It is apparent to us, from the work that we have bid out recently, that NOW is the time to build, IF you have the money.
To the first part of that statement: “NOW is the time to build”: On several recent occasions, we have bid or priced small to medium-sized commercial projects and have been astounded by the savings that can be realized. In some instances, we saw 30% savings over similar projects priced just 12 months ago. One project budgeted at $95/sq. ft in 2008 was recently bid at $70/sq. ft. Another project that bid 8 months ago was rebid last month (WITH ADDITIONAL WORK) and dropped 27% in cost. CRAZY!
In our discussions with general contractors and subcontractors, this “savings” can be attributed to many factors:
- Not much work out there, so competition is at a fever pitch.
- Material prices have not escalated as expected, and others have actually gone down significantly – the old Supply & Demand.
- Labor has gotten cheaper.
- Contractors are cutting back on overhead and profit to survive.
While drastic savings can be worrisome (as contractors cut overhead and profit, and as labor gets cheaper, their ability to survive to completion of the project is questionable) and should be met with some measure of caution, a credit-worthy contractor can perform adequately in today’s climate for a lot less than last year, and for a lot less than some future date when this economy gets headed in the upward direction again. When will that happen? Who knows. Varied predictions are out there.
But until it does, there are deals to be had, again, “IF you have the money”…the second part of the opening statement.
If you DON’T have the money, good luck getting it. Banks are tight and all indications are that they will only be getting tighter. Recently, banks were reporting to the Federal Reserve that they are continuing to tighten standards and terms for all types of loans, but especially commercial real estate loans. In fact, the phrase commonly heard from banker buddies is, “If you could get approved for a loan, you probably don’t need a loan.”
The FDIC is hammering banks on their existing commercial loans. Between stress tests and equity requirements, banks are in no mood to finance commercial real estate without 70% or more pre-leased by Class-A tenants, a large percentage cash down, AND lots of liquid assets to secure the loan. Those projects are few and far between, unfortunately.
Some developer clients have employed less traditional means of financing: private financing, owner financing, investing in Lottery tickets, etc.
Ground-up construction has slowed drastically because of the lack of funding, and there doesn’t appear to be an open faucet anytime soon.
So, coming full circle: Now’s the Time to Build….IF you have the money.