It’s simply too early to tell what the long-term impacts of the COVID-19 pandemic will be on construction projects in the Lehigh Valley, but banking executives from at least two major lenders in the region are reporting that, as far as construction loans are concerned, some things haven’t changed.
Based on the number of construction loan applications Peoples Security Bank and Trust Company (PSBT) is receiving these days, multi-family (apartment) and industrial projects are most popular today, and that’s really nothing new, according to Jeffrey Drobins, Lehigh Valley market president. Headquartered in Bethlehem, PSBT is an independent community bank serving 14 counties in Pennsylvania, including Berks, Lehigh and Northampton counties, as well as Broome County in New York, through 29 offices.
“Multi-family projects have been popular for quite some time,” Drobins said. “In March, the market briefly paused, but starting in early summer, the bank began to see requests for new projects, many that have been in planning for the past year or two. Rising rental rates, low vacancy, population growth, and affordability (as compared to major metro regions within driving distance for employment) continue to make these projects attractive to the developer community.”
Industrial projects have been arguably the most attractive for a while, he said, adding that COVID-19 really has had no impact on industrial projects.
There’s been no slow down at all, he says.
“Rising rental rates, low vacancy, and limited land availability for new construction make these projects the most attractive to the developer community,” Drobins said. “The increasing demand for e-commerce, access to quality highway infrastructure, access to quality labor, and our strategic location within reach of 40 percent of the U.S. population within a six-hour drive will continue to drive the attractiveness of this asset class for many years to come.”
Joe Feilmeier, commercial market president for Lehigh Valley with Fulton Bank, agrees: “Currently, we’re seeing the most continued construction loan demand for multi-family buildings and industrial projects. We’ve seen volume drop for retail and office space requests, as many of the businesses that would serve as tenants driving those projects are riding out the current market volatility and delaying their own plans.”
In 2019, Lancaster-based Fulton Financial Corporation consolidated all affiliate banks under the Fulton umbrella into one bank – Fulton Bank. This included Lafayette Ambassador Bank in the Lehigh Valley. Fulton Bank currently serves a five-state footprint.
John M. Hayes, executive vice president with New Tripoli Bank, said his bank is seeing a lot of activity with respect to loans for residential construction. “Right now residential construction is really heating up,” he says, “primarily because there is no inventory for sale in the Lehigh Valley.”
The growth includes single-family housing, multi-family units and residential rental properties. “Nothing is happening on the commercial side (when it comes to construction loans) with the exception of residential rental housing. That is a very hot segment of the market right now.”
To quantify what New Tripoli Bank is seeing regarding the Lehigh Valley residential market from another perspective, Hayes says mortgage loan applications at his bank have experienced a surge recently too. “Our mortgage pipeline for the last three months is more than double what it historically is,” he says.
Founded in 1910, New Tripoli Bank operates three locations in Lehigh County, in New Tripoli, Claussville and Upper Milford Township.
In terms of the types of projects that PSBT might be shying away from these days, Drobins says the bank’s approach to what it does has changed little due to the pandemic.
“Hotel and restaurant financing, even in the non-COVID-19 environment, is challenging,” he says. “These segments have high failure rates, are capital intensive, and collateral is specialty use. Like most lenders, Peoples Security Bank and Trust Company typically lent cautiously into these segments and will continue to do so. I don’t think you’ll find a lender today actively looking to lend into any of these segments.
“The fallout from COVID19 is largely unknown still,” he says. “We are currently managing the bank in a conservative manner so we are fully prepared to deal with any issues which may occur in late 2020 and into 2021. Certain projects like hotels, restaurants, entertainment venues, I suspect may be delayed or may never move forward. Particularly, new hotel construction I would expect to be on ‘pause’ for quite some time.”
Hayes says that all businesses have been impacted by COVID-19 and many are operating more conservatively when it comes to financial decisions. “It’s been very difficult and businesses, by and large, are holding on to capital. They’re not buying new equipment. There’s concern about what the rest of the year will look like with respect to the pandemic.
A slow down ahead
Fulton’s Feilmeier also expects the construction arena to slow down for a while. “Construction projects may take several years to come to market,” he says. “Some developers who were in advanced planning stages are moving ahead.
It’s a trend that’s bearing out at the national level. A June survey by the Associated General Contractors of America (AGC) found that 61% of contractors saw a project canceled as a result of the COVID-19 pandemic, and 48% had a project that had begun before the pandemic put on hold. The survey does note that some of this delay can be attributed to supply chain disruptions, with one in four firms citing construction materials shortages caused by lockdowns and trade disruptions as the cause of project delays.
Based in Arlington, Va., AGC represents more than 27,000 firms, including some 6,500 general contractors, and 9,000-plus specialty-contracting firms, according to the organization’s website. More than 10,500 service providers and suppliers are also associated with AGC, all through a nationwide network of chapters.
In the end, Feilmeier points out that loan applications for construction projects are really no different than other financing requests. “In the current environment, banks in general are carefully reviewing all financing requests,” he says. “Fulton Bank continues to provide construction financing and has consistently supported customers in many industries through a variety of economic cycles.
“While the market is in a difficult place right now, we are still pursuing projects, and we continue to find ways to help our customers. The pandemic will eventually end, and the economy will recover,” he says.
Drobin says: “The Lehigh Valley developer community is very resilient and we’ve seen them work through and come back from very tough economic challenges, so I would expect them to adapt, pivot and persevere coming out of this pandemic,” he says.