Is uncertainty about the cost of building materials, supply chains and the labor market putting pressure on construction loans these days?
“While it is important to note that prices have begun to decline, material costs and labor problems have impacted the housing and commercial lending landscape,” said Spence Broadhurst, regional market leader and president of FNB’s East Carolina region. “By some estimates, sawnwood prices alone have increased unit costs for new apartment buildings by between $ 10,000 and $ 15,000.
“At the same time, we are in an extremely active market that is overflowing with excess capital and liquidity, and many companies are ready to take on construction projects to expand,” added Broadhurst. “In Wilmington, this is especially true for industrial space, as well as for tenements and single-family homes, where the pandemic has accelerated high demand for inventories.”
Mark Johnson, Wilmington’s market leader at Dogwood State Bank, said that while most of his bank’s commercial borrowers are moving forward, there have been some setbacks.
“I was talking to someone today,” he said recently. “There is a property that they were going to buy three or four months ago, but someone else bought it. The broker called him back today and asked if he was still interested because the cost of the construction caused the other side to back down.
“We’re starting to hear about some projects that may be delayed or people abandoning major renovation projects,” Johnson continued. “However, from an industrial point of view, the material [of concern] usually steel, not lumber. Many buildings currently under construction placed steel orders several months ago, so fortunately they are moving forward with their projects. ”
Johnson pointed to recent news of declining prices for lumber and some other materials.
“Today I read that these costs will decrease a little more. If this information is accurate, then great, ”he said. “Everything will be very fast.”
Meanwhile, according to Broadhurst, the FNB is looking for solutions for borrowers.
“We are working with borrowers to structure transactions that take into account fluctuations in the cost of materials. Many borrowers are sitting on deferred capital that they can invest to cover additional costs, or we can count on contingencies if costs exceed expectations even more, ”he said. “To balance the uncertainty, we also advise clients to take steps to control what they can – and right now this could include fixing historically low interest rates with a swap to make financing costs more predictable.”
These low interest rates could be a factor keeping construction “booming,” said Bill Scott, mortgage specialist at Corning Credit Union in Wilmington.
“Reduced construction costs. [by the low rates],” he said.
Scott also believes that builders provide useful information to their clients.
“I think the builders are pretty good at what is thrown at them; circumstances that sometimes change every day. They tell people in advance [about possible delays]so people know about it. If the house is already under construction, delays due to the inability to obtain materials are usually not so many. “
Scott said that Corning construction borrowers see their homes completed within a standard 12-month loan period. As for the skyrocketing costs, there is nothing the lender can do to increase the amount of the loan once it closes, so the borrower must be held accountable for the additional cash in the short term, he said. But that will change after construction is complete.
“When everything is settled and done, we can help [address the cost overrun] with a personal loan or a loan secured by equity capital, ”- he said.
It is not only low interest rates that help borrowers withstand higher costs and keep project costs within the original assessed value. If the borrower already owns the land, the increased value of that land could give him more financial leverage, says Ashley Weninger, a mortgage banker for Southern State Bank in Wilmington.
“We [finance] many custom built houses, ”she said. “Most of our clients already own their land plots and have a significant share of capital in them. The value of the plot increases the value of the house. Estimates remained fairly good; so far we have had no problems with the assessment. “
For higher tier homes, price is still a concern, especially given the high cost of lumber, but Weninger says most builders are good at incorporating contingency reserves and amortizing costs, and most custom home borrowers expect cost overruns and have made provision for those.
“We had some borrowers who asked if there was a way to increase the loan amount, but we don’t see people saying, ‘We’re just not going to build.’ Most of them are moving forward anyway. “
Broadhurst noted that creativity and flexibility on the part of bankers and borrowers are essential.
“For example, our construction finance team sees clients get creative with more efficient floor plans and wait longer in the project cycle to list and evaluate homes to make sure they have an accurate estimate of their value and margins.” – he said. said.
“With continued high consumer demand for homes, we can allow home builders in this scenario to fund additional new homes that have not yet been contracted, allowing them to continue growing their businesses while mitigating the risks associated with the current high material cost volatility. ”