Fewer new construction projects have come to market since the coronavirus pandemic hit the U.S. Even now, six months into the outbreak, few owners and developers are willing to take risks during the continued economic uncertainty. Nevertheless, lenders and financiers still want to back good projects and banks are actively looking for new commercial construction deals. 

Here, Construction Dive talks about these challenges and what the future holds with Frank Cook, national program director of construction risk at Burlington, Massachusetts-based construction advisor EBI Consulting.

With the continued economic uncertainty due to the COVID-19 pandemic, what’s the outlook for funding new construction projects now?

While it’s not as robust as it was before COVID-19 hit, there certainly are avenues for funding new construction projects. Traditional banks are lending on construction projects, but they are maintaining a tight risk profile – they’re looking for trusted existing clients to bring them low-risk projects with lower than average LTC, or loan-to-cost, ratios. We should expect to see moderate growth in the construction lending space, nothing near as aggressive as previously projected, but still positive growth.

Are owners putting new projects out to bid?

This is the real crux of the matter. The financing is available, but many owners, investors and developers are playing the “wait and see” game. Projects that were in the pipeline pre-COVID moved forward for the most part, but owners have been hesitant to kick off new projects since. Owners heavily entrenched in the retail and hospitality spaces especially are holding their cards back, while those focused on industrial and multifamily assets will continue to be busy. 

Is there money available to build new, ground-up construction that hasn’t already started?

We are hearing from both national banks and more specialized regional banks that they’re open for business, they’re just waiting for the projects to be brought to them. The capital is available for construction, especially for multifamily and industrial, but the projects are slower to get started.

Many owners have to account for increased costs due to COVID-19 safety inspections and supply chain delays, which are adding to the delayed appetite for new projects. 

How are banks and other financial institutions viewing new commercial construction?

Financial institutions are being rightfully cautious in heavily impacted asset types and markets. Regions that are dependent on tourism, for instance, are unlikely to see new hotel construction lending. Similarly, banks are not interested in Class A office in major metros where the majority of the workforce are increasingly remote. But key secondary and tertiary markets, areas heavy in industrial/ warehousing and distribution activity, opportunities for redevelopment and multifamily projects are welcome by lenders across the board.

Is it a risk they want to take?

Traditional lending sources are being selective and lending on fewer projects than we’ve seen previously, but this has opened the door for alternative lenders and capital sources to come in and provide financing where others won’t. The diversity of funding sources in the construction lending space only continues to diversify, and opportunistic investors and lenders alike are active right now despite the pandemic.