TRG | The Bottom Line – 6/28

TRG has had a bullish view on non-res construction, which we maintain even as rates are rising and ABI has consistently been under 50 YTD. We have published a few notes this week that share the latest market intel and a recent Fed data point. Our continued positive outlook comes from channel checks and the ramping activity of megaprojects, which we heard from multiple contacts this week. “Local” projects have more rate sensitivity, and many projects don’t pencil out at present interest rates. Also, banks often are unwilling to lend when economic conditions are choppy or challenged. We monitor a measure from FRED entitled “Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans with Construction & Land Development Purposes”, which tells what we view as an encouraging story. The data shows that a growing percentage of banks tightened meaningfully through 2022, which peaked above 70% in mid-2023. That has stepped down to the most recent stance of 24.6% in April 2024. Said another way, more banks are willing to lend money for commercial construction projects. For perspective, the 10-year average is ~20% and the pre-COVID average is ~8%, both below the current level. Again, implying banks could loosen further and lower rates could spur incremental construction activity. In essence, our bullish stance is unchanged - we believe that non-res construction will prove resilient, as megaprojects show solid growth and “local” projects range from flattish to modest growth, depending on the region.