By Michael Regina
These are extraordinary times for commercial construction. Highly volatile market conditions and ongoing uncertainty are a challenge for the industry and its trade partners. Amid the economic downturn, now may not seem like a good time to build, especially in the commercial sector.
However, 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.
Deeply Discounted Real Estate
Property values for commercial real estate in the United States have dropped 20 percent to 45 percent across the board. In the western states, the decrease has been even deeper. A good example is a deal on a piece of land that was under contract in 2007 for $1.5 million. That deal eventually fell apart in the development process for the previous buyer. Now the price being paid for that same parcel is $800,000. New office buildings that sold for $2.4 million in 2008 are now selling for $1.6 million.
Landlords are doing everything possible to protect their portfolios—from offering free rent for a year to dropping rental rates to 2001 levels. Owners are looking to reduce their losses. This puts more power and control in the hands of buyers. Additionally, given the fact that real estate owners are cash poor and looking to convert their assets, there’s a large supply of land and existing buildings on the market.
Rock-Bottom Interest Rates
It may be difficult to remember the last time commercial interest rates were this low. It was, in fact, about 20 years ago. Comparative analysis on new commercial interests in certain markets shows that it’s cheaper to own a building than to rent today, opting to forego paying someone else’s mortgage when rates are so low.
Like home ownership, commercial real estate should be viewed as a long-term investment in which it doesn’t make sense to throw money at a landlord each month. In today’s market, it’s a great time to buy and build.
Despite downturns, one thing that’s full steam ahead is streamlined approval processes. Even just 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 not the case today. Now it appears these same agencies are starving for fees and desperate for new projects.
It’s not uncommon for townships to call construction firms inquiring about new submissions. These agencies need to support the departmental staff that process project paperwork and are eager to know what’s in the minimized pipeline. The combination of technological efficiencies and eager reporting agencies has swung the pendulum back in the favor of construction companies that used to be at the mercy of the paperwork bottleneck. In a slow economy, there’s a greater ability to control more parts of the process in relation to agencies, which makes it a great time to build.
Reduced Cost of Labor, Materials and Services
The law of economics states that when there’s an excess supply of goods or services, the cost of those goods or services will drop. This is the case today with construction labor, goods and professional services. Various trades are seeking work from any projects that can be generated during this downturn. Things were 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 to keep their employees, resulting in decreased labor and services costs.
While many remain cautious about building these days, there are others forging ahead and taking advantage of today’s available real estate, reduced labor and material costs, and low interest rates.
Michael 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 lifecycle to provide clients with single professional contact-point control. For more information, visit www.bigskyllc.com.