If you don’t have time to go through the entire of Rabbet’s 2023 State of Construction Finance Report yet; but you’re curious as to the findings, we’ve got you covered! Here is a quick summary of this year’s report.
Each year Rabbet surveys construction lenders and commercial real estate developers to uncover trends and benchmarks in construction finance. This year’s report found that developers and lenders still face challenges surrounding communication and collaboration. Future-proofing operations is top of mind for both lenders and developers, including both rethinking legacy processes and implementing new technology.
Rabbet surveyed over 90 qualified professionals across lending and development with active construction portfolios ranging from less than $20 million to more than $1 billion. Respondents were sourced via Rabbet’s own network of lenders and real estate developers, which includes but is not limited to Rabbet’s customers.
The 2023 State of Construction Finance Report seeks to dig deeper into understanding the “why” behind many of the challenges and shifts that have occurred. This report takes a closer look at how lenders and developers are addressing and perceiving construction finance in 2023.
Survey Snapshot
- 64% of respondents claim that software has helped their team gain efficiency and productivity
- 58% of lenders are investing in process improvements to stay ahead and combat the current macroeconomic climate
- 46% of lenders say risk on projects has increased over the last year
- 68% of developers have invested in process improvements to improve upon legacy processes in the last year
- 39% of draws get sent back to developers for additional documentation by the lender
- 46% of lenders say they would automate the identification of at risk projects
Top Challenges for both Construction Lenders and Developers
Based on the results of this year’s report lenders and developers have been more willing to evaluate and enhance their processes internally and externally with the ultimate goal being efficient tracking of and access to relevant data. They are now acting on many of the lessons they’ve learned in the last few years.
Real estate development and construction loan management each comes with its own set of challenges. In previous reports, real estate developers felt challenged by internal collaboration and reporting project statuses externally. This year, collaborating externally remains a challenge for lenders; however, there is a new and clear emphasis on real-time data tracking and management that has emerged as the biggest challenge for developers.
Legacy Software
This year, developers and lenders still have a strong reliance on spreadsheets yet many respondents touted typical spreadsheet softwares as their least favorite tool. Many accounting systems were also mentioned as an unfavorable tool for developers specifically.
Spreadsheets have been the most widely used program for both lenders and developers for the last 3 years. This survey sought to understand what the “correct” amount of usage for this legacy process should be and how much of the process can be automated to reduce the inefficiencies and risk related to manual entry and other laborious tasks.
Manual Risk
Human error associated with manual processes and data entry still have industry stakeholders concerned about errors and data security. The positive impact of the digital processes on project risk is being recognized by both lenders and developers.
Win, Lose, and Draw: The Complexity of the Draw Process
Only 71% of draws are completed without errors, according to lenders; whereas developers report that close to 61% of draw packages submitted are approved without additional documentation and change requests.The time spent on the construction finance process is heavily tied to the complexity of the draw process.
This process continues to be arduous, time-consuming, and inefficient for both lenders and developers. As construction starts slow down due to macro-environmental shifts, time is of the essence for both lenders and developers to focus on the inefficiencies of their current draw processes and correct the areas where bottlenecks and errors may occur. The complicated nature of the current draw process leaves many opportunities to lose information and time and in future years when teams are winning new business at an accelerated rate again, operational efficiency will be even more important.
Where does the time go?
There is a consistent belief by both lenders and developers that some of the construction finance process could be automated to increase efficiency. This report sought to understand where time is currently spent in this process in order to identify areas where automation would have the biggest impact.
Lenders would automate the identification of at-risk projects more than any other activity. This comes as no surprise when considering the added risk inflation, rising interest rates, and labor shortages can add to a project exposure. Lenders also mentioned they would automate “borrowers preparation of draw materials” and would value “more automated & comprehensive management level reporting.” 43% of developers claim that they would automate month-by-month cash projections and forecasting over all other tasks related to reporting if they could.
Investing in the Future
The current macroeconomic environment is undoubtedly a concern for both lenders and developers. Both parties are reevaluating legacy processes while deal volume may be down in order to ensure that their operations have the stability and agility to navigate any of the uncertainties that lie ahead. Both parties are enlisting the help of software and digitization in order to “future-proof” their processes as much as possible.
A digital transformation brought on largely by the necessary process changes which stemmed from the pandemic has opened the industry up to modernization. The ever-changing economy’s impact to the industry is illuminating the imperativeness of leveraging technology in order to stay competitive.This report dives into the impact of new technology in processes that were seemingly unchanged for decades and where the most valuable changes are being pursued.
In previous years, this report has followed the industry’s perception of technology as it went from reluctance to adopt technology to an acknowledgement that technology and automation would enhance processes and potentially reduce risk and all the way to seeing the follow through of that shift in mindset. Now, there is widespread adoption of technology and we are seeing the result of this implementation.
Trends and Takeaways
Trend #1 : Lenders and Borrowers Want Reliable Data Management Alignment
Takeaway #1: Desire for a more standardized process and transparent data
Trend #2: Implementation and Reliance on Technology to “Future-Proof” Operations
Takeaway #2: Tech-enabled operations are more sustainable
Trend #3: Technology unlocks competitive advantages
Takeaway #3: Change now is worth it for stability later
To view the complete 2023 State of Construction Finance Report, click here. For more information about Rabbet, visit rabbet.com.
Rabbet is transforming the construction finance industry with tailored solutions that provide a complete picture of construction and asset management portfolios. Designed for real-time workflows and comprehensive insights, Rabbet enables real estate developers, construction lenders, and related service providers to lower operational costs, make more informed decisions, and earn trust with other financial stakeholders. Founded in Austin, TX in 2017, Rabbet has improved visibility and efficiency for over $100B in construction and capital expenditure projects.
