With the onslaught of COVID-19, our worlds turned upside down in the span of a few months. As the global pandemic continues, sweeping changes will be required within the US construction lending industry, and it is clear these rules and regulations will remain in place even after the pandemic recedes.
As we all work to understand “our new normal,” banks and financial institutions, service providers and the inspector/appraiser community need to plan how to be prepared for the long term. What can we expect to happen to the future of the construction lending industry?
Stricter Safety Precautions
When COVID - 19 initially hit, the importance of sanitary conditions and health and safety became even more imperative for the construction worker. As business picks up, expect to see increased safety precautions implemented at job sites and in offices. Many locations will enforce a 100% mask and gloves policy along with vast amounts of hand sanitizer, well-stocked handwashing stations and all other personal protective equipment (PPE) available as staple items. Additionally, staggered shift work and temperature checks may also be required.
This new normal will likely be reinforced by local, state, and federal regulations. Complete guidance on what is recommended at construction sites can be found on the Occupational Safety and Health Administrations website at: OSHA COVID 19 Construction Guidelines
Project Delays
In the face of COVID-19, many construction sites were able to continue to operate; however, all markets across the country were affected by interruptions and stoppages. Additionally, according to the National Multifamily Housing Council (NMHC) COVID-19 construction survey, 85% reported delays in permitting due to the virus. In fact, according to a National Association of Home Builders (NAHB)/Wells Fargo survey, some 33% of builders experienced some disruption in their supply chains.
Moreover, some subcontractors have been slow to return to work for fear of contracting the virus in addition to municipality inspections and projects taking longer. While the health and safety of all workers is the top priority, crews, and the number of people on job sites are also decreasing in size because workers now must practice social distancing while on job sites as a health precaution. Ultimately, these factors create delays and resulted in longer construction terms for individual projects as a whole.
Financing Disruptions
With the initial slowdown in the real estate market due to the coronavirus pandemic, many lenders pulled or froze financing due to uncertain construction terms, resulting in the disruption of at least $3.9B in construction loans. Indeed, many builders and developers were challenged to secure funding and continue work on new and current projects.
As the virus placed so many workers on unsteady footing, many lenders have tightened their lending standards requiring borrowers to have additional reserves or increased contingencies. Lenders face an already higher risk with construction loans because in the case of a borrower’s default, the value isn’t achieved until the home’s completion. The longer the project remains under construction and if delays persist, the project is at higher risk of budget overruns due to possible supply issues or basic inflation. Thus, an ever present and critical component in construction lending is selecting qualified and accomplished builders, as this decision determines how quickly and accurately construction will be completed.
While the borrower selects the builder, lenders review and “register” the builder through a thorough evaluation of a builder’s qualifications and review of previous examples of work. Trinity offers an extensive evaluation of contractors to allow lenders to make educated decisions about which builders they allow into their portfolio of construction loans (Builder Information Report, BIR). For more information on this service, please visit Trinity Loan Administration.
As we all learn new ways to adapt and define our new normal, Trinity is dedicated to walking alongside our customers and vendor community, working to communicate, collaborate and coordinate each step of the way. We are so proud to be a part of an industry that has adapted and evolved with every changing day and look forward to a bright and thriving future together.
