The present economic conditions are challenging for many to understand and forecast.
The current situation seems to be unique so looking to history for similar patterns can be a challenge. This is especially true for those in the real estate and construction industries who depend heavily on many local and global resources, including materials, labor and capital. While we don’t know your particular situation, we’ll offer four broad thoughts you might consider when navigating through 2023.
One pervasive thought is that no one system or aspect of our economy seems to be broken like the prior financial crisis, so we believe that short-term corrections and adjustments are necessary and healthy for longer term prosperity. We suggest adapting smartly today while keeping your head and eyes open toward 2024.
The supply chains for materials and shipping have improved significantly. Factories are producing goods and transportation options are more reasonable. Compounded by a shrinkage of demand means that pricing for many items are trending downward and lead times are shortening. As materials can be roughly one-third of construction cost, this should enable smaller contingencies in project budgets and maybe potential for buyout savings. We do believe that homebuilders pulled back much too quickly as demand for places for millennials to live remains strong and home production is even lower than needed.
One serious caution lies in the fact that most trades and professions remain under tight labor conditions with insufficient workers with appropriate skillsets. Labor and professional services are roughly 75% of project costs so increases could offset any materials savings.
With the Federal Reserve raising benchmark rates, they have both increased the cost of debt and caused uncertainty and caution with capital purchasing. This surely makes a large project more difficult to rationalize by financiers and those who buy current properties want to pay less. Both will likely translate to businesses postponing many deals through the second quarter of 2023. Depending on the occupancy type, sellers of some properties will eventually acquiesce to lower prices and transactions will resume.
Real Projectives® assists real estate owners, financiers and occupiers in making sound decisions for acquiring, renovating and developing income-producing properties. If you could use an outside view with construction and development expertise, we’d be glad to discuss your unique situation. Please give us a call.