We can all agree these past two years have been anything but predictable. Working with borrowers and investors on projects across different asset classes, we wanted to hone in on four challenges we’ve repeatedly seen across the board with construction contractors!
Planning Delays
It may take longer than what is expected owing to many reasons like compliance hurdles, labor shortage, and technological and organizational complexities. Even if all works, materials, expenses, and quality mechanisms are planned ahead of time, the enormous risks involved apart from unpredictable factors may push the project completion beyond the stipulated time and result in cost overruns.
According to the Q4 2020 U.S. Chamber of Commerce Commercial Construction Index, 71% of contractors surveyed are facing at least one material shortage. Lumber was the most-cited material shortage (31%), followed by steel or electrical supplies other than copper wire (11%) and lighting supplies (10%) [source].
Population Decline in Major Cities
Major cities in America including New York, Chicago, San Francisco, and Los Angeles are witnessing a population decline in the last few years. The trend picked momentum since the onset of the Covid-19 pandemic when the enormous rents became unfeasible for middle-income residents. While some cities are seeing mass exoduses, others – like Phoenix AZ and Austin TX to name a few – are benefiting greatly from these huge population booms (source).
Work-from-home policies and public health shutdowns accelerated the exodus from these large metros. The pandemic shed light on the positive side of remote working.
Cost Increases
These construction challenges are straight out of a textbook: low supply and high demand. As we all know from our freshman year Macroeconomics professors, that inverse relationship never tends to pan out well. The planning delays noted above are only increasing costs (low supply), while up-and-coming cities are attempting to keep up with the new boom of residents (high demand).
Capital Shortage
As we know, large-scale construction projects cost a pretty penny. Often, when capital isn’t available on time, contractors are forced to push the schedule. Or else, it will result in further expenses. The delayed date of completion will lead to client dissatisfaction too.
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In another blog post, we outlined how Colonial enabled a retail commercial property developer to kickstart his dream property with an express loan.