I’d say in some other submarkets as well,” he said.

By all indications, demand for office, residential and industrial space is remarkably strong. But builders and lenders worry the economy may be due for a correction, a concern heightened locally by layoffs at Intel. Lenders tend to be more forward-looking due to the length of time it takes for loans to mature.

“The economic cycle is very healthy, although it feels very late,” said Chris Nelson, principal at Capstone Partners, which is working with Cairn Pacific to develop the Leland James office building in the Con-way master-planned area.

Interest rates remain low. Developers and lenders said they’re seeing rates around 4 to 4.5 percent. Blake Hering, a principal at Norris, Beggs and Simpson Financial Services in Portland, said interest rates are hovering “in that plus or minus 4 percent range.” Projects with good locations and fundamentals are able to get interest rates below 4 percent, but projects that are considered to be a little bit riskier are likely to get slightly higher rates.

“Borrowers seeking 65 percent leverage can get the most advantageous rates and terms in the market,” Hering said. “At 70 to 75 percent, terms become less attractive. Market fundamentals, supply and demand are in good balance, and there’s plenty of capital out there when these projects do seek financing.”

Re-leasability, or the attractiveness of a project to a potential second generation of tenants, is important, Hering said.

Killian Pacific’s 240 Clay project, a five-story mixed-use building with 60,000 square feet of office space and 5,000 square feet of retail, got financing through HomeStreet Bank. Simple, an online banking startup, will be the major office tenant.

Johnson said HomeStreet Bank “had the vision and the willingness” to lend for a dramatic renovation of a former warehouse building that was gutted by fire in 2007. 240 Clay will feature heavy timber construction; an individually controllable, in-floor heating and cooling system and a “fitness lounge” with lockers and showers.

Johnson said a developer’s track record still matters when a loan is sought.

“Our reputation and our financial strength are hugely important,” he said.

Demand for office space remains extraordinarily strong. Of 1.3 million square feet of office space under construction and scheduled for delivery in 2016, 75 percent is pre-leased, said Patricia Raicht, senior vice president at Jones Lang LaSalle in Portland.

“What’s happening with pre-leasing is a testament to demand in the market,” she said.

Portland’s Central City had a 6.5 percent office vacancy rate in the first quarter, according to JLL.

Johnson said he’s never seen the office market this busy.

“Right now we’re in the strongest office leasing environment in Portland’s history, or at least in the last 20 years,” he said.

Office space is filling up faster than residential and retail space. For example, TMT Development’s Park Avenue West has fully leased 13 floors of office space (primarily to law firm Stoel Rives), but the project’s residential units are only 15-20 percent full. A major ground-floor retail tenant is still being sought for Park Avenue West, Fritel said.

Originally, Park Avenue West was conceived as a 27-story office tower. TMT reprogrammed it to better meet the market and lenders’ preferences, Fritel said. The project needed a major tenant to get off the ground. Stoel Rives’ early commitment to the project was crucial, he said.

PCCP, formerly Pacific Coast Capital Partners, provided TMT’s construction loan, which was refinanced in January, Fritel said. TMT then obtained permanent financing in January with MetLife.

Johnson said that Killian Pacific, which is due to deliver two large mixed-use buildings this year and one in 2017, seeks financing or refinancing 10 to 15 times a year for its projects. Those efforts aren’t becoming any easier.

“It’s a situation where the best projects have some really good options to be able to get debt,” he said. “But a more questionable or innovative project, novel locations – it’s going to be kind of tough.”

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