Construction and related lending has been building a head of steam, but will it continue? Multiple projects, developers and lenders are impacted by this question.
On the one hand are positives – construction has been booming nationally (see below) and growth predictions remain. According to a recent report from Business Wire, over the next four years, the construction industry in the U.S. is expected to reach a compounded annual growth rate of 4.9%, climbing to $1,804.8 billion in 2023. Further, the multi-year construction boom has engulfed all asset classes in all cities.
According to CrediFi’s data on construction lending, construction lending, in particular, has seen a major boom over the last several years, alongside construction starts. The number and aggregate value of construction loans increased dramatically from 2016 through 2018; 2019 remains to be seen.
However, on the other hand – the market may be turning. Larger construction projects, with loans over $100M, started to slow in 2018. Middle-sized construction projects (between $7M and $100M of loan value) held their own during the same time period.
Still, these market conditions offer strong financing opportunities, of 2 varieties, for lenders.
The first type of opportunity is for those lenders happy to extend construction loans. The boom in construction projects has worked to the benefit of any lender engaged in construction lending. Of note, not all of these lenders are like the much-debated Bank of the Ozarks. Many, in fact, are quite stable national and super-regional lenders like First Republic Bank, Wells Fargo and Wintrust. In fact, players of all types, including insurance company lenders and of course debt funds joined the construction party.
The second type of opportunity is for all of those other lenders not interested in construction lending. In particular, coming off a multi-year construction boom presents yet other opportunities to many other lenders. In particular, the “construction lending wall” upon us will see multiple construction projects seeking permanent financing. In other words, this presents a great opportunity for those lenders that may not offer short-term construction loans but are interested in putting permanent longer-term financing in place. Even if construction lending comes down in 2019, this doesn’t take away that opportunity.
Top markets for construction starts
According to Dodge Data & Analytics (a specialty-provider of construction project data) and their First Half 2019 Commercial and Multifamily Construction Starts Report, nearly two-thirds of the top 20 markets in the U.S. registered year-over-year gains between H1 2018 and H1 2019 including Cincinnati (130% growth), Nashville (112%) and Atlanta (69%).
CrediFi, which tracks construction lending data, also shows growth. For example, metropolitan areas around the Bay Area, Houston, and Seattle saw their loan levels grow dramatically through 2018.
Other once-booming markets such as Phoenix, Orlando, and Columbus saw their level of construction starts slow into 2019, after reporting banner years in 2017 and 2018.
In major metropolitan areas such as New York/New Jersey with the massive Hudson Yards development, the $1.77 billion 65-story The Spiral office tower, and institutional renovations like LaGuardia Airport and Penn Station, some slowing is inevitable.
Where do we go from here?
According to Wells Fargo’s Construction Industry Forecast 2019, markets showing the greatest growth in construction are global gateway cities, technology-centric metro areas, and energy-driven markets.
To plan the right next business moves, whether you’re contemplating a financing project or looking to finance already-completed buildings, project-specific financing data is extremely helpful. At the end of the day, knowing what those projects are and what loans are available for refinancing can help drive successful business decisions.
CrediFi is the source for unbiased loan data on construction lending.