Erik Hayden is the Founder and Managing Partner of Urban Catalyst.
Many real estate developers often take a wait-and-see approach to their projects when the market is volatile. But the big question is: Should they hit pause?
Real estate development projects across the board are in a wait-and-see mode due to the pandemic. When a project stops, it could take up to 12 months or even longer to resume, further delaying the completion time. But by recognizing how to take advantage of a down market and practicing patience, savvy developers can buckle up and ride out this storm.
Developers don’t always have to slam on the breaks. They just need to adapt to the speed bumps.
My partners and I at Urban Catalyst have developed billions of dollars of ground-up commercial and multifamily projects in Silicon Valley over the last two decades, including projects during the Great Recession, using the following essential strategies to keep developments on track. Here’s what I’ve learned about navigating economic downturns and moving projects forward.
Learn from the past.
A silver lining for developers that came out of the Great Recession was a drop in overall building costs. During that time, in Silicon Valley, we saw real estate market construction costs drop across the board.
So far this year, nationwide construction costs for nonresidential buildings declined in the second quarter, according to the Turner Construction Co. cost index released in July.
The current recession won’t last forever, so seize this opportunity to play the long game. We all know real estate can be an excellent long-term investment. Our sector isn’t intimately tied to daily stock market swings.
Keep a laser focus on markets with high growth potential.
Based on Bloomberg’s analysis of demographic criteria like workforce education levels, healthcare and consumer debt, a number of regions with strong tech industries, venture-capital funding and research universities are predicted to see a faster recovery from the economic impact of the pandemic. San Jose, where we’re based, and San Francisco were the top-ranked cities, followed by Boston; Madison, Wisconsin; and Seattle.
Diverse urban economies also are expected to bounce back relatively fast, while areas that are highly dependent on travel and leisure (think Las Vegas) will not. Other regions that could emerge stronger include Washington, D.C.; Albany, New York; and Minneapolis-St. Paul. Moody’s (subscription required) additionally called out Durham, North Carolina and Austin, Texas.
The bottom line: Developers who play the long game have time to ride out occasional market upheaval. Most projects take several years from when they begin construction to completion, so developers should not be swayed easily by temporary economic setbacks and think long term.
Be first to market.
We also learned from the Great Recession that commercial projects that are first to market win the best tenants.
Here in Silicon Valley during the last recession, developer and my industry peer Jay Paul built the 1.6 million-square-foot Moffett Towers office and R&D complex in Sunnyvale, forging ahead to finish construction in 2008 and holding on tight. As the economy recovered, the towers were ready to meet pent-up demand in the Class A market that swelled during the Great Recession.
The lesson: When we emerge from this pandemic-induced slump, developers should be ready to meet pent-up demands.
Diversify your portfolio.
Is anything 100% recession-proof? Well, probably not. But certain sectors are more recession-resistant when the economy falters. Invest in enduring property types with a good location and strong demand-drivers.
I’d bet on senior living, despite the recent pandemic. By all expert accounts, demand for senior housing will skyrocket during the next two decades. The number of Americans aged 65-plus is projected to nearly double from 52 million in 2018 to 98 million by 2060, according to one analysis of 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 have already started returning to colleges — to campuses that were struggling with housing shortages before the coronavirus. Last year, at San Jose State University, a student group urged officials to designate safe parking spaces where housing-insecure students could sleep in their cars.
Further manage risk by diversifying your developer’s portfolio with projects that span several sectors: residential, mixed use, industrial, office and retail.
Be prepared and detail-oriented.
Do everything you can to help local planning officials move your projects forward. These days, when it feels like everything else is out of your control, take charge by being organized, prepared and obsessive about your application details. Submit utterly complete and clean packages. Filing sloppy plans will result in delays.
The reality is real estate developers don’t have to freeze in the face of today’s economic uncertainty. Move forward thoughtfully. Learn from the past, and look for silver linings.