Plan Intelligently For Church Expansion In 2018
by Nathan Artt, on February 2018
One of the most exciting times for a church is realizing the need to expand. It means that you’re not only growing now, but have a vision to continue growth in the future.
It can also be daunting. A lot of information and differing opinions exist regarding what is happening with construction costs and interest rates in the market today. Because churches are impacted significantly by these increasing costs, and are already in the situation of having more needs than resources, we wanted to pull together some important information in one place so that you can plan intelligently for growth in 2018. It is our hope that asking the right questions and having knowledge of some current trends will greatly assist you as you move through your planning phase.
It is no secret that construction costs have significantly risen over the past few years. In both 2014 and 2015, the construction price index increased by 11-13% each year, which means that a project which would have cost $5,000,000 in 2013 cost at least $6,160,000 by the end of 2015 (some markets experienced even higher increases). This is one of the highest and most rapid increases we’ve ever seen in construction, which was the result of both a high demand for vacancy as well as a major shortage in the labor market (most of the increase in cost was due to labor, not materials). However, in 2017, the increase dropped to a more sustainable level of 3.8% in non-residential (commercial) projects.
In 2018, we will continue to see a rise in both construction spending and construction prices. The forecast for construction spending shows an increase of over 12%, but the construction price index is likely to continue to rise at a rate between 3-4% by the end of the year. Again, a $5M project that was started in design at the beginning of 2017 will likely cost somewhere around $5,400M this year. This growth looks like it will continue through 2021. According to Conor Sen with Bloomberg, the construction industry is 600,000 jobs short, so as the continued demand for construction increases, especially in major markets, the labor cost will continue to rise with it. As the residential market increases 9-11% year over year, this will “steal” even more of the labor force, making construction more and more expensive every year for the near future.
This is one of the most discussed topics in the country right now. Due to the booming economy, the decrease in unemployment, and the increase in consumer spending, the Fed will have no choice but to raise interest rates this year (which we already started to see in 2017). The question is, “how much?” While no one has a crystal ball, there is a lot of good information in the market right now, and we hope that this synopsis helps you understand what to expect this year.
First, interest rates are not all the same. For the purposes of keeping it simple, we will look at the difference between long-term (7-10 year) and short-term (Prime through 5-year) interest rates. Both short term and long-term interest rates will likely increase this year, but short-term interest rates will see the greatest impact. The prime rate, a floating rate that closed at 4.25% at the end of 2017, will likely increase to 5.25%. The 5-year treasury rates could also increase just as much, which means that the 4%, 5-year interest rate in 2017 could be as much as 5% this year. Long-term rates, such as the 10-year fixed (based on the 10-year treasury), will likely increase by a half point. A good 10-year fixed rate in 2017 was around 4.5%, which means that a “good” 10-year rate in 2018 will be slightly higher or at the same price as a 5-year rate.
What does this mean for you?
Process has never been more important.
- Be sure to get consistent milestone pricing at every interval of design (concept, schematic, DD, and construction drawings). The building you have been planning is more expensive than it was just six months ago.. Do not move forward into the next phase of design if you haven’t received a price check on the last phase.
A decision without information is an expensive guess.
- Eliminate the guesswork by making sure you have a general contractor at the table with you. Without this expertise, there are increased chances of having to re-design and move back your timeline significantly, or to incur more cost/debt.
Money is more expensive
- Plan that for every million dollars borrowed, it will cost you $10,000 per year more than it did a year ago. For a $5M loan, that is the equivalent of one staff position ($50,000).
- Because of the increase in annual debt service as a result of rising interest rates, this could also potentially mean that you can borrow less than you could a year ago. Keep in mind that borrowing capacity is greatly impacted by cash flow, which is greatly impacted by debt service (interest payments). If you were at the height of your debt ceiling before, this is an extremely important element to consider.
These considerations are obviously only a portion of the planning phase, but hopefully being aware of them early on will allow you to approach these aspects of your expansion with confidence. Our goal at Ministry Solutions is to say yes to growth by eliminating guesswork, accelerating vision, and protecting the purpose of your church. If you would like for us to provide you with a free analysis of your finances, project, fundraising capacities, etc., click here to get in contact with our team immediately!