Old Tyler’s Page 2018-07-03T17:28:11+00:00

How to See Opportunity in Construction Financing

 Construction is projected to grow 8 percent through 2019, yet gone are the days of 75 percent LTV to be replaced with a 45 LTC.

So what does this mean…

 Construction opportunities are still plentiful. Lenders just

need to be smart in the fulfillment of these loans.

“What we are hoping is that a lot of the construction is starting to finish up and will start selling in the market, which will start opening up the construction buckets…”

-Jeff Zickefoose, Executive Vice President at commercial real estate services firm JLL in Dallas

 Larger banks are being more selective:

Maturing market cycle and concentration risk in particular geographic markets or product types are making large lenders more selective in their construction lending.

According to the National Real Estate Investor, banks are also being more conservative due to new Basel III rules now in place.

 Doors are opening for smaller community banks:

 There continues to be a steady flow of capital, although the big banks have tightened their hold on construction loans and are more focused on serving existing clients.

This opens the door for small regional and community banks to fill the gap.

A Temporary Downshift for Early 2018

Overworked, overwhelmed, and under staffed. Don’t worry, your solution is here…

 The first quarter of 2018 proved to be a slight slowdown in construction growth. Although the year started off slow, an acceleration is beginning.

TOP MSAs Growth

36 of the top 50 MSAs will experience

expansion in 2018.  Top 3: New York City

(-2%), Dallas (10%), and Houston(14%)

  •  Predicting a 6 percent overall growth in contrast to recent years of almost double.

  •  6% residential, sustained by 9% growth in single-family units.

  •  Non-residential should have strong Institutional growth with education and public buildings growing 6%.

  •  Commercial is expected to grow 2% with office leading at 6%.

  •  Overall, non-residential is predicted to grow 4%.

  •  Texas, Nevada, and New Mexico are the geographical leaders.

  • 36 of the top 50 MSAs will experience expansion in 2018. The three largest MSAs, in terms of construction starts spend, are forecasted to be: New York City (-2%), Dallas (10%), and Houston (14%).

Accelerated Growth on the Horizon

 Despite smaller increases in the past year, analysts believe construction projects are finishing up and starting to sell in the market; there will be a new trend of even more capital flowing into construction financing from banks.

The AIA Consensus on construction forecasts accelerated growth and budgeting in 2018 to 2019; The chart shows estimated growth changes.

 The consensus forecasts that the industrial and institutional sectors will dominate the projected construction growth in the near future.

(Source: aia.org)

AIA points out 5 guiding factors for this economic optimism:

• Rebuilding and repairs from natural disasters

• Tax reform implications for construction

• Possibility of an infrastructure package

• Strong consumer and business confidence levels

After a slightly disappointing 2017, 2018-19 are projected to see high levels of growth in nonresidential construction. This year, the strongest growth is expected from the commercial sectors including office, retail, commercial, and lodging facilities. By 2019, commercial sectors will likely see slow down, while industrial, healthcare, and education facilities are projected to start trending. The institutional categories largely have not reached the level of the past, and are favorable to generate above-trend growth for the next few years.

The Perfect Storm is Developing for Community Banks

Larger lenders are being conservative, due to new Basel III rules, other regulations and the desire to focus on existing customers. Construction growth is expected to increase steadily through 2019. And to top it off, land developers are discovering it more challenging to find financing through larger lenders.

Community bank are in the best position to take advantage of the situation.

This post is a summary of Beth Mattson-Teig’s article posted on www.nreionline.comwww.aia.org, Michael Stoler’s article posted on www.commercialobserver.com, and Kamal Mustafa’s article posted on www.bankdirector.com