Commercial construction halt creates greater debt risk.
Over 450 construction projects were underway in New York before COVID-19 took over news headlines. All that has stopped by now.
“We’re closing down nonessential construction sites,” said Cuomo during his press briefing. Narrowing down definition of "essential" construction, meant closing most projects in the state and disrupting $65 billion industry. Uncertainty on billions of loans allocated to fund multiple projects across New York has suddenly increased .
“We are closing down nonessential construction sites. Some construction is essential to keep the place running, but nonessential construction is going to stop”
Cuomo's order includes several exemptions allowing for work to continue on necessary healthcare facilities, hospitals, public infrastructure, transit facilities,homeless shelters, public or private schools.
Just hours before Cuomo's directive, an article published by New York Times summarized poor working conditions at most of city's construction sites.
"Construction sites, even during normal times, are notoriously dirty. Workers often share a single portable toilet, which rarely has soap or hand sanitizer. Running water is not common."
We are about to see domino effect with non-essential workers staying at home, contractors and vendors not being able to survive and lenders wondering when and if they will get paid as major deadlines are missed.
Lenders struggle to assess correct loan to value ratios as economy has pretty much stopped. Largest commercial lenders have to be consistent but at the same time flexible when it comes to lending during difficult market conditions like COVID-19.
Projects that are already under construction are at much greater risk of failing to complete the rest of planned development as lenders might declare out-of-balance and won't be able to fund remaining commitments.
Consequences of declaring loan out-of-balance create unwanted stress on both lender and borrower. Skilled lending professionals should be able to mitigate the risk using detailed loan agreement and available tools to create viable exit strategy.