In today’s construction news, learn about how the development of new hotels in the United States is slowing down because regional banks have tightened their lending rules at a time when domestic tourism demand is high. Meanwhile, due to forecasts showing that wells will run dry under existing conditions, the state of Arizona limited future home-building in the Phoenix area on Thursday due to a scarcity of groundwater. Finally, developer Joins Modular Construction Companies to Raise Availability of Low-Cost Apartments
United States Hotel Builders Are Running Out of Money as Access to Construction Loans Dries Up
Regional bank lending regulations are making it difficult for U.S. hotel developers to get money, limiting hotel building at a time when Americans are traveling more.
The financial stress on regional banks, the largest lenders to hotels and other commercial real estate markets, has forced hotel developers, private equity firms, and general contractors to postpone projects or find other creative ways to raise capital, according to Reuters.
The regional banking crisis, which led to the failure of three mid-sized U.S. lenders and a flight of deposits to larger banks, has hurt the hotel industry and the U.S. economy.
Shopoff Realty Investments, a California developer, halted construction of Dream Las Vegas, a 21-story hotel and casino resort, after Silicon Valley Bank collapsed in March.
Build Central Inc., a subscription-based research and analytics firm used by some large hotel brands to assess market opportunities by location, shared previously unreported data with Reuters that 59 of the 98 U.S. hotel projects that broke ground or were in pre-construction this year have been paused since March.
“The regional banks that used to be active for us 9 to 12 months ago are not showing up to finance hotels for us today,” said MCR Hotels Chief Investment Officer Joseph Delli Santi, the third-largest U.S. owner-operator of Hilton and other hotel brands.
Over the past year, access to loans and higher construction costs have delayed projects in Florida, Texas, and California, said James Hansen, executive vice president of business development of hotel developer and operator Hotel Equities. The regional bank upheaval had extended construction loan approval times.
Hilton Worldwide Holdings Inc (H.N) and Marriott International (MAR.O) CEOs have also warned of a decline in hotel development as credit becomes more expensive and scarce in their last earnings calls.
Blue-chip manufacturers like Caterpillar Inc., whose commercial real estate customers account for 75% of construction sales, will also see slower hotel development. Due to high financing or leasing rates, customers are buying less equipment.
After the bankruptcy of Silicon Valley Bank (SIVBV.UL), Signature Bank (SBNY.PK), and First Republic Bank (FRCB.PK), numerous regional lenders considered tightening lending requirements and providing fewer commercial real estate loans.
As lending criteria tightened, smaller hoteliers without existing lending relationships ran into problems, said Andy Ingraham, a hotel developer and president of the National Association of Black Hotel Owners, Operators, and Developers.
Ingraham said he and others are struggling to finance projects.
According to Evens Charles, CEO of Frontier Development and Hospitality Group, a Washington D.C. developer with 10 hotels, private equity firms have filled construction loan funding gaps at higher costs.
“I’m hearing 9-10% (interest rates), and it’s coming from a 4% environment two-and-a-half years ago,” he remarked.
“Sit on the Sidelines”
Small to mid-size banks, including lenders with less than $250 billion in assets, hold nearly $2.3 trillion in commercial real estate loans for facilities like offices, hotels and warehouses, the equivalent of 80% of their total liabilities.
Regional banks are discounting commercial real estate loans. In May, troubled regional lender PacWest Bancorp (PACW.O) stated it would sell $2.6 billion in real estate construction loans.
In the first quarter of 2023, S&P Global Market Intelligence discovered banks began reducing their hotel credit portfolios. 14 of 24 banks with more than $125 million in hotel and motel loans reported quarter-over-quarter decreases, according to regulatory filings.
Western Alliance (WAL.N) was the anomaly. In the first quarter, the Arizona bank increased its hotel loan portfolio by 14%. In an email, a spokesperson said the bank had “deliberately slowed” hotel lending near the end of the first quarter with a “eye toward slower economic growth overall.”
Hotel developers were already hurting before the regional banking crisis, according to Mitchell Hochberg, president of Lightstone Group, a New York-based private real estate investor and developer with a $3 billion portfolio of hotel properties.
New projects are halted.
“Good hotel deals are harder to find,” he stated. “A lot of developers would prefer to sit on the sidelines until rates come down rather than be burdened with the excess costs.”
Arizona Puts Limits on Building Homes in Phoenix Because of a Lack of Water
Original Source: Arizona Restricts Phoenix Home Construction Amid Water Shortage
Due to estimates that wells may run dry, Arizona banned Phoenix homebuilding on Thursday.
The Arizona Department of Water Resources’ action will restrict population growth in the Phoenix Active Management Area, home to 4.6 million people and one of the nation’s fastest-growing areas.
The state’s recent analysis predicted a 100-year water shortage in Phoenix of 4.86 million acre feet (6 billion cubic meters).
The state responded by denying new Assured Water Supply certificates, which allow home construction.
Arizona has imposed such restrictions on other areas, and not all of greater Phoenix requires a certificate, but experts said the measure was certain to slow home-building in an area representing over half the state’s population.
“It’s a reality check. “We need water to grow,” said Sharon Megdal, director of the University of Arizona’s Water Resources Research Center.
Developers must find other sources to build, according to the Department of Water Resources.
Farmers, Native American tribes, and officially designated entities with excess water to sell are all facing shortages due to overuse and a century-long drought.
Megdal said recycled or desalinated brackish groundwater could also boost supplies.
Even though new homes have doubled their water efficiency and replenish their groundwater through the Central Arizona Groundwater Replenishment District, a home builders trade association said theirs is the only industry required to meet 100 years of groundwater demand.
“We have struggled with the fact that we’re the only one that ultimately is stopped when groundwater issues arise,” said Spencer Kamps, vice president of the Home Builders Association of Central Arizona.
Arizona’s Colorado River is also stressed.
As part of a seven-state effort to rescue a river that supplies 40 million people, including Phoenix, Arizona and partner states in the Colorado River Compact agreed last week to lower their river intake by 13% over three years.
In Response to the Rental Housing Crisis in the United States, Greystar Launches a New Brand
One of the largest U.S. apartment owners and managers launched a brand aimed at addressing the nation’s shortage of workforce housing that will include modular construction to keep costs down.
Greystar, based in Charleston, South Carolina, said Ltd. by Greystar will provide newly built housing for workers such as teachers, first responders and nurses who generally can’t afford to rent such flats. The brand focuses largely on utilizing technologies that advanced during the epidemic to cut running costs at properties, allowing for lower rates.
Rents must be affordable and rise no more than the consumer price index or 3%. April CPI was 4.9%. Ltd. Med Center, Greystar’s first development, is located in Houston near the Texas Medical Center, the world’s largest medical center district.
Greystar, No. 2 on the National Multifamily Housing Council’s 2023 list of the largest apartment owners, joins other developers in addressing a workforce housing shortage that grew during the pandemic as rents rose above inflation.
While rent growth has slowed dramatically, primarily because of record levels of development, new housing is mostly targeting the higher end of market rentals.
In an October report, Fannie Mae estimated 4.4 million rental and ownership units were needed in 75 U.S. metropolitan areas. Fannie Mae estimates a shortfall of workers earning 60% or less and 80% to 120% of median income. Fannie Mae defined workforce housing as 80%–120% earners.
The demographics of metropolitan areas and their housing stock can vary greatly, so some “areas have a pronounced need for more affordable low-income housing, while others need more workforce housing,” Fannie Mae noted in the research.
States, cities, and school districts nationwide were addressing the workforce housing problem. The 100-mile-north of Phoenix Chino Valley Unified School District announced it was building 10 $550-per-month studio units to attract teachers.
According to CoStar data, Greystar’s new Houston Ltd. property’s average asking rent is $1,043, $800 below the average for new apartments.
Greystar senior director of innovation Brandon Chinn says leasing is strong. The company’s marketing plan went beyond most new apartment leasing companies’ digital campaigns.
Chinn told CoStar News that they delivered cookies and gift baskets to schools and the medical center to spread the word.
Reducing property employees helps lower operational costs. Renters take self-guided tours. Or they do virtual tours.
Apartment owners used those technologies during pandemic shutdowns. Potential renters prefer the new procedures.
Chinn said the residences will have plenty of self-serve components, operating through smartphone apps to make requests. He said net operating income is rising.
Greystar plans four more Ltd. developments in 18 months. One will be made entirely of modular components from Greystar’s April Knox, Pennsylvania plant.
“We are harnessing the innovative power of the private sector to deliver a rental product that is less expensive, more attainable, and sustainably produced to meet a need we are seeing in the market,” Greystar founder, chairman, and CEO Bob Faith said last month.
The industry claims that module construction, delivery, and installation speed saves the most money. Modular apartment construction has grown in recent years to speed up unit delivery.
According to the Modular Building Institute’s 2023 annual report, multifamily development has dominated modular construction for three years. One-third of output is multifamily.
Last year, the industry generated $12 billion, accounting for 6% of construction starts. That’s triple 2015’s industry.
St. Paul, Minnesota, Florida, New Hampshire, Massachusetts, and Pennsylvania have built new apartments using modular construction.
One major player is Brazilian homebuilder MRV’s Miami-based apartment developer Resia. It builds modular apartments in Texas, Atlanta, and South Florida. The Genlser-designed 537-unit Resia Ten Oaks in West Houston will open late next year with modular construction.
Last year, the company announced a panhandle factory in Bay City, Florida.
When the plant was announced a year ago, Resia CEO Ernesto Lopes said, “Our construction method allows us to build quickly and achieve cost-savings that are passed on to our residents.
Summary of today’s construction news
To put it simply, in the first quarter of 2023, S&P Global Market Intelligence discovered banks began reducing their hotel credit portfolios. 14 of 24 banks with more than $125 million in hotel and motel loans reported quarter-over-quarter reductions, according to regulatory filings.
On the other hand, Arizona and partner states in the Colorado River Compact agreed last week to lower their river intake by 13% over the next three years as part of a seven-state strategy to safeguard a river that supplies 40 million people, including Phoenix, with drinking water.
Finally, Florida, New Hampshire, Massachusetts, and Pennsylvania have built new apartments using modular construction. MRV’s Miami-based apartment developer, Resia is a prominent player. Texas, Atlanta, and South Florida apartments are built using modular construction. West Houston’s Resia Ten Oaks, a 537-unit Genlser-designed complex, will debut late next year. The company built a facility in Bay City, Florida, near the panhandle, last year.