What Will Happen to Construction Loans in a Post-Pandemic World?

The pandemic created new turmoil and complexity for lenders.

• Increasing commercial loan defaults in 2020
• COVID restrictions on foreclosures and evictions
• Declining property values as collateral
• New loans, such as the Paycheck Protection Program (PPP)

Lenders focused heavily on PPP loans, which essentially were no-risk. Add to this the provisions of the CARES Act, which allowed modifications to construction loans, forbearance, interest rate modifications, or payment plan revisions.

It clogged the lending pipeline. As financial institutions rallied to meet new challenges, it also slowed down traditional lending for construction projects. Many lenders failed to meet their commercial lending targets in 2020.

Construction Loans in 2021

The good news is that lenders have a significant backlog of funds that they are ready to lend in 2021 as the construction industry starts to ramp back up. Financial institutions will also need to create more good loans to balance out the continuing bankruptcies and defaults that are likely to continue for the next year.

Projects that feature added stability are likely to get quicker approval. For example, construction projects with strong deal sponsors with high net worth, liquidity, and personal guarantees are prime for loans.

Construction Project Shifting to Meet Demand

Construction loans in industries ramping up to meet shifting consumer demand will also likely get approval. Data centers, warehouses and fulfillment centers, delivery companies, and industries that cater to e-commerce are in demand and support stronger rent stability. Warehouse construction set a record in 2019 of $30 billion. Even despite the pandemic, the record was broken in 2020, and warehouse construction spending is expected to continue in 2021.

As the population continues to age, healthcare, medical, and other outpatient facilities will see continued investment.

Hospitality and lodging may continue to lag with some of the highest delinquency rates. Lodging alone saw a 22.1% delinquency rate toward the end of 2020 – nearly twice as high as retail.

More than 110,000 restaurants closed in 2020 due to COVID as sales fell by $240 billion. That also left a lot of unoccupied building space. Look for construction loans for renovating existing spaces to increase in 2021. Office space faces a similar fate. With more companies keeping employees working from home and reducing their office footprints, the new construction sector may lag while the renovation of existing spaces is expected to surge.

Funding for Public Projects

As local and state governments are seeing diminished revenue and extraordinary expenses in the wake of COVID, they may be hesitant to put the additional debt on public balance sheets which will limit lending. Federally-backed projects, however, are expected to escalate in 2021 as an additional way to stimulate the economy.

Construction Financing is Available

The bottom line is that financing is available for the right projects, especially with the right sponsors. Many owners, investors, and developers remain hesitant to embark on new projects, however. It may result in more market pressures for competitive bidding.

Many lenders are facing pressure to fund construction loans now while conditions look favorable. At the same time, loans may come with additional risk provisions to deal with potential COVID effects on project completion and potential loan defaults. This may include higher rates and more stringent terms than in the past.