Hi, How Can We Help You?

Category Archives: Financing Construction

The past few years have completely changed many industries and reshaped how people live their lives. As we head into a new year, it’s time to look forward and plan for continued changes, advancements, and challenges in the year ahead.

Non-Residential Construction Predicted to Slow Down

Based on the potential recession that’s looming on the horizon, non-residential construction is expected to slow down. It will not be a devastating drop in activity, but it will be felt by the industry as a whole. Recessions usually come with a decrease in overall spending which will affect most industries, including construction.

Manufacturing construction, in particular, has grown 22% in the last year, but changes in economic trends are set to slow down that growth rate. The pandemic switch from spending on services to spending on goods is starting to reverse, meaning there is less demand for greater manufacturing capacity and therefore manufacturing construction will slow.

Other specific areas of non-residential construction such as commercial construction, infrastructure, healthcare construction, etc. are harder to predict and will likely experience less of a drop in activity.

Inflation Will Cause a Decrease in Construction Starts

A recent article from Construction Dive predicts that “Total U.S. construction starts will drop 3% when adjusted for inflation to clock in at $1.08 trillion next year, according to the 2023 Dodge Construction Outlook.” Specifically, commercial starts such as retail, office space, warehouses, hotels, etc. are predicted to decrease by 13% in 2023, adjusted for inflation.

Richard Branch, Chief Economist at Dodge, said, “The construction sector has already started to feel the impact of rising interest rates. The Federal Reserve’s ongoing battle with inflation has raised concerns that a recession is imminent in the new year. Regardless of the label, the economy is slated to significantly slow, unemployment will edge higher and for parts of the construction sector it will feel like a recession.”

Public and government funding will support manufacturing and infrastructure construction activity, but an economic downturn will negatively affect the residential and commercial construction sectors.

Greater Focus on Sustainability and Resiliency

While construction starts are predicted to slow in 2023, there will be an even greater shift towards sustainable building practices and resiliency of construction projects. The industry focus on net-zero (zero waste) construction and remodeling projects will continue to grow exponentially in the next year, leaving companies who don’t invest their resources into green building practices at a disadvantage.

Aside from environmentally friendly construction practices, there will also be a greater emphasis on creating or modifying buildings and infrastructure to increase resiliency. With the wildfires, hurricanes, and other natural disasters we’ve seen in the past year, there is a push to create infrastructure that can withstand these catastrophic events.

This focus on sustainability and resiliency will lead the construction industry into new ways of thinking and doing. From rebuilding homes to renovating warehouses, architects, designers, builders, and Mechanical, Electrical, and Plumbing (MEP) engineers are going to need to approach these projects with an eye for opportunities to choose sustainable building materials or more resilient building structures over traditional construction practices.

Innovations in Technology

In the increasingly digital world, there has been a steady growth in spending on technology and digitalization across all industries.

The construction industry in particular has started seeing huge leaps in innovative technology-based practices, such as 3-D modeling, Augmented Reality, Building Information Modeling (BIM), Computer Aided Design (CAD), and off-site construction.

Digital tools not only make the design and construction process easier and more efficient; they also greatly increase the level of precision of measurements and materials, which leads to fewer mistakes during construction and ultimately, money saved.

More Collaboration Opportunities

With the advancement of tools and technology, there has come an increased level of collaboration between companies and sectors in the construction industry. We now have the ability to digitally send plans, drawings, models, and more to anywhere in the world, which opens up huge opportunities for collaboration and connection.

At Pro Engineering, we stay up to date on the latest industry trends, technologies, and regulations. We engineer our MEP designs to maximize energy efficiency and sustainability. If you want to learn more about what we do and how we can collaborate on your next construction project, contact us today.

Are you looking for ways to secure funding for commercial construction projects? Depending on your role, financing can mean different things for different commercial property types.

Commercial real estate developers often rely on investors. If you own a business or manage a large organization, the company’s needs can change over time. You’ll need to complete a construction project budget to address future growth.

Regardless, building commercial buildings requires financial resources. Every building comes with a cost based on the commercial property design. The latest buildings are more sophisticated and durable.

Before the project gets off the ground, securing financing is an essential step. Construction costs have increased to almost three times that of pre-Covid. The increase can make or break your plans.

Fortunately, there are ways to secure financing for commercial construction projects. Here’s everything you need to know about financing commercial buildings.

Traditional Commercial Construction Finance Option

In a perfect world, all commercial construction projects get funded through traditional banks. Money is readily available, whether a new building or a commercial leasing build-out. Access to funding extends the feasibility and alleviates the risks of large-scale projects.

Commercial banks, including community banks and credit unions, are a great source for different types of commercial property projects. A traditional bank loan comes with the option of fixed interest rates. You can also extend the repayment period over 25 years.

Banks also offer short-term construction loans. These loans get repaid once the project is completed and sold.

Construction business loans also cover commercial construction equipment and commercial property designs by architects.

SBA-Guaranteed Bank Loans

The most difficult construction business loan is a loan backed by the Small Business Administration (SBA). The federal government backs SBA loans. If you cannot repay the loan, the bank issuing the loan isn’t left holding the bag.

Of course, this means there’s a strenuous process to qualify. It also means the loan process takes longer and will require more paperwork.

There are two types of SBA loans for construction projects.

504 Program

The 504 program is a multi-purpose commercial construction finance loan that allows you to borrow up to $5 million for a single project. However, you can qualify for three loans with a cap of $16.5 million.

Fund uses include:

  • Commercial construction equipment
  • Commercial property design
  • Mechanical, Electrical, and Plumbing Engineers
  • Real Estate

The terms of the loan vary. Loans for commercial construction equipment have a 10-year repayment period, whereas a loan for real estate has a 20-year repayment term.

7(a) Program

The 7(a) program is similar to a 504 program. The repayment terms for equipment are seven years and for other loans 25 years. You can borrow significantly less with a $5 million cap.

Real Estate Crowdfunding

Real estate crowdfunding is the process of receiving funds from multiple investors. It is similar to other platforms that allow people to contribute funds to a common cause. Think of it as a GoFundMe campaign but with more oversight.

This commercial construction finance option relies on multiple investors. You choose whether to offer equity in the project or to make it lending-based.

Equity crowdfunding is for commercial construction where the builder will hold onto the property. The investors receive a return on monthly rents or when units get sold.

For the lending-based model, the borrower must repay the lenders monthly or quarterly with interest.

Hard Money or Private Lenders

Hard money lenders may not be the ideal financing options for some commercial construction projects. However, when it comes to a commercial leasing build-out, it’s worth consideration.

Private investors issue these types of loans. The lender is often a private investor but can also be a friend or colleague. Therefore, the repayment terms aren’t the same as a traditional lender.

Qualifying for a hard money loan comes down to your ability to repay the loan. Don’t be surprised if the repayment period gets tied to your ability to sell or collect on the project soon after completion. The interest rate on the project is also higher than banks.

On the positive side, a hard money loan cuts through the red tape. You won’t have to meet all the requirements of a regular loan. For example, a hard money lender may not require bank statements, a business plan, or other documents.

Another bonus is you’ll get the money much more quickly. Instead of weeks, the lender can get you the funds in days.

Life Insurance Company

With proper financial planning, one can leverage funds from other assets in order to get a larger source of funds than otherwise possible. A little-known secret outside the construction industry is that life insurance companies underwrite commercial construction loans.

Although these companies are more vested in existing properties, some offer construction loans. The terms and conditions are similar to traditional loans.

Use the loans for anything from multifamily units to hotels. Life insurance loans may have a minimum loan amount of $1 million but come with a 30-year loan term.

Capital Campaign

A capital campaign for commercial construction is an option but can take longer than securing a loan. You’re most likely to see churches or other non-profits utilize this option.

The benefit of capital campaigns is the money is donated, so there is no repayment. The downside is your project can take months or years to break ground. The result will significantly impact future projects.

Weigh the pros and cons of a repayment period with interest vs. a debt-free project.

You can also choose a commercial property design that allows you to build in phases. Investors see their money at work, which increases future contributions.

Commercial Construction Financing That Works for You!

Financing construction projects may be a bit more difficult in the current commercial climate. Don’t let this news deter you from moving forward. With these options, you can find financing that fits your project needs. 

We hope the information has you exploring different types of commercial construction finance options. With funding secure, your next step is to locate mechanical, electrical, plumbing, engineers, and design services.

About Pro Engineering:

Pro Engineering has provided mechanical, electrical, and plumbing engineering design services in Orange and San Diego counties since 1995. During this time, we’ve established ourselves as one of Southern California’s best engineering consulting firms.

Our MEP engineering design team can help you prepare required construction documents for city or state submission for permitting. Even after plans are finalized, we continue to make adjustments and revisions per owner request, city plan check requirements, or to meet engineering goals. Projects can move fast, luckily, so can we.

 For more information on how we can assist you with your next commercial construction project, contact us today

U.S. inflation officially is at a four-decade high at 8.6%. This is starting to affect many different parts of Californians’ lives such as gas, shopping, and business operations. However, it is clear to all that housing and the housing market is where most people are feeling the full weight of these all-time high interest rates. The cost of shelter in California is one of the highest in the nation and the increase in pricing is only making this more noticeable.

First-time home buyers are expected to be the ones who feel the total effects of inflation in California. Interest rate hikes are affecting private student loans, adjustable-rate mortgages, home equity lines of credit, and credit cards. For a first-time buyer that probably has other financial strains happening, alongside looking for a new home, the ability to start their buying journey may feel impossible. Current homeowners who have adjustable mortgage rates are also seeing their rates increase. If your credit score is on the lower side, you can expect to have hardships getting any sort of loan for buying a home. Banks are now being extra cautious about whom they are lending their money to and exactly how much they are lending. All these factors are going to affect the construction industry.

Currently, the demand for housing remains high. We can expect that prices will remain high until further notice. Businesses can also expect interest on their loans to continue to increase unless rates are fixed. Overall costs for business expenses and supply chain pressures continue to increase prices.

As pricing continues to increase, we can expect that fewer development projects will be pursued.

In the construction space, a recent article Inflation: The impact on the construction sector states, “Some contractors and developers are facing increased challenges to secure funding for projects amidst questions about the bankability of projects. In a high inflationary environment, funders will generally be more cautious when offering funding to projects that are high in value, complex, or have long build times.” The author, Kelly Outram, Head of Global Contractor Development, Marsh Specialty recommends “five actions developers should consider:

  • Review project budgets against current pricing
  • Discuss risk sharing with stakeholders
  • Consider supply chain challenges
  • Reassess your material procurement procedures
  • Revisit insurance policies.”

Though much of the future inflationary impact on California residents and businesses seems unclear, it is predicted that the effects of these increases will be felt throughout the next few years. To read more about the effects of inflation in California read this blog post from the LA Times.

About Pro Engineering:

Pro Engineering has provided mechanical, electrical, and plumbing engineering design services in Orange and San Diego counties since 1995. During this time, we’ve established ourselves as one of Southern California’s best engineering consulting firms.

Our MEP engineering design team can help you prepare required construction documents for city or state submission for permitting. Even after plans are finalized, we continue to make adjustments and revisions per owner request, city plan check requirements, or to meet engineering goals. Projects can move fast, luckily, so can we.

For more information on how we can assist you with your next commercial construction project, contact us today.