Are uncertainties in construction materials costs, supply chains and the labor market putting the squeeze on construction loans these days?
“While it’s important to call out that prices have started to come down, material costs and labor challenges have factored into the lending landscape for residential and commercial construction,” said Spence Broadhurst, regional market executive and president of FNB’s Eastern Carolina Region. “Some estimates indicate that lumber prices alone have added between $10,000 and $15,000 in per-unit costs to new multifamily construction projects.
“At the same time, we are in an extremely active market that is flush with excess capital and liquidity, and many businesses are ready to take on construction projects to expand,” Broadhurst added. “In Wilmington, this is especially true in the industrial space and for both multifamily and single-family housing, where high demand for inventory has been accelerated by the pandemic.”
Mark Johnson, Wilmington market executive with Dogwood State Bank, said that while most of his bank’s commercial borrowers are moving ahead, there have been some setbacks.
“I spoke with somebody today,” he said recently. “There is a piece of property they were going to purchase three or four months ago, but somebody else bought it. The broker called him back today and asked if he was still interested because the cost of construction had made the other party back out.
“We’re beginning to hear of some projects that are perhaps delayed, or people who are backing out of capital improvement projects,” Johnson continued. “However, on the industrial side, the material [of concern] is usually steel, not lumber. Many buildings going up now put their steel orders in months ago so, fortunately, they are moving forward with their projects.”
Johnson pointed to recent news that the cost of lumber and some other materials is declining.
“I read today that those costs are going to come down a little more. If that information is accurate, then great,” he said. “Things will turn pretty quickly.”
In the meantime, FNB is looking for solutions for borrowers, according to Broadhurst.
“We are working with borrowers to structure deals that account for fluctuations in materials costs. Many borrowers are sitting on pent-up equity that they may inject to cover the added expenses, or we may look to build in contingencies if costs even further exceed expectations,” he said. “To counterbalance uncertainty, we also advise clients to take steps to control what they can – and right now, that could include locking in historically low interest rates with a swap to make the cost of financing more predictable.”
Those low interest rates may be a factor in keeping area construction in a “boom stage,” said Bill Scott, a mortgage specialist with Corning Credit Union in Wilmington.
“The cost of building is mitigated [by the low rates],” he said.
Scott also believes that builders are giving their customers good information.
“I think the builders have got a pretty good handle on what’s been thrown at them; circumstances that are sometimes changing every day. They are telling folks up front [about possible delays], so people are aware in that respect. If a home is already under construction, there usually are not too many delays because of inability to get materials.”
Scott said that Corning’s construction borrowers are seeing their homes completed well within the standard 12-month loan period. As to spiking costs, there’s nothing the lender can do to increase the amount of a loan once it has closed, so the borrower must be responsible for additional monies in the short term, he said. But that changes once construction is complete.
“Once everything is settled and done, we can help [address the cost overrun] with a personal loan or a home equity loan,” he said.
It’s not just low interest rates that are helping borrowers weather higher costs and keep the project cost within the original appraised value. If a borrower already owns the lot, the increased value of that land can give them more financial leverage, says Ashley Weninger, a mortgage banker with South State Bank in Wilmington.
“We [finance] a lot of custom home builds,” she said. “Most of our customers already own their lot and have a lot of equity in it. The value of the lot is boosting the value of the home. Appraised values have held up pretty well; so far we have not had any appraisal issues.”
With higher-end homes, price is still a concern, especially with the high cost of lumber, but, says Weninger, most builders are good at including in a contingency reserve and cost cushion, and most custom-home borrowers expect cost overruns and have made provision for those.
“We have had some borrowers ask if there is any way we can increase the loan amount, but we’re not seeing people say ‘We’re just not going to build.’ Most are going forward anyway.”
Broadhurst noted that creativity and flexibility on the part of bankers and borrowers is essential.
“As an example, our Builder Finance division is seeing clients get creative by using more efficient floor plan designs and by waiting longer in the project cycle to list and price homes to be sure they have an accurate gauge of their cost and margin,” he said.
“With continued high consumer demand for homes, we may allow homebuilders in this type of scenario to finance additional new homes that are not yet under contract, enabling them to continue growing their business while mitigating risks associated with the current high volatility of material costs.”