So, is now a good time to start a building project? While it is a scary time, there are opportunities abound for those that have the courage and means. I am no fortune teller, but I can dish out a bit of what I've heard and experienced in the last few months. Of course I'll also throw in some invaluable gut intuition.
The Bad
- Banks - Lending is tight. Really tight. As a banker recently told me, "our current appetite for lending is small." He went on to say that the easiest type of loan to get these days is for an owner occupied building. That is their way of saying if you're building it for yourself to occupy (a home, remodel or commercial building) and you qualify, you may have some of their money.
- Uncertainty - The development attitude in the recent boom was build it and they will come. This is not the case anymore. You have to be careful what you build, for whom, and at what cost.
The Good
- Cheap Land - The price of land seems to be back to where it needs to be to make development projects work again. People assumed that the ever escalating price of new homes and condos was all developer greed. It was not. High land prices and construction costs dictated high sales prices.
- Foreclosures - OK, foreclosures are bad. Someone loses, banks fail. This is one of the main reasons we got into this mess, right? I get it. Now for the bright side. Foreclosures can be opportunities. The cheap real estate they offer allows for new opportunities - a quick condo flip, land for your new home, the chance to develop a small project, etc.
- Cheaper Construction - The price of materials and labor have fallen due to demand reductions. Almost all material prices have been in decline since the summer of '08. Contractors are hurting. Less work for them means they will take on projects for smaller overhead and profit percentages. Quality contractors are also taking on smaller jobs that they wouldn't touch a few years back.
- Cheaper Soft Costs - It pains me as I write this, but the bad market has also lowered the costs of architects, engineers and all the other people that get you to the point of construction and beyond. Why? They are also hurting.
- Faster Permitting - We do a fair amount of architecture work in Los Angeles, and the difference at City Hall these days is astounding. What used to be a four hour wait to submit for plan check is now a four minute wait. In our experience, their processing times are much faster as well.
- Time - Time is the typically bane of the architect and owner's existence. Building projects take time. They have to be designed, coordinated with consultants, documented and permitted. All this adds up to a long process that can be quite burdensome. Now, however, this time factor can help with some of our major negatives. Banks will start lending again. The market will recover. So when you think of a building project, think about the time involved. Many projects take about a year to get to permit/construction start (when you need that construction loan), then the construction can take another year (when you move in or need those prospective buyers.) So ask yourself where you think things will be in one to two years.
- Emerging Trends - Major slowdowns are often times of reflection and change. This is very true in the building biz. Of late, I've seen a strong desire for smaller, more efficient, green buildings. This trend comes both from awareness of climate change and our financial need to do more with less. I like this trend and think that it'll bring about some very innovative and evolved projects.
Do you have any thoughts on this? Questions?
