Markets

Volatile Mid-Year Outlook for 2023 Commercial Construction Projects

Commercial projects and real estate are expected to be volatile through the end of the year.
By Ben Johnston
July 19, 2023
Topics
Markets

The remainder of 2023 is expected to be volatile as Fed rate hikes continue to slow the economy while combatting inflation. Increased volatility is anticipated in the capital markets which will translate into volatility in real estate prices. Unemployment is expected to rise, but be prepared to see higher unemployment disproportionately impacting the lowest wage earners who are already showing signs of weakness through higher credit delinquencies and reduced purchasing power.

However, the high-end consumer will remain strong throughout the year, while being more price conscious and looking for bargain investment opportunities. High-end consumers will continue to build and invest in real estate but will be looking for price concessions and better overall terms as the cost of financing these projects continues to rise.

Here’s a deeper look at notable trends:

Financing applications

A tightening across the banking sector since at least the spring of 2022. This tightening accelerated after the failures of SVB and Signature Bank. As banks have pulled back from extending credit to small businesses, there has been an increase in quality applicants who are looking for additional growth capital and are unable to obtain the financing they need from the banking system.

Economy

The Federal Reserve seems determined to slow the economy through additional rate hikes until inflation comes under control. As a result, the economy will likely continue to slow in the coming months, and this slowing could place greater strain on the construction industry. Ultimately, the employment rate is the greatest indicator of demand in the construction industry. If unemployment begins to rise, demand for new housing and home renovations is likely to decline.

Business loan interest rates

The cost of capital to small businesses has risen at a rate this is likely in-line with the rise in the Federal Reserve rate. This has been challenging for businesses that depend on regular financing as a core part of their regular operations. Businesses which consistently fund the purchase of inventory or raw materials are especially impacted. Higher cost of capital also makes the financing of certain new projects and expansion opportunities uneconomic, slowing overall growth.

Residential real estate

Higher interest rates are cooling the real estate market across the country, but we continue to see strong credit demand from contractors as a shortage of affordable housing, coupled with low unemployment rates, generate demand for new housing stock. In addition, higher interest rates mean that many homeowners are locked into lower rate mortgages and are choosing to stay in their home rather than selling and repurchasing in a higher rate market. As a result, many of these homeowners are looking to renovate existing housing stock, driving demand for contractors.

While consumer savings has declined significantly from its post-pandemic high, higher earners have by-in-large maintained their savings while lower earners have burned through much of theirs. With strong rates of employment across all income levels, consumer spending has remained elevated. This is especially true for high earners who have continued to invest in real estate and home improvement despite a higher interest rate environment. However, it is believed that the failure of SVB and Signature has made high-end consumers more cautious about the overall state of the economy and it would not be surprising to see a further slowdown in high-end real estate purchases, especially if interest rates continue to rise.

Expectations for other industry markets

Overall, the shortage in affordable housing across the country will drive demand for multi-family construction for years to come. However, the outlook is more pessimistic regarding commercial office space, which is expected to suffer in many major metropolitan areas as remote work becomes a permanent fixture in American life and many long-term corporate leases expire. All real-estate markets will be susceptible to the negative effects of higher interest rates and constrained bank liquidity, which may create significant volatility in real estate prices should another banking shock occur.

by Ben Johnston
Ben Johnston is the Chief Operating Officer of Kapitus, one of the most reliable and respected names in small business financing. Kapitus provides growth capital to small businesses and has provided over $3 billion to over 50,000 small businesses since 2006. Kapitus offers a number of loan products to small businesses, including SBA loans, revenue financing, equipment financing, cash-flow based factoring, revolving lines of credit and invoice factoring.

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