Although many report that the economy is on its way to recovery, experts at Northeast Ohio construction firm 620 Construction anticipate that 2011 will be yet another challenging year for the construction industry. Primarily, these individuals expect that the industry will suffer from the lack of available financing.
The amount of financing available within the construction industry has diminished for several reasons. First, available financing has decreased because of the general attitude toward commercial property among banks; that is, these institutions believe all commercial property to be “high risk,” and as a result, they avoid financing commercial construction ventures. Although the federal government claims that it is encouraging banks to loan money to small businesses, bank examiners are nevertheless making it extremely difficult for these banks to loan such money. Some banks will not even look into commercial real estate projects before denying them credit.
Another reason for the decrease in financing available for commercial construction projects is the reduced and/or eliminated lines of credit offered by banks for these types of ventures. In the past, lines of credit could be opened so that a project could be started before permanent financing was arranged. Now, permanent financing must be organized before a construction project can begin. This process causes huge delays in commercial construction projects.
A third and final reason that Medina construction experts believe that commercial projects cannot receive financing involves the appraisal system. Because the appraisal process is putting a greater emphasis on comparable sales in the marketplace and because recent sales have been under duress, average appraisals have been amounting to approximately 40-45% of the actual cost of building projects. As a result, owners are either being forced to invest more cash or put up a considerably greater amount of collateral. This is both retarding the ability for companies to expand and limiting the number of projects in the marketplace.
Ohio construction experts at 620 Construction warn that it now takes two to three times longer to process a loan than it did three years ago. Therefore, the company suggests that any business hoping to expand should plan well in advance, regardless of that company’s immediate financial position.