costs have climbed back up 40% from pre-pandemic levels. With demand remaining strong, suppliers continue to hold the upper hand. • Supply Chain Disruption: Material availability and delivery lead times continue to challenge project teams. From PVC to roofing material, steel, appliances and even paint, these disruptions continue to persist. With most facilities having to shut down or slow down at some point during the pandemic, the demand never wavered. This in turn led to supply not being able to keep up with demand, creating a feeding frenzy for materials, ultimately driving costs higher. • Labor Shortage: Labor also plays a large role in the volatility of the market. While labor concerns were already plaguing the construction industry, the pandemic compounded the issue. Project slowdowns, concerns over health risks and government subsidies drove the workforce to stay home in lieu of reporting to work during the pandemic. With fewer workers available to put work in place, labor costs began to rise. The construction industry is experiencing a major shortage of skilled labor. With 20% of the construction workforce over the age of 55 and the number of workers between the ages of 25-54 decreasing by 8% over the past decade, there are concerns over how the age of the workforce will affect the industry long term. Mitigating Risk While the market environment is rife with volatility, the housing crunch and historically low interest rates through the bulk of the pandemic kept the demand for new project starts at an all-time high. This seeming paradox currently has credit departments tightening requirements and pushing prospective borrowers to take on the risk of rising costs post-closing. To keep deals moving forward in these uncertain times, risk mitigation is of heightened importance. Mitigating this risk, much of which is unknown, requires diligent underwriting, learning from the mistakes of others and implementation of sound industry practices. Below you will find a two-part recommendation for assistance in identifying and ultimately mitigating risk currently involved in CRE transactions. The two-part solution refers to identifying and mitigating risk pre-closing (loan underwriting) as well as tracking the risk post-closing (loan servicing). Pre-Closing Identifying risk and implementing mitigating efforts during the underwriting phase are nothing new to the CRE world. What has changed over the last 18 to 24 months is the focus of the due diligence review and underwriting process. Below you will find a current list of what to focus on and industry best practices that have proven to be successful in the face of extreme uncertainty: • Contractor/Project Team Qualifications: Contractor selection can make or break any CRE project. In today’s market, selecting the right contractor is imperative to a successful outcome. Pre-pandemic it was customary to review the corporate resumes and financial statements of contractors. In today’s environment, we must take the analysis one step further. Not only is it good practice to underwrite the corporate entity, but it is also extremely important to identify and vet the individuals who are proposed to manage and supervise the project in the field. This is accomplished by reviewing resumes and interviewing those who will be tasked with the daily operations on site. This step is recommended to ensure the proposed field team has adequate experience with similar projects and understands the risk that exists in today’s market. Continued on page 24 In this time of uncertainty, it is more important than ever to properly structure CRE transactions with a focus on industry best practices and risk mitigation to move deals forward. July • August 2022 23
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