Shutdown poses big risks for projects — even when it ends
Loans, insurance, labor, material costs affected by construction ban
Most types of construction in New York have been halted for more than a week, an unprecedented statewide shutdown that presents a slew of financial and logistical challenges for builders.
The potential consequences are manifold as development timelines are stretched indefinitely and workers on projects allowed to continue risk exposure to the coronavirus. While the long-term effects of the suspension remain to be seen, experts say projects will likely take a financial hit when it comes to construction loans, insurance and labor.
Joshua Emory, a principal at Primrose Capital, said the financial pain of construction stoppages most affect projects close to completion. Borrowers that have drawn 90 percent of the loan with three or four months of work left will be facing interest payments on “a very large loan balance” until the project is done, he noted.
He said some lenders might grant borrowers concessions or interest-payment deferrals, but there is no guarantee.
“Those tough conversations are beginning to unfold,” he said, “and unfortunately we don’t have a precedent.”
Emory said he expected many lenders and borrowers to find a “happy medium,” especially for debt funds subject to less regulation than banks.
“[There’s] no reason to sour the relationship just because of the site shutdown that’s out of the hands of everyone involved,” he said.
Jim Fraser, head of commercial real estate finance at Built, which provides software to manage construction loans, said restarting construction work will be costly and, depending on the length of time a project sits, its value could be diminished.
“It’s one thing if this is short-lived — a month or maybe two. It’s another thing if this drags on,” he said. “It’s time-sensitive, is the bottom line.”
Of the 29,587 construction loans nationwide using Built’s platform as of April 6, about 16 percent were affected by government-ordered stoppages related to the pandemic. The affected loan commitment value is more than $4.3 billion.
Fraser said no consensus from lenders has emerged on whether they will respond to affected borrowers, although he pointed to an interagency statement on loan modifications issued by the Federal Deposit Insurance Corporation as a start.
According to the statement, modifications of loan terms will not automatically categorize changes related to Covid-19 as troubled debt restructurings, a substandard classification that is subject to additional regulations.
When projects across a city, state or region are permitted to resume, they will face another problem: a surge in demand for workers and supplies.
Linda Foggie, head of international real estate and construction consulting firm Turner & Townsend’s New York City office, said supply of materials could be tight when projects come back online en masse. Projects in the city will also compete for labor and approvals from the Department of Buildings, the Department of Housing Preservation and Development and other agencies.
“When we do return, there will be considerable pent-up demand for municipal inspections,” she said. “There will be many [projects and clients] who will need to mitigate the lost time.”
Joe Charczenko, of insurance and surety brokerage Construction Risk Partners, noted that construction insurance prices were already rising before the pandemic. A months-long shutdown of the economy and an impending recession could further contract the insurance market.
“I think it’s going to hurt,” he said. “What we have is the convergence of a hard market and confusion of how much new work we will have when we turn the spigot back on.”
Essential construction in New York includes work on healthcare facilities, utilities and affordable housing, as well emergency construction to stabilize a site. According to the Department of Buildings, as of Wednesday, just over 130 sites had been separately approved as “essential” by the city, in addition to those exempted by the state’s sweeping order.
Building Trades Employers Association President Lou Coletti noted that even at these essential sites, his members are seeing a huge drop-off in workers.
“Even with taking all the precautions, we’re getting 20 to 40 percent of the workforce that is showing up for work,” he said.
The federal CARES Act extended unemployment benefits to individuals who are typically not eligible, notably independent contractors. Some construction unions, including Mason Tenders District Council of Greater New York and Long Island and the New York City District Council of Carpenters, have also started allowing members to tap into their retirement savings.
Unions will have to grapple with a drop in the amount of money being fed into their benefit funds, but Tamir Rosenblum, general counsel at the Mason Tenders District Council, said his organization can withstand the decrease in work.
“It’s a resilient program,” he said. “It’s not running like an airline, which is out of business after two weeks of this.”