Questions: Quick Answers About Construction, Risks & Financing…

These two questions were asked by a reputable economist in my circle a year ago? What should we expect from second quarter GDP growth? Is construction helping or hurting? Recently, while underwriting, advising about financing and discussing the current economic market landscape with a small developer about a project, a couple of related questions were asked. The answers are below and may be helpful if you needed fast answers.

Construction that finishes phase 3, and the building goes into operation, producing cash flow – not much of hurting here but plenty of help for local sub-market economy and even small businesses.  However, if the project is stalled, the sponsor walks away or just cannot finish the project, that’s just a hard pill to swallow – plenty of hurting here. As far as, the growth rate of real gross domestic product (GDP), a key indicator of economic activity, I would expect more growth for 2Q17.

First quarter showed weak performance due to instability in labor market and consumer spending, which also hindered business performance. According to many top Economists, growth in consumer spending was 0.6% instead of 0.3% previously reported. There was also slight fall in corporate profits after tax based on inventory valuation, etc. Anyhow, GDP in second quarter will be stronger, growth estimate was 0.9% but as of now we are at 1.2% rather.

The construction deals that I look at for financing are interesting and complex too. The risks for construction projects such as: environmental, logistical, management, financial, technical, social, political, etc., always force the lending community to remain on high alert.  Nonetheless, the financing exists for the right project and sponsor. Do these answers above still apply for construction in 2018? Obviously, GDP for the 2Q18 increased to 2.3% and more construction has taken shape since. However, the answers about risks in lending remain intact. This does not mean some construction and development projects are not going to get funded.

By: Ibsen Alexandre
Ibsen Alexandre offers his opinions about real estate finance, business, and investment at www.Refivest.Com and other real estate publications. He can be reached at ibalexandre@refivest.com

The opinions expressed herein are those of the author(s) and do not reflect the view of a particular firm, its clients, any respective affiliates nor any Media Platform. This article is for educational general purposes only and is not intended to be and should not be taken as solicitation to lend.


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