The Benefits Of Building In A Bad Economy
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By Michael Regina
There is no doubt these are extraordinary times. Highly volatile market conditions and ongoing uncertainty have made it duly challenging for the commercial construction industry and its trade partners.
Amid the current economic downturn, now may not seem like a good time to build, especially in the commercial sector. However, while perspectives may differ, there are many benefits of building in a bad economy, which can present unique opportunities. The key is knowing what to look for and maintaining a forward-thinking visionary mentality.
In any tumultuous period of change, the doom and gloom set will always find reasons to postpone building projects, but those who actively seek the silver lining and closely assess timing-based opportunities can gain significant advantages.
Here are four favorable reasons to pull the trigger on a commercial construction initiative during an economic downturn:
1. Deeply Discounted Real Estate
The U.S. has seen property values for commercial real estate drop 20-45% across the board. In the western states the decrease has been even deeper. A good example is a recent deal on a piece of land that was under contract in 2007 for $1.5 million. Eventually, that deal fell apart in the development process for the previous buyer. Now, the current price being paid for that same parcel is $800,000.
The same goes for new office buildings that sold for $2.4 million in 2008 that are now selling for $1.6 million in 2011. Even landlords are doing everything possible to protect their portfolios—from giving away free rent for a year to dropping rental rates to 2001 levels. Owners are looking to reduce their losses. Consequently, this puts more power and control in the hands of the buyer. Additionally, given the fact that real estate owners are cash poor and looking to convert their assets, there is a large supply of land and existing buildings on the market.
2. Rock Bottom Interest Rates
It may be difficult to remember the last time commercial interest rates were this low. It was, in fact, approximately 20 years ago, dating back to the early 1990s. Comparative analysis on new commercial interests in certain markets shows that, today, it is cheaper to own a building than to rent, opting to forego paying someone elses mortgage when rates are so low. Like owning a house, commercial real estate should also be viewed as a long-term investment where it doesnt make sense to just throw money at a landlord each month. In todays market, its a great time to buy and build.
3. Streamlined Processes
Despite downturns, one thing that is full steam ahead is streamlined processes. Even five years ago, it seemed to take a lifetime to get any new project approved through various local, county and state governing agencies. This is definitely not the case today. Now, it appears that these same agencies are starving for fees and are desperate for new projects, when one bears in mind that the fees new development brings support many of these agencies.
Its not uncommon for townships to call construction firms inquiring about new submissions. These agencies need to support the departmental staff who process project paperwork and are eager to know whats in the minimized pipeline. The combination of technological efficiencies and eager reporting agencies have swung the pendulum back in the favor of construction companies who used to be at the mercy of the paperwork bottleneck. In a slow economy, there is a greater ability to control more parts of the process in relation to agencies, which makes it a great time to build.
4. Reduced Cost of Labor, Materials and Services
The law of economics states that when there is an excess supply of any good or service the cost of that good or service will drop. This is the case with the cost of labor, goods and professional services. Various trades are constantly seeking work from any projects that can be generated during this downturn. This was quite different in 2006 when these same companies were turning down work just as fast as they were growing business with the surplus work they already had. Today, companies are willing to cut their prices in order to keep their employees, resulting in decreased labor and services costs.
Regina is the co-founder and owner of BIG SKY Enterprises, a commercial real estate developer, design/builder and finance firm that strategizes, executes and oversees every aspect of a project development life cycle to provide clients with single professional contact-point control.