Almost every business is watching the economic news right now, looking for signs of the impending recession. But even though almost no business is immune to a recession, the effects of it are felt differently in different industries. Real estate developers, for example, have a unique view of recessions. Their projects take months to plan and years to complete, so the effects of a recession take a while to trickle down into their day-to-day. This lag time plays in their favor at the beginning of a recession but can come back to hurt them when conditions turn around. How developers plan around downturns can help them avoid canceled projects when times are bad and take advantage of the growth that inevitably follows.
No two recessions are alike, but that doesn’t stop people from comparing them to each other. This time around, people are looking for parallels to the last recession in recent memory, the great financial crisis (GFC) of 2008. But this recession is very different for a lot of reasons. The economic landscape following the GFC left an incredible number of homeowners with more loans than their homes were worth, leading many of them into foreclosure or to be sold at a loss. The shock to the financial system caused massive layoffs and left many speculating that it could take decades to recover. In response, federal banks around the world slashed their interest rates to historic lows, but even that didn’t give many property investors confidence to continue with their projects.
This recession is quite different. Rather than happening overnight, like the GFC, this current downturn has come on slowly. Instead of homeowners finding themselves with underwater properties, this time around, commercial building owners are facing high vacancies and are having a hard time refinancing. The great recession took everyone by surprise, but people have been predicting this current downturn for years.
Developers that hit pause on their projects when alarm bells of the recession sounded might have missed out on a few good years of growth. That has left many of them with much more reason to continue with their projects. “We are not stopping because we want to be ready,” said Jay Stark, Principal at The Pinyon Group. His projects are in California, a state with one of the longest permit and entitlement processes, which also gives his team another reason to keep projects going. “For certain projects, the planning phase might outlast the recession, so there’s no reason to table them,” he said. “Plus, even if we don’t think it is feasible to do the construction part of a project, we could always just sell the entitled land to someone else who might be able to make it work.”
Another unique aspect of this recession is the high-interest rate environment that it has caused, but even that is not enough to derail most projects. “We got almost all of our financing done in 2022, so we are able to ride this out with what we have,” Stark said. “Other projects in the future might be harder to make pencil, but that really depends on the property type.” For example, the Pinyon Group does a lot of affordable housing projects, and according to Stark, those investors are more worried about tax incentives than interest rates.
Recessions do put most investors on high alert. This means that developers have to be extra diligent when communicating with investors during downtime. “It depends on the project, but most of them, we have investor meetings every week,” said Stark. Partially thanks to the pandemic, there are a number of tools available to help developers with those regular touchpoints. The ability to easily share and collaborate over documents and plans has empowered virtual meetings in a way that was never possible before.
Another peculiarity of the current economy is the tight labor market. The talent shortage, especially in a specialized, technical field like development, can often mean high turnover. The churn of employees is easier to deal with when developers are able to stay organized. Here is another place where developers have a growing number of options to help them collaborate efficiently on one system of records.
Right now, many investors are saving their money and waiting for opportunities. “Most of us thought that things were overinflated before, so if you were patient, it is kind of nice to see things come back down to earth,” said Stark. Eventually, though, things will start to look up, and when they do, developers will have to be ready. That means not only having financing and contractors in place but being able to easily pull data together for analysis. The ability to find and use real-time market data, like construction costs in a particular market, can help developers make smarter decisions, but they are only useful if the process is speedy enough to be actionable. To ensure that they will be ready for the surge of activity once the economic situation does recover, developers can use this downtown to learn a number of new tech platforms available to them that can do anything from making your historical project data searchable and organized in dashboards to automating low-level admin tasks that help you keep headcount at more manageable levels.
So far, this recession seems like it has been a long time coming. Even as inflation and interest rates started rising, asset values stayed stubbornly high. We seem to finally be easing into the downturn, but that doesn’t mean something won’t happen to accelerate it. “What I worry about is what I have never thought or heard about,” said Stark. Developers everywhere are hoping for the best but planning for the worst since either seems just as possible. By staying nimble and adopting good tools and processes, developers will be ready for a bounceback, a catastrophe, or anything in between.
Thank you to Propmodo for this article. To read more, click here!