Construction Industry Sees Supply Chain Shift Away From China, Spooked Capital Markets

The Dallas-Fort Worth construction industry avoided the construction moratoriums enacted by other U.S. states during the coronavirus outbreak, but it was unable to dodge the negative effects of disrupted supply chains and nervousness from capital providers.

"Here in DFW, we were generally lucky from an industry standpoint that Texas construction projects kept moving," VCC Construction Managing Director Derek Alley said while speaking at Bisnow's Texas Construction & Development webinar Thursday.

But Alley and other construction leaders said the area was not immune to delays caused by virus-related disruptions in the supply chain, particularly with the U.S. so reliant on shipments from China, where the coronavirus originated and first spread.

Crescent Real Estate Equities Managing Director Joseph Pitchford said his firm had 1,600 hotel guest rooms under construction and product coming from China when the virus first broke out. 

"We got hit. There were significant delays of furniture coming from China."

Knowing what the industry knows now, Pitchford and other DFW construction experts anticipate a more diversified supply chain in the future that leans more heavily on domestic suppliers and manufacturers as well as other countries outside of China. 

"It shed some light on how efficiently these things are being transported," Rastegar Equity Partner CEO Ari Rastegar said. He expects China could lose its foothold as the nucleus of the supply chain, allowing more diversity when it comes to construction manufacturing and shipments.

"It's going to create a more competitive landscape," Rastegar added. "There was some short-term pain ... but it will be an incredible long-term benefit." 

DFW construction leaders remain optimistic overall about the market but said the capital markets are spooked, giving rise to difficulties in procuring parts of the capital stack while sparking greater interest in relationship banking and regional and local bankers. 

"The capital markets are really tough right now," Rastegar said. "I am seeing the [loan-to-value ratios] coming down, and the balance sheet for construction financing is significantly lower than it was."

Construction leaders in DFW also see a dramatic disparity in how they view the construction and development landscape when compared to how capital providers see it in the wake of the pandemic.

"There is a little bit of that fear in the capital markets," Thakkar Developers CEO Poorvesh Thakkar said. "It’s not just fear, they are waiting for things to become distressed. They are waiting for the distress to come."

This is making it more difficult on the construction financing side. 

Despite this belief among some capital providers that distressed assets are coming and the market is at greater risk of losing value, Thakkar and Rastegar said the DFW commercial development market is showing signs of resilience and preservation of value. 

"I have actually seen cap rates compress in multifamily," Rastegar said, noting that 94% of multifamily providers still collected on their recent rents.  

"The capital markets are totally inverted when it comes to the reality of what is happening in our markets."