There's opportunity to be found, even amid challenging headwinds and a costlier environment. During an April 30 NJBIZ Construction & Development Panel Discussion, experts offered advice on navigating uncertain times as well as insights into the industry and its quandaries.
Editor Jeffrey Kanige moderated the virtual event, joined by:
- Chris Erb, executive vice president and head of development, Russo Development
- Donald Hoffman, partner, EisnerAmper
- Lisa Lombardo, director, Business & Commercial Litigation Group, Gibbons PC
- Michael Leondi, vice president of construction & design, Rockefeller Group
- James Thaon, principal and branch manager (Red Bank), Bohler
The discussion explored labor issues and education, supply chain delays, increased prices, artificial intelligence, diversity, sector specifics, conversions and more. It kicked off where most things start in business, as Kanige put it, with money specifically, the cost of borrowing.
While interest rates are higher than they have been, panelists indicated that the lingering uncertainty surrounding whether and when policymakers will seek to adjust them further is having an outsized impact.
“What we have seen with the hundreds of construction companies we represent is that it could be government work, it could be private work we have seen projects that were bid. Contracts were signed and they’ve been put on hold," Hoffman explained.
That uncertainty makes execution more difficult. “People don’t want to commit this cost to capital if they think rates may drop three months from now, six months from now, which would dramatically impact the cash flow of these projects they are going to build,” Hoffman said.
'You don't know what you don't know'
"There's certainly a lot of trepidation on starting deals," Thaon said.
He said people are being more strategic now; where collaborators have always "sharpened their pencils" now they're doing it twice.
"I've probably seen more joint venture partnerships than I've seen in the past," Thaon observed. According to him, bringing on someone else can help mitigate risk in a high-interest rate environment and make deals work. "On the broker side, the sentiment we're hearing is it's still difficult to negotiate land values down because land owners are still holding their prices strong."
The shift has changed the impetus of the schedule-driven sector. "Now, it's more so, kind of waiting and being more strategic before just jumping right in and getting started with things," Thaon said.
Lombardi noted the impact of higher rates are felt across the spectrum.
"Parties aren't ready to sign [contracts] because financing has not been lined up. ... The owners are having less bargaining power than they used to and on the contractor side ... [they] are borrowing money, right? So, they're also subject to these higher rates. It it tighter profit margins for them, perhaps increasing the cost that they're passing on to the owner, they're passing on to the project, because necessarily, obviously it's profit driven " she explained.
In addition to P3s, Lombardi said borrowers are also diversifying their lenders or pursuing mezzanine financing. Either way, she suggested locking in now. "Because you don't know what you don't know. It's not necessarily going to go down, but can it go up?"
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If you're well capitalized, you might be in a bit of a different situation. But "caution is definitely the word of the moment," Erb advised. For those that can afford it, though, the present offers opportunity.
"Figure out where are the sellers that are willing to make market deals in today's market and go get deals done right now," Erb said, adding later that, "Maybe we're not at the bottom-bottom of the trough or the top-top of the mountain, but we're approaching it." Especially looking ahead to 2025 and the potential for "an interest rate cut or two. It's starting to feel pretty good to find deals to make."
"For all the pessimism that's out in the market right now to me, that's the kind of counterpoint for those that can be opportunistic," Erb said. "We're heading into a time right now that is potentially pretty good."
Leondi said that levels of confidence are not as high as just a couple of years ago and that costs are up. "You name it, our pro forma materials costs, even availability of materials, or the financial picture of our vendors, right?"
To combat that, he recommended a return to the real estate industry's roots: relationships.
"It's probably time that we need to double down on our existing relationships with each other," he said, adding later that coming out of the pandemic, "It's become very transactional and a lot less organic. And some of that camaraderie seems to be missing."
Look for expanded coverage of the Construction & Development panel discussion in the May 6, 2024, issue of NJBIZ.
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