Despite being deemed “essential,” construction must tackle obstacles caused by the pandemic
BY BILLY OLSON
With approximately 95 percent of the population on lockdown in an effort to reduce the spread of COVID-19, businesses across the country have, in many cases, been devastated. And while the construction industry has been deemed an “essential business” in many parts of the nation, it is still experiencing massive disruptions as a result of the pandemic.
This manifests itself in numerous ways, from decimated foot traffic to lost labor, and if not navigated effectively, could cause irreparable damage to developers and lenders alike.
When it comes to the loss of foot traffic, the reasons are obvious. Aside from the financial hardships that millions of Americans suddenly find themselves facing, most are only venturing out for essentials, such as groceries or medical appointments. This means customer willingness to be searching for a new build, or indeed any property, is significantly diminished.
Developers are facing this challenge alongside another key disruption from COVID-19: cancelation rates. These are obviously going to be significantly higher than during the normal run of business, and come with the added difficulty of builders not only losing their original customer, but being stuck with a home that was built to that customer’s specifications and an extremely limited pool of potential new customers to market the property to, given the current drop in foot traffic.
Other disruptions that need to be navigated include the impact on acquisition and development lending, given that a massive number of projects that were scheduled to start within March and April have been halted. This means that a lot of loans – often coming with higher advanced rates for acquisition and development – might be turned into raw land loans for the foreseeable future until construction can commence. Lenders may find themselves now holding on their books and in their pipeline more land loans than they likely want to.
Navigating the disruptions
With all these disruptions and more to deal with, the most important way for lenders and developers to navigate around them is communication and collaboration. While no one party in the chain has a solution or even a clear idea of the time frame or extent of the pandemic’s disruption, a clear understanding of what each party is dealing with on any given day is key.
The developer, for example, has clear insight into the day-to-day market movements, and this can be shared with the lender, who may have similar insight but not necessarily from the same angle or at the same level of detail. Developers can also give weekly updates on foot traffic, cancelation rates, supply materials, permits, inspections, and so on. Lenders can facilitate this by providing a survey for the developer to fill out on a weekly or bi-weekly basis to see what’s taking place and how together they can navigate around it. This will help all parties have a clear idea of what’s happening (or not happening, as the case may be) from week to week during these exceptional circumstances.
Developers must also ensure that they do everything they can to maintain their supplier and labor relationships by having just as much communication with suppliers and laborers as with a lender. You don’t want those partners to feel like you’re neglecting, or worse, breaking a relationship that you’ve potentially had for a very long time.
Without this communication, you risk these parties going to another market where they can get either the customers or work that they need, leaving you to have to find new labor and new material sources.
Developers with the financial capability to maintain these relationships by providing advances to suppliers and laborers should consider doing so. It’s a smart way to keep them on board, because as soon as those construction halts are lifted, you want to be building fast and you will need labor and sup- plies immediately available.
Lenders, meanwhile, must also be sure to have very frequent conversations with their customers and not wait on financials or covenants in quarterly reviews. Real-life touchpoints at least weekly are imperative right now to work together as a lending institution and developer to address what might happen over the coming months.
Lenders must also navigate the COVID-19 dis- ruption by constantly monitoring which regions have stay-at-home orders in place and how and when this changes. It’s critical for a lender to have this oversight of what this means for its portfolio. Alongside this, lenders should be monitoring building permits. Have borrowers gone from typically starting 20 homes a month down to five, three, fewer? Lenders need to ensure they monitor whether the developer is still actively seeking permits and if so, how many. This will help the lender keep up to speed on the activity going on in the developer’s portfolio and which projects are still happening.
Billy Olson is the director of builder finance solutions at Built Technologies.