Constructioneconomy

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Part of those headwinds are a simple dollar-and-cents calculation on the cost of credit. Rising interest rates make loans more expensive, and it’s no surprise that higher expenses slow down construction.

But another part is the reaction banks have had to higher interest rates, which have led them to steer their lending practices even further towards safety as the economy tightens.

Brian JOhnson

“When money was cheaper, even as some would say ‘free,’ you would see projects financed at 75%, 80%, 85% to the cost of the project,” said Brian Johnson, CEO of Choice Bank. But now, he said, banks are asking for higher developer equity in projects.

“So that means partners have to raise more cash coming in and contribute to help keep the debt level lower and ensure the same level of risk is there in terms of the project working,” Johnson said.

The other big issue, Johnson said, has been the collateral damage in the banking sector that higher interest rates have already caused. A string of bank failures earlier this year is closely linked to higher rates, and has made depositors more skittish about where they put their money.

“There’s just been so much deposit outflow out of the banking system,” Johnson said. “And then a lot of that money has flowed to the big five banks, because the government has given them an implicit too-big-to-fail designation. And so banks are also worried about their liquidity positions.”

That, too, makes lenders more nervous about big construction projects – long-term bets where loans take decades to pay off.

Jacobson also pointed out that it’s not just interest rates. Though the cost of materials figures into gloomy outlooks less than the higher costs of borrowing, there are certain components that are still harder to obtain.

“We control lumber and steel, in the United States, more than we can control electrical and mechanical components. That can be more of an international play. And things that are going on in the world sometimes can affect those things more than what we can get from raw materials around here or from Canada.”

Rich jacobson

But not everything is gloomy. Plenty of industry leaders point out that slowdowns are uneven across the country, with some spots still seeing plenty of activity. And as Lance Monson, preconstruction manager at Construction Engineers, puts it, “there’s never a year where construction costs are going to be less the following year.”

“So you could say, ‘Hey, we’ll just wait two years until interest rates have gone down,’” he said. “But what good does it do you to wait two years, so you can save a couple of percentage points on interest if you’re paying five or 10% more for the project as a whole?”

And Jacobson points out that things could certainly be worse.

“It’s not the worst thing in the world, as long as it’s not like 2008 and 2009, the Great Recession,” Jacobson said. “So sometimes it can be manageable, and it makes you step back and think about how you’re running your business, you know, in the markets and the locations you’re in.”

Another reason to breathe: Kraus-Anderson has a big business, handling projects that range from higher education to parking structures to retail.

“We’re pretty well diversified,” Jacobson said. “I would not want to have all my eggs in one basket, in any industry right now, just because of the volatility.”

A MIXEDUSE APARTMENT BUILDING BUILT AND DEVELOPED BY KRAUSANDERSON IN ST. PAUL, MINNESOTA, COMPLETED IN THE SUMMER OF 2022.

IMAGE BY JACK EICKHOF, ONESHOT MEDIA/ COURTESY KRAUS ANDERSON