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Construction costs complicate financing | The Spokesperson’s Review

By on June 17, 2022 0

Some Spokane-area lenders say they are working through challenges to finance commercial construction developments and move projects forward despite soaring building material prices and rising labor costs, which have resulted in project delays and cancellations.

Aliza Seay, president of the Spokane Valley-based Northwest Business Development Association, said the amount of time borrowers have to lock in an interest rate for a construction project has changed due to rising construction costs. construction – from six months to between 90 and 120 days. .

“It’s really been a challenge for our applicants because the construction industry is very busy and with the cost going up it’s been difficult to meet that deadline,” Seay said. “The other impact is that due to the increased cost of materials, they have canceled and postponed projects.”

Jim Frank, CEO of Greenstone Corp., a Liberty Lake-based real estate development company, agreed and said Greenstone had scaled back some projects under development over the past three months due to soaring costs.

The company obtains financing for its larger commercial projects, including some developments in the Kendall Yards area, but it self-finances residential housing estate developments.

Frank declined to disclose the specific projects Greenstone has had to cut due to rising costs in recent months.

A U.S. Construction Outlook, released in May by the Associated General Contractors of America, reported that in two years, from April 2020 to April 2022, building material prices increased significantly for products steel, which increased by 107%.

In addition, lumber and plywood prices soared 89%; copper and brass metal products increased by 77%; aluminum metal products, 72%; plastic building products, 49%; and freight transport by truck increased by 41% during the same period.

Meanwhile, construction bid prices could not keep pace, rising only 23% for non-residential building construction, signaling that some projects should not proceed as they become financially unfeasible.

“We’ve seen our construction plans on 504 loans drop dramatically,” Seay said. “We are busy in terms of other loans. We’re absolutely having a fantastic year, but it’s not thanks to a lot of building projects. »

504 loans backed by the US Small Business Administration can be up to $5 million and are intended to be used for major purchases, such as a building, major fixed assets, and major equipment.

She said the NWBDA has seen an increase in commercial refinancing activity, which has helped offset the decline in commercial development loans.

Seay explained that the refinance loans offered by the nonprofit have fixed rates.

“A lot of the commercial market is gearing up to rerate over the next three to five years, so in the step-up market, they’re looking for a fixed rate, and that’s what we can deliver,” Seay said.

The NWBDA’s average loan in fiscal 2021 was $877,000, compared to an average loan of $1.07 million in 2022 as of April 30, Seay said.

NWBDA is a Certified Development Company licensed by the US Small Business Administration to help administer and manage the SBA’s 504 Loan Program.

The organization provides secondary construction financing behind a third party lender or bank which typically funds 50% of the loan amount. The NWBDA can provide financing for approximately 40% of the loan, and the applicant would be responsible for the remaining 10%.

“That first loan with the third-party lender or the bank will often be a variable rate that resets every three or five years, depending on the program,” Seay said. “But our share is always fixed for the term of the loan and that’s why with commercial real estate we can go up to 25 years at a fixed rate.”

Saif Hakim, vice president and director of commercial loans at Seattle-based Craft3, said the longer the process takes, the more fluctuations there are likely to be.

“Any construction finance lender understands that costs increase daily and weekly, so make sure we approach loans with the right line items in place…and doing due diligence up front helps our flexibility.”

Craft3’s due diligence includes constructability analysis to give an idea of ​​current market conditions as well as the latest material and labor prices and where they are headed to understand how and in what areas the developers will spend their project funding.

“We noticed that as the process takes 90 to 120 days depending on the size and scope of the project, as we get closer to closing, there have been changes in the budget,” Hakim said.

“The main point for us as a lender in this area is to be flexible and have the ability to restructure and find ways to mitigate costs to help the deal get over the finish line.”

Craft3 offers loans for smaller projects, which typically cost less than $200,000, as well as additional loans for larger construction projects, similar to how the NWBDA funds commercial development loans.

Megan Hulsey, commercial lender in Craft3’s Spokane office, said the nonprofit is seeing an increase in lending activity in today’s market.

Traditional lenders require higher collateral value and better credit ratings before taking out commercial loans. And they are referring commercial borrowers to Craft3 for project financing as they tighten lending requirements, she said.

Frank from Greenstone said the biggest challenge to moving business development forward is the cost of labor.

He added that demand is still strong, but low employment levels in the industry have caused delays and cancellations, driving up the cost of developments.

“Cheap labor no longer exists,” Frank said.

He said rising labor costs in the local construction industry can be attributed to the retirement of baby boomers leaving the workforce; remote workstations; child care costs that may limit a worker’s ability to return to on-site work environments; opportunities for better paying jobs in other industries; and a lower level of immigration that the industry previously relied on for workers.

Frank predicts that the high cost of labor will continue over the next few years as commercial developers failed to invest in capital improvements to increase efficiency before the onset of the labor crisis. work.

“Investing in these capital improvements to become more efficient will take years,” he said.