Credit Market Meltdown Squeezes Contractors

October 1, 2008

The upheaval on Wall Street is delaying or stopping projects all over the country, even ones already under way. Developers who had lined up construction loans from Lehman Brothers have found the check wasn’t in the mail this month, forcing contractors to front the money—if they can find it—or walk off the job. For projects that contractors expected to start this fall, the developers are finding the lending window has been shut for now, or the revenue assumptions for the finished development no longer look valid.

Public projects and institutions such as hospitals and universities may not have the same credit difficulties, but their funds have also taken a hit. Many states are dialing back their forecasts for income and sales tax revenues while increasing their projections for social welfare spending. That combination, along with a requirement that their budget be balanced in a fiscal year that typically ends just nine months from now, means construction projects will be delayed, scaled back or canceled.

Institutions that had counted on endowments or pledges from wealthy donors may find their portfolios have shrunk too much to proceed with planned projects. Putting the economic engine back in gear may not be easy. Banks and other lenders that have suffered losses directly on mortgages may be able to sell those to the government, depending what sort of rescue package is implemented. (At this writing, nothing has been enacted.) But they are unlikely to recoup losses incurred on many indirect investments and may have to reduce their lending until they attract more capital.

State and local revenues will not bounce back right away, although a “stimulus” package that appropriates funds for public works could resuscitate construction. The best chance for recovery is if housing revives. Although figures on permits, starts and sales in August were dismal, the inventory of unsold new homes has shrunk substantially. If the lending window for mortgages reopens, there could be a rapid upturn in home sales. That would quickly spur other consumer spending and would bring single-family home construction back to life by the second half of 2009 in some parts of the country. Property tax receipts would then turn up, helping school districts and other local governments.

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