Non-residential construction lending and building predicted to slow in 2023
It’s never been easier to apply for a commercial construction loan in the 2020s. Instead of driving miles to a brick and mortar bank, and spending precious time going over your company’s financial well being with a loan professional, you can apply for funding utilizing a CRE Lending & Investing Software Platform or something similar right on your laptop or phone.
But with interest rates on the rise, plus inflation still plaguing most of the western world, and supply chain issues not going away anytime soon, applying for a construction loan might be easier than ever, but being approved in 2023 could prove more difficult than usual.
That said, thus far, 2023 does not seem to be shaping up as a banner year for non-residential construction projects. According to a recent report by Forbes, the number of commercial construction projects will likely shrink as the economy falls into recession due to reduced spending and higher interest rates. The decline in non-residential construction won’t be shocking, but the drop will be significant and noticeable.
Says Forbes, the current financial situation is confusing since overall spending is considered moderate, but costs of just about everything you need is up significantly. What this usually translates into is that spending activity would be way down once you consider the inflation adjustment. But there are said to be positive signs in the economy that contradict that view.
For instance, employment for commercial construction is up. This includes all trades from laborers to roofers to electricians. There are said to be other indicators that look good also or so says the chief economist for the Associated General Contractors in the U.S. But forecasting for 2023 is turning out to be a difficult proposition since economists are lacking a concrete starting point (pun intended).
Says Forbes, positive construction industry and lending narratives along with positive employment data obviously present a more rosy picture of 2023 than others would argue. Considering the high cost of everything plus inflation, commercial construction activity is said to up 4 percent over the past year. That stat is, indeed, a head scratcher.
It appears the anticipated downturn in 2023 is derived solely from recession fears which could hit in mid-2023 or even early 2024. Whatever the case, a recession, while not one-hundred percent certain, is said to a highly likely scenario. However, it is predicted to be less severe than the 2008-2009 recession but worse than the one that hit in 2001.
Macroeconomic factors revolving around commercial construction will be rising interest rates which would naturally lead to a halt in spending. This is a natural result of any recession. But when you look at the situation on a micro level, individual sectors will do better based on others. For instance, commercial contractors who do work for industries requiring non-routine maintenance for their plants usually doesn’t slow down as much as new office space construction might during a recession.
Forbes states that commercial construction constitutes the biggest category of non-residential construction, making up nearly one full quarter of the industry. This includes factories, industrial facilities, warehouses, wholesale facilities, brick-and-mortar banks, bars, restaurants, retail outlets, and more.
Since the summer of 2020 during the pandemic, the non-residential commercial construction industry has remained relatively healthy, despite some projects experiencing some significant delays. Even retail construction, which appeared weak on the surface, held its own over the past two years.
However, construction of large shopping malls has come to a virtual standstill. Yet restaurants, supermarkets, activity-oriented retail spaces like craft shops, spas, and gyms, have kept on growing.
Amazon, the king of retail outlets has slowed its warehouse constriction, but this is likely a temporary maneuver while popular items like books for example, are now said to be purchased online sixty-five to seventy-five percent of the time, compared to just twenty-five to thirty-five percent sold in traditional bookstores.
According to Fortune Magazine, Amazon has killed or put aside plans to construct up to 42 facilities which would make up close to 24 million square feet of usable warehouse space. But warehouse space construction is beginning to slow for all businesses in the U.S. while warehouse vacancies are said to be on the rise.
So then, what’s the bottom line for non-residential construction and lending come 2023? Look for continued activity throughout the first couple quarters, with a slowdown later in the year. That said, if a recession never comes, look for continued growth in the commercial construction industry sector.
