Hillwood supports new housing fund now that lending to AD&C is tightening

The only thing that is unequivocal right now on the home and new construction front is that the $80 billion to $100 billion home builders in the US are going to build and build the new homes they want to sell in 2026 and every year thereafter. It is harder to obtain and more expensive to finance.

National Association of Home Builders VP for Survey and Housing Policy Research Paul Emrath provided new data to illustrate that reality in his Nov. 14 article An eye on housing after.

What lies beneath this tightening, however, is a larger structural shift – one that is not temporary. It is also unlikely that interest rates will decrease if interest rates fall next year. Local and regional banks, once the mainstay of AD&C lending to private builders, are reducing their exposure to land, development and construction loans. National banks have been withdrawing for years. Regulators have increased the cost of holding AD&C loans on bank balance sheets. Capital requirements have become stricter. And after several high-profile bank failures in 2023 and 2024, boards and credit committees are demanding cleaner books, shorter maturities and less concentration risk.

For builders and developers, the impact is reflected in every term sheet: lower leverage, more recovery options, more money left over, slower processes and stricter covenants. The change has created a funding gap big enough to fill the space once dominated by private credit by banks. Debt funds, insurance balance sheets and family offices are now making first-lien AD&C loans on a scale that barely existed five years ago.

It is increasingly private capital – and not banks – that keeps many pipelines and many more pipelines moving.

Against that background, Avila has Real Estate Capital’s announcement this morning is more than just a fundraising press release. AREC has closed the first $100 million of a second debt fund focused on providing project-level land development loans and revolver lines for homebuilders for vertical construction, on track to reach a $1 billion target by mid-2026.

The new vehicle builds on a proven model: AREC’s first debt fund closed in July 2025 with more than $700 million in commitments and co-investments, supporting many communities and more than 10,000 new homes across the country.

What’s different this time is who comes forward first. Dallas-based Hillwood Communities – one of the largest single-family master-planned community developers in North Texas and an active equity and debt investor with partners across the country – has taken on the role of “anchor” as lead investor in Fund Two.

In a market where bank credit has been tightening for almost four years in a row, this combination is important.

A need of $100 billion collides with tighter credit

In our conversation about the new fund, AREC CEO Tony Avila provides a rough estimate of annual demand for AD&C capital.

These are the same $80-$100 billion housing companies that are concerned about financing their own land and construction plans for the 2026-2027 period.

At the same time, as Emrath’s analysis shows, lenders are lowering loan-to-fee ratios, reducing dollar obligations, raising their own interest requirements and demanding more personal guarantees. Effective interest rates on many AD&C loans are still above 10 to 12%, even after modest recent declines from their peaks. Builders and developers feel the pressure on both sides: less credit, at higher all-in costs.

The result: projects that would work on a fundamental basis never get off the ground because the capital stack cannot be raised on workable terms. That is the gap that AREC is filling – and expanding – with its second fund.

Aimed at ‘disadvantaged’ owner-occupied homes, not rental properties

Geographically and product-wise, Avila is candid about what AREC’s second fund will focus on.

At a time when much of the institutional money poured into land and horizontal development is spent on single-family rentals, Avila draws a hard line.

In other words, this is a for-sale housing fund that focuses on parts of the market where AD&C capital is both scarce and expensive for private operators – entry-level, attainable and the more modest end of growth and age-related neighborhoods.

Why Hillwood’s anchor investment matters

On the Hillwood side of the table, the decision to serve as lead investor is not a casual bet on returns; it’s an extension of what they already do in multiple roles within the capital stack.

During that period, Hillwood not only created many of its own master plans, but also provided equity and sometimes debt to partner developers in Florida, the Mid-Atlantic, California and other regions.

Balda describes the AREC partnership as a natural continuation of that history.

After carefully examining the track record of AREC’s first debt fund and the team’s pipeline, Hillwood moved from interest to conviction. “It became a natural progression that we are now one of the lead investors in his fund, and we plan to continue to grow it,” says Balda.

From Avila’s point of view, Hillwood’s decision is a clear signal to the rest of the limited partner universe.

Crucially, Avila notes that Hillwood itself manages many limited partners.

For builders and developers who rarely step into a Tokyo pension room or the investment committee of a large family office, this partnership between an operating land developer and a specialist lender is the most important practical point: it increases the likelihood that Fund Two will actually reach and deploy that $1 billion target.

A first-line way for companies to go from ‘first loss’ to ‘last loss’‘

Avila’s subsidiary, Builder Advisor Group, has sold many builders over the years. One of the reasons capital from former builders and developers has followed Avila into private credit is the shift in risk exposure.

He explains:

The same reasoning applies to construction loans.

For the private builder or regional developer looking to keep a lot pipeline on track for the 2027-2028 period, the fund is designed to sit in that first lien position on land development and verticals, while builders and equity partners assume more of the remaining risk – but also retain the benefit of successful projects and eventual lot or home sales.

Balda sees this structure as attractive both for Hillwood’s own return prospects and for the health of the broader development pipeline.

Patiently meeting an “underserved” housing need

The strategic gamble here is simple: There is a fundamental lack of homes for sale in the US, and the current slowdown has more to do with affordability and financing than a collapse in underlying demand.

Balda candidly notes:

At the same time, he argues, this is not the time for reckless growth.

That patience can be just as crucial as the dollar amount. Builders want capital partners who won’t panic at the first sign of slower absorption, and capital partners need operators who can adjust product, pace and pricing without hurting returns.

What’s next

None of this changes the facts Emrath highlighted: AD&C lending has been tightening for 15 straight quarters, and the overall cost of debt remains high. However, Avila’s second fund, anchored by Hillwood, offers private builders and regional developers an alternative source for their next land development loan or construction revolver – one specifically focused on for-sale homes, attainable pricing and first lien structures that reflect actual project risk.

For strategic managers, the practical questions now are:

• Does the company’s capital plan assume a world in which traditional AD&C credit from banks is becoming increasingly tight?
• Are there deals in the company’s pipeline for 2026 and 2027 that will only work if someone like AREC provides the debt at scale?
• And if so, does the company have the agility and agility to make deals in the “right markets with the right sponsors” that these types of funds are built around?

The capital will not suddenly become abundant again. But as this fund launch shows, at least some of it is trying to move in your direction.