Industry pundits are buzzing about the McGraw-Hill Construction report, as quoted below in the Wall Street Journal.

Commercial Construction May Slow - WSJ.com

In a closely watched report expected to be released today, McGraw-Hill Construction will forecast that spending on commercial and manufacturing buildings, such as offices, warehouses and hotels, will decline 7% next year, in dollar volume, and 10% in the number of square feet of space built. That would be a sharp turnaround from this year, when commercial and manufacturing construction is expected to end the year up 11% in dollar volume. The McGraw-Hill forecast is based on the company’s tracking of construction projects, including the issuance of building-permit data by local governments. That data, known as construction starts, are an indicator of future construction spending and often correlate strongly with actual construction spending. The strength in the commercial sector until now had been offsetting the decline in the housing market. That appears to be changing, though continued growth in institutional construction, such as universities and hospitals, and road construction will provide somewhat of a balance. The pattern of having one sector up while the others were down “has been a moderating force,” says Robert A. Murray, vice president for economic affairs at McGraw-Hill Construction

As one of the more popular financing resources for commercial construction loans, we can attest to our observation of significant declines in residential acquisition & development financing on a national level this year, to the point where even the best deals are not being financed, however the inclusion of residential subdivision projects in the commercial construction loan metrics is potentially misleading. Highly qualified sponsors seeking to build NNN or credit tenant office, net lease retail, flagged select service and better hospitality, warehouse and light industrial assets are still able to secure financing, but as always, commercial real estate is local.

What many sponsors are reporting to us is that their local banks are increasingly retrading previous commitments or declining to quote on new projects, however our approach has always been to look at commercial construction loan requests on a local basis. Multiple markets whose residential values are in trouble are still in fundamental need of additional commercial property, and some MSAs, such as Seattle, are enjoying continued demand for residential as well as multifamily, commercial & flagged hotel / motel product.

If you are a sponsor seeking financing to get your next commercial development off the ground, visit our Commercial Construction Loan site for more information, or give us a call at (800)290-4770

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The effect of rising commercial loan interest rates on new projects is all too well known. Higher rates turn strong projects into marginal ones, and marginal projects into cancellations and quagmires. Investors and financiers want to see clear, contemplative business plans before even entertaining projects in such markets, without which the developer is highly unlikely to secure any type of commercial loan or equity.

Many sponsors seeking commercial loan financing for new construction projects are surprised by this trend, largely because until recently money flowed rather freely into projects of all kinds and business plans often went something like “We’ve got an apartment building, and we’re developing another apartment building“. Moreover, the planning and architecture sides of the project very often had little to no contact with the investor side.

We are seeing change in this regard throughout the industry on new commercial loan originations. Investors, equity and debt partners alike, are more likely to be represented during the design phase of the project, and are “buying in” to projects earlier in the process. This increases the visibility and marketability of the project to capital sources, increases the chances of securing good commercial loan terms, and supports successful outcomes for all.

Architects themselves have come forth advocating the involvement of the financiers early on in the design process, which would normally seen as heresy. But a project which is planned without investor involvement is more likely to experience difficulty in the commercial loan process, and poor financing leads to huge redesigns and cancelled projects, not to mention uncollectible receivables for the architect!

It’s easy to think a finance expert may not seem too useful during the design phase of a project. After all, they’re the money guys, right? One of the key areas of contribution is in developing investor-grade models for costing, staffing, key count, operations, and phasing. The earlier in the process they begin the better, as it helps the design teams believe that the business modeling presented is able to attract finance and can be carried out to fruition. In addition to this financial “design” work, the finance team is uniquely positioned to analyze the design process and the business plan to ensure that the overall project continues to be attractive to capital throughout the development process. This measurement keeps the design on plan, and can help steer it back should it get off course.

Every project is a business venture, part of an overall business strategy, and the business plan for that venture must make sense. Regardless of the type of project, be it the next in a string of local apartment buildings, or the expansion of a hotel brand into new territory, or a good old fashioned renovation, each new project must fit within a company’s strategy. Financial experts are well suited to looking at the build, comparing it with the strategy, and determining whether or not it pencils out. The earlier they are involved, the more effective they can be, by optimizing workable projects so that they are easier to capitalize, manage and complete on time and on budget, while preventing inadvisable projects from burning financial resources of all parties.

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