{"id":14355,"date":"2023-03-19T02:23:41","date_gmt":"2023-03-19T09:23:41","guid":{"rendered":"https:\/\/essential.construction\/news\/bank-failures-cause-uncertainty-for-contractors\/"},"modified":"2023-03-19T02:23:41","modified_gmt":"2023-03-19T09:23:41","slug":"bank-failures-cause-uncertainty-for-contractors","status":"publish","type":"post","link":"https:\/\/essential.construction\/news\/bank-failures-cause-uncertainty-for-contractors\/","title":{"rendered":"Bank failures cause uncertainty for contractors"},"content":{"rendered":"

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Pressure on America\u2019s banks is fueling uncertainty in financial markets, causing concerns of a spillover to overall construction activity, according to economists.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

After the closures of Silicon Valley Bank and Signature Bank last week, questions surfaced about how those collapses could impact the construction industry. For instance, numerous construction executives attending the Associated General Contractors of America\u2019s national convention in Las Vegas this week have inquired about potential industry impacts from these bank failures, according to Ken Simonson, AGC\u2019s chief economist.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

SVB had $209 billion in assets and $175.4 billion in deposits as of Dec. 31, <\/span><\/span><\/span><\/span><\/span><\/span>according to the Federal Deposit Insurance Corp.<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>, while Signature Bank had <\/span><\/span><\/span><\/span><\/span><\/span>$110.4 billion in assets and $88.6 billion in deposits<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> as of Dec. 31. Neither of those closures had any direct impact on contractors nor their projects, said Simonson.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

But contractors can expect tightening and some tension from small and regional banks, said Greg Ross, industry managing partner at Grant Thornton, a Chicago-based accounting firm. These are big players in the construction industry that will likely tighten their credit lines and make it more difficult to close loans.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201c[It\u2019s] important for construction companies to build cash reserves and maintain a certain level of liquidity,\u201d said Ross. \u201cMake sure you have some diversity in your investments where you are able to react quickly.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Nonresidential construction activity this year has <\/span><\/span><\/span><\/span><\/span><\/span>remained at high levels<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> despite elevated <\/span><\/span><\/span><\/span><\/span><\/span>construction and borrowing costs<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>, according to an Associated Builders and Contractors analysis.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Impact on interest rates<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

President Joe Biden has taken steps to restore confidence in the U.S. banking system, and said Sunday that taxpayer dollars would not pay to rescue depositors. Instead, the money will come from a fund banks already pay into \u2014 the Deposit Insurance Fund, <\/span><\/span><\/span><\/span><\/span><\/span>according to a White House press release<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>. Through that fund, depositors will have access to all of their money, while shareholders and certain unsecured debt holders will not be protected, <\/span><\/span><\/span><\/span><\/span><\/span>according to the Department of the Treasury<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a>.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cAt the moment, I think regulators have acted promptly and appropriately to limit the damage,\u201d said Simonson. \u201cThe fact that Treasury interest rates have plunged may mean other \u2018safe\u2019 investments will benefit from lower financing costs, such as highly rated state and local borrowers.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Simonson concluded that the impact on the construction industry will be minimal, at least until there has been more time to see if there are other hidden problems among the country\u2019s large banks.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

These large banks, such as JP Morgan, Citi and Morgan Stanley, all expect a rate hike at the next Federal Reserve meeting, said Anirban Basu, ABC chief economist. Meanwhile, Barclays and Goldman Sachs reportedly await no change to already high rates.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

It is conceivable that there will be no further rate increases this year, said Basu. For instance, Japanese financial holding company Nomura expects the Fed to actually <\/span><\/span><\/span><\/span><\/span><\/span>cut rates<\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/span><\/a> at its next meeting.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

However, a more likely outcome is that the Federal Reserve will raise rates perhaps once or twice more during the months ahead. Those rate hikes will take many months to make themselves apparent in the economy, said Basu.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

\u201cWith the likely tightening of financial conditions given the growing stress on America\u2019s banks and ongoing efforts by the Federal Reserve to rein in excess inflation, commercial real estate and construction are likely to weaken further during the year ahead,\u201d said Basu. \u201cThe current moment is, above all else, defined by uncertainty.\u201d<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Looking ahead<\/span><\/span><\/strong><\/span><\/span><\/span><\/h3>\n

Though contractors with work related to infrastructure, industrial facilities and healthcare will remain busy, privately financed projects outside of that scope could see a slowdown, said Basu.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n

Grant Thornton\u2019s Ross also agrees a slowdown could be on the horizon for commercial projects.<\/span><\/span><\/span><\/span><\/span><\/span><\/p>\n