By Steve Diamond

Utah’s strong economy and robust job market are attracting people to the Beehive State and keeping generations of Utahns here as well. As a result of the state’s growing population, housing is in high demand. However, supply is low. And despite apartment complexes, subdivisions and houses going up across the state, it will still be difficult to satisfy the demand, especially when the population is only expected to keep growing and the construction industry continues to face COVID-19-related challenges.

First things first, though: How much housing does Utah need to keep up with the fundamental levels of demand?

In March, Bank of Utah hosted a Real Estate Economic Forecast event, featuring Utah brothers and real estate brokers Neil Walter and Jon Walter of ARTI Academics, who shared their insight and analysis on the Wasatch Front, Southern and Northern Utah real estate markets. They included population projections by the Utah Population Estimates Committee showing growth for Salt Lake, Utah and Washington counties through 2025.

Salt Lake County’s population is expected to grow from approximately 1.18 million people to 1.25 million, which would require 4,800 housing units to be built each year through 2025. Utah County’s population is expected to grow from approximately 679,000 to 768,000, requiring 5,000 housing units to be built each year. And Washington County’s population is expected to increase from approximately 187,000 to 219,000, requiring 2,700 housing units. That’s 12,500 units per year through 2025, just for three counties — and those figures, according to the Walters, are conservative.

According to the Utah Population Estimates Committee, Weber County is also expected to grow from 260,000 to 286,000 people through 2025, and Davis County’s population is forecast to grow from 355,000 to 386,000. Considering that the average size of Utah households is 3.1 persons, that means 1,677 new housing units will be needed yearly through 2025 in Weber County and 2,000 will be needed per year in Davis County.

It’s important to note these projections were generated pre-COVID and the pandemic has brought up an entirely new dynamic: People like working at home and have discovered that they don’t have to live in the same community where they work.

“People are starting to think, ‘Where do I want to live?’ For example, they may say, ‘I want to keep my San Francisco job and salary, but I want to live in Beaver, Utah, where I like to recreate,’ and they’ll be able to do that,” Jon Walter explained. That’s likely to be yet another factor in Utah’s population growth.

As more and more discussions revolve around soaring population projections and the need for additional housing inventory, it would appear to be an opportune time to build or invest, particularly with current historically low interest rates. However, with COVID-related supply chain delays and materials on back order, there is a great strain on building schedules and costs, which is not ideal for builders and investors.

In the banking industry, construction loan servicing specialists talk to builders daily when they call in to access funding through disbursements, or draws, and they often hear about material and product shortages. For example, bathtub surrounds, as of mid-March, were six weeks out. With builders running on already tight schedules to satisfy loan terms, these delays are worrisome for everyone involved.

The shortages and backorders are also presenting other new challenges, with builders being asked by materials vendors to pre-pay for items they typically don’t pay for in advance. When builders request a disbursement or draw from a lender, they must provide invoices and receipts for the work performed during the draw period. In the past, pre-payments weren’t typically approved for disbursement, but now it’s something builders and lenders find themselves working through together.

Even more disconcerting is that the price of construction materials is skyrocketing. According to the National Association of Home Builders, lumber prices alone jumped 180 percent since last spring. Nationwide, “this spike has caused the price of an average new single-family home to increase by more than $24,000 since April 17, 2020. Similarly, the price of the average new multifamily home has increased by nearly $9,000 over the same period due to the surge in lumber prices,” the trade organization recently reported.

Commercially speaking, this can become problematic for developers and builders who get their projects appraised using the income approach, a methodology that estimates the market value of a property based on the income of the property. Because it relies on the income of the property, it’s most often used when appraising multifamily homes such as apartment complexes or duplexes. It becomes difficult when the costs begin to exceed the income value of the property.

Can builders and, ultimately, investors and homeowners, balance the opportunities of population growth and mortgage rates with the threats of rising costs and decreasing access to supplies?

The answer is yes, with the help of a community banking partner. Because community banks play a vital role in funding commercial and residential building, and because they have strong ties to and knowledge of their communities, lenders are deeply aware of the pricing trends, challenges and requirements to get construction financing in this unique climate.

Lenders keep tremendous amounts of data that can help developers and builders know what to expect, know if and when they’re being taken advantage of, what average prices are in the areas where they’re planning to build, and if a project is too risky to get appraised properly. This data can help developers and investors make logical decisions and assure their projects are structured for profitability. On the residential side, lenders can also help homeowners know if the prices they’re being quoted are in line with other projects in the area or are overpriced.

A quote from a recent article from the American Bankers Association saying, “Construction lending pumps life into American communities,”and a quote from Neil Walter saying, “Population is the single most important driver to economic activity,” sum up how crucial these two factors are to us all. Population growth and construction lending are not just important to builders, developers and investors, they’re important to every single person in the state of Utah, as we all work to keep our state’s economy strong and to offer a high quality of life for those who have lived here for years and those who are looking to move here.

Steve Diamond is a senior vice president and commercial lending relationship manager for Bank of Utah in Ogden. Bank of Utah has 17 full-service branches across the state and trust teams in Ogden and Salt Lake City.

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