Business

Five Tried-and-True Strategies to Keep Projects Moving During a Recession

COVID-19 is causing many to rethink expectations and timelines, but they don’t all have to. Developers and investors can move forward by recognizing how to take advantage of a down market—and practicing patience.
By Erik Hayden
October 15, 2020
Topics
Business

Real estate projects across the country are stuck in idle, but should developers and investors hit the brakes? That’s one of the biggest industry questions at a time when millions of dollars are at stake.

When a project stalls, it could take a year or longer to ramp back up to speed. Ouch. Time is money, right? Cash flow, labor availability and material costs can all change while a contractor waits.

COVID-19 is causing many people to rethink expectations and timelines, but they don’t all have to. Developers and investors can move forward by recognizing how to take advantage of a down market—and practicing patience.

Here are five essential strategies to keep projects on track.

1. Let the past guide you

History has a way of repeating itself, so learn from it.

If the last Great Recession taught us anything, it’s that down markets have silver linings. For example, building costs—everything from steel to labor—declined during the economic upheaval. In the San Francisco Bay area, costs fell by 20% in 2008. It was a supply-and-demand bonus, with more materials and labor available in the marketplace.

This time, overall construction costs slid 3% to 5% so far in the San Francisco Bay area. If costs eventually reach a 20% reduction, the seven projects one development firm is working on in downtown San Jose’s Opportunity Zone could see a whopping $100 million cost reduction.

Also, during the last recession, municipalities streamlined permitting processes and reduced fees to spark development. For example, San Jose, Calif., created a “high-rise incentive program” for any multifamily project developed downtown. It included breaks on park impact fees and affordable housing impact fees. Keep an eye out for new local initiatives that would embrace developer-friendly incentives. Industry lobbying could make all the difference.

2. Embrace the future and look for strong indicators of growth

Real estate can be an excellent long-term investment, partly because property assets aren’t intimately tied to daily stock market swings like the ones making today’s investors so nervous.

Looking toward the future, stay laser-focused on markets with high growth potential and the ability to recover quickly from the pandemic.

Predictions about future winners are already rolling in, and they primarily are regions with strong technology industries, venture-capital funding and research universities.

A Bloomberg study determined San Jose/Silicon Valley, San Francisco, Boston and Madison, Wis., are best poised for recovery based on their economic atmosphere, demographics and residents’ access to health care. Meanwhile, Moody’s Analytics compared population density and education levels to create its Top 10 list of San Jose; Denver; Durham, N.C.; Madison; Provo, Utah; Raleigh, N.C.; Salt Lake City; Tucson, Ariz.; Washington, D.C.; and Boise, Idaho.

Most projects take several years to complete—from building permit application and groundbreaking to leasing up. By the time tenants are signing on, today’s pandemic and economic turbulence could be just memories of the past.

Don’t get deterred by temporary setbacks that cost forward momentum. It’s important to hit milestones and keep moving projects forward.

3. Be the market leader

We also learned from the Great Recession that the projects that are first to market win the best tenants.

Case in point: In Silicon Valley, during the last recession, developer Jay Paul built the 1.8 million-square-foot Moffett Towers office and R&D complex in Sunnyvale, Calif. The developer forged ahead, finished construction in 2008, and held on tight. The risk met with a reward: As the economy recovered Jay Paul’s towers were ready to welcome major tenants including Microsoft, Hewlett-Packard and Motorola. Today’s tenants also include tech giants Facebook, Amazon and Google.

As the industry emerges from this pandemic-induced slump, developers and investors should be ready to meet pent-up demands in the same way.

4. Recession-proof your portfolio

Nothing is 100% recession proof, but certain sectors are more recession resistant. Focus on property types in good locations slated for growth and strong demand-drivers.

For instance, demand for senior housing is expected to skyrocket during the next two decades. The number of Americans ages 65 and older will nearly double from 52 million in 2018 to 95 million by 2060, according to the U.S. Census.

Another asset class to double down on is student housing. This might seem counterintuitive given the current situation with on-campus versus remote education because of COVID-19. But the reality is students already are returning to college towns—to campuses that were struggling with housing shortages pre-coronavirus. It’s been so bad that schools like San Jose State University have found some students sleeping in their cars.

Developers can further manage risk by diversifying the portfolio with projects in several sectors: residential, mixed-use, industrial, office, retail and others.

5. Be prepared

Preparation and attention to details is key. To keep projects moving forward, developers should submit utterly complete and clean permit packages to their municipal planning departments. Filing sloppy plans will result in delays (and cranky city workers).

The bottom line

The reality is developers don’t have to hit the brakes with their projects in today’s economic uncertainty. Learn from the past, look for key indicators of figure growth and play the long game, and you will emerge as market leaders.

by Erik Hayden
Erik Hayden is the Founder of Urban Catalyst Opportunity Zone Fund located in downtown San Jose, CA. He has been responsible for developing more than $3.5 billion in real estate projects, including over 2,300 residential units in the California Bay Area. Learn more about Urban Catalyst and our portfolio of seven projects at www.urbancatalyst.com.

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