July 19, 2018
The New York region’s biggest construction boom in this century is continuing unabated, and lenders are maintaining their levels of transaction volume in support of it. Yet there are growing signs of concern. Here to chart the landscape and discuss what steps lenders can take to mitigate risk is Bill Tryon, chief strategy officer with Partner Engineering & Science, Inc.
Q. Is the construction market in NYC beginning to slow down?
A. Not yet—construction in NYC appears as robust as ever, with an abundance of development across sectors. According to the New York City Building Congress Construction Outlook, we’re still in the biggest construction boom of the 21st Century, with an anticipated $52.5 billing in construction spending in 2018 and $50.1 billion in 2019. The rezoning of East Midtown, approved by the City last fall, was designed to loosen restrictions on new development and encourage a resurgence of Midtown as a business center. There are massive, transformative projects underway throughout the city, from luxury condo towers to multi-use public spaces.
Even with all this evidence of a healthy construction market, construction lenders and developers are growing increasingly cautious. Construction costs are high everywhere, but New York is the most expensive place in the world for construction, so it makes sense to be careful.
Q. What’s driving that sense of caution?
A. Developers face significant headwinds, including the labor shortage and the higher cost of materials like lumber and steel. We have yet to see the impact of the global tariffs on the economy, so we are all navigating that big unknown. We’re starting to see New York real estate prices dropping. And, while foreign investors are still buying New York City commercial real estate, they aren’t as aggressive, and slowing sales (particularly of office space) have caused New York to lose ground as a foreign investment target.
Q. How will these headwinds affect construction lending?
A. It’s hard to predict too far in advance. However, we have insights from some of the industry’s top construction lenders, gathered via survey at the 2018 Construction Lender Risk Management Roundtable.
On the positive side, the survey indicated that the majority of construction lenders plan to continue with either the same or greater volume of deals, indicating continued opportunity for development in the foreseeable future. Most lenders chose deals with the same or fewer risk factors, with only a very slight uptick in higher risk deals.
The survey also indicated some areas of concern. 90% of responders concurred that construction costs are rising. The vast majority of them have witnessed the labor and materials shortages that drive costs up. Almost two-thirds of responders saw projects running over budget more often, and a whopping 87% of responders saw projects running behind schedule. When you combine project delays with budget overruns, the risk of project defaults or unfinished sites rises considerably.
Q. How can construction lenders mitigate the risk in this market?
A. Both lenders and investors must be selective about opportunities, and patient through protracted closing times. If you’re breaking ground now, it will likely be two to three years until you’re leasing or selling the space, so the investment takes some faith, planning, and risk management. In this market, Construction Risk Management involves time, careful assessment, experienced guidance, and solid due diligence.
The Construction Lender Risk Management Roundtable (CLRM) is an annual event that provides a platform for the construction industry to share ideas and discuss hot topics and issues that construction lenders face on an everyday basis. In conjunction with the annual event, CLRM hosts regional forums throughout the year. The next regional forum will be held in New York City on July 26. For more information, email CLRMinfo@partneresi.com.
For comments, questions or concerns, please contact Paul Bubny