“Recent uncertainty among lenders could lead to new challenges for U.S. construction firms as more projects fail to pencil out.”
Why this is important: Economic conditions, including interest rate hikes, point to decreased construction activity in coming months as financing costs for many developers have become prohibitively high. Coupled with these conditions is the recent uncertainty in the banking industry. According to the Associated Builders and Contractors, construction backlog decreased to 8.7 months in March, its lowest level since August 2022. Meanwhile, industry experts, concerned about the long-talked about recession, stress that lending standards for banks have tightened as banking insecurity intensifies causing owners and developers to hold off on projects in the short term. These trends are fueling increased concerns about access to capital in general, and the development of a vicious cycle where lenders charge more to limit their risk, and developers will not or cannot pay higher interest rates to achieve their targeted returns.
Additional factors influencing capital access is the focus on yield from projects and longer lead times for materials. Challenges for project yield (a property’s return after purchasing costs and renovation expenses) are exposed with higher and more limited capital costs and access. On the supply side, longer lead times for materials increase the cost to carry the goods for contractors and developers. Although some materials have become more readily available, the overall supply chain still remains in a fragile state, according to a first quarter CBRE market trends report.
Nevertheless, many industry observers believe that the recent bank failures and corresponding reaction by the Federal Reserve could ultimately force it to put the brakes on interest rate hikes, which may help temper the construction headwinds. --- Bryce J. Hunter