Uncertainty in Construction Lending

It likely won’t come as a surprise that the key word to describe construction lending is uncertainty. Purchases are down more than 30% in the first two months of this year as compared to the same timeframe in 2016. During the most recent offering of RMA’s Credit Risk Management Audio Conference Series, Bill Tryon, director of Strategic Development and principal at Partner Engineering and Science, Inc., and Richard Hamm, president and owner of Advantage Consulting and Training, discussed how the construction lending industry has fared thus far in 2017 and offered recommendations for managing current conditions.

A leading economic indicator of construction volume, the Architecture Billing Index (ABI) from the American Institute of Architects (AIA) is a monthly survey that gathers data on the billings of architectural firms. The data offers insights into what the industry is likely to do in the next 9 to 12 months. Recently, the index has shown non-residential and commercial and residential construction on an upward spiral. Infrastructure has been relatively flat, however, there could be a potential impact from the Trump Administration’s 10-year infrastructure plan.

Tryon shared a few interesting points regarding the index’s recent numbers. For the past couple years, residential had been a significant driver of the construction industry, but it has fallen off lately and institutional and commercial and industrial investments have increased in the past three months. He is also seeing that the volume of building west of the Rockies is lower and firms have reported a decline in billings for the last several months in a row.

Costs have been a concern in the last few years. Skilled labor has been in short supply where construction has been heavy, but mitigated by depressed materials prices. Infrastructure spending is likely to increase all construction costs by both capturing labor used in commercial or residential construction and by increasing the need for construction materials.

Because of uncertainty and the volume of construction that lenders have taken on, the industry is seeing some lenders revisit policy requirements and refine their processes. Hamm weighed in on this topic and reflected on what he’s seeing in training programs that he supervises as well as courses that he teaches for RMA. He recommended centralizing the construction administration management function so the institution is in tune with market changes and nuances. This provides greater clarity and enables lenders to think through situations more holistically.

Hamm also stated that the key to a successful construction loan outcome is quality control and due diligence of the contractor. He mentioned tools that can help with vetting contractors including AIA 305 form and, for smaller banks and projects, the Fannie Mae 1202 form.

For more information on this topic, register for RMA’s course, Construction Loan Management: Administering the Construction Loan Process.

Join us on Tuesday, June 13 for the final offering in the 
2016–17 Credit Risk Management Audio Conference Series, CECL Is Here: Don’t Panic.


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