Panel: real estate, construction must weather storm

Panel: real estate, construction must weather storm

The effects of the residential housing bust have begun trickling into the commercial and industrial real estate markets, meaning most developers and contractors will have to wait until 2010 to resume normal business activity, said a panel of experts.

“The homebuilders and land developers are saying that they have written off 2008, they’ve pretty much written off 2009 and they’re expecting 2010 to be when we’ll see some turnaround,” said Jerry Lopatka, managing principal of Dugan & Lopatka, a Wheaton accounting and consulting firm.

The five panelists, speaking to a group of business leaders at The Business Ledger’s second Newsmakers’ Forum of 2008 at Silver Lake Country Club in Orland Park, agreed that many architects, engineers, land developers and homebuilders are moving away from the residential sector and into commercial.

“I call them crossovers,” said John Kowalski, president and owner of JEK Owner’s Advocate Program, Inc. “For business owners, it means really inexpensive construction because the contractors are desperate.”

Kowalski stressed though, that this scenario can create some less than forthright business practices from construction companies, and property owners need to do their due diligence when selecting and overseeing contractors, architects and engineers.

“Care has to be taken,” he said. “That’s extremely important right now.”

Speaking from a contractor’s perspective, Phil Van Duyne, vice president of Itasca Construction Associates, Inc., stated that while business has been slowing, his company is not desperate and there are still numerous opportunities in the market.

“There are nuggets out there,” Van Duyne said. “It just takes a little bit longer to look for them.”

Van Duyne has found business opportunities in the health care and retail industries as well as municipal projects and industrial developments related to products with military use.

Sill, many real estate ventures are having a hard time progressing out of the planning stages.

“The cranes we see in the sky and the strip malls going up are probably last year’s inventory,” said Thomas Jaros, a partner in the Real Estate & Finance Practice Group of Levenfeld Pearlstein LLC. “People are not starting many new projects.”

Much of this difficulty stems from banks tightening their lending requirements as a result of the sub-prime crisis.

“I think everyone knew, sooner or later, this point was coming,” said Edmund Burke, senior vice president and regional real estate manger for Harris N.A. “I don’t know if everyone envisioned the depth by which sub-prime financing would impact us.”

This has caused banks to look very cautiously at any new opportunities, said Burke, meaning that any builder who has leveraged his existing properties will not have available to him the bridge financing and home equity loans that were so common just a year ago.

“If an individual or entity is not leveraged though, banks are willing to play ball,” Burke said.

This has left developers with few desirable options. If leveraged, most builders have a nine month timeline to pay their loans, said Kowalski.

“(The developer) is left with (the option) of restructuring the loan or going to a market that is not going to pay top dollar for the property,” Kowalski said. “I’m working with a large developer right now that is fielding offers in the 30-40 cents on the dollar range.”

For developers to have any chance of borrowing from a bank, they must have supporting capital and a proven track record.

“If you can provide a level of certainty of closing and trustworthiness, you’ll separate yourself from the pack other than by price,” said Jaros. “The clients that I have right now that are getting deals done have a history and are well-capitalized.”

From a banking perspective, Burke believes that consistent past performance is one of the key aspects when considering potential lending partners.

“Banks are looking to lend to people that they’ve done business with in the past or they know within the community are capable of performing on what they say they’re going to do,” Burke said.

Another issue to consider for any industrial or commercial project is the trend in construction toward environmentally conscience building practices. These “green” initiatives have slowly built momentum and are ranked using the Leadership in Energy and Environmental Design (LEED) Green Building Rating System.

This has created another hurdle for builders who must now comply with costly environmental codes, which normally add 5-8 percent to a project’s price tag. As a result, the majority of LEED-certified buildings are municipal and university projects, not those in the private industry.

“For some of the projects, they ask about (LEED) but when they see the price tag for full certification, they shy away from that,” said Van Duyne.

Yet some of the building codes going into effect in the Chicago metropolitan region are forcing building owners toward LEED certification, compelling LEED to diversify its classification system.

“They’re loosening up LEED right now,” Kowalski said. “They’re making it a bit easier to get the certification.”

This environmental trend has led to more stringent regulatory codes in construction, meaning that many current LEED initiatives will eventually become the standard by which all future projects must follow.

“The primary benefit is a commitment to sustainability,” Van Duyne said. “Current building codes all require a certain level of energy efficiency.”

Still, the green movement has not caught on completely.

“Since we talked a year ago,” said Lopatka, “I have not had any clients at our firm that have been looking at green buildings.”

All five panelists agreed that while there has been much talk of a recession, they are not yet seeing its effects.

“Outside of manufacturing, most of our clients are doing very well,” Lopatka said. “Our clients’ biggest concerns seem to be not so much the recession but more so the potential for tax increases both in Washington and Springfield.”

Kowalski believes it is a problem of perception.

“A lot of this is a self-fulfilled prophecy,” he said. “We heard so much about how bad everything was that everybody just kind of backed off.”

Burke has found that his clients’ biggest worry is the potential future impact of inflation on unemployment.

“If people are losing their jobs, they can’t afford to buy things. So how does that affect retail?” said Burke. “If unemployment takes off, that whole sector could continue to slow down.”

Jeremy Stoltz, Staff Writer

Posted on Monday, June 16, 2008 (Archive on Monday, June 23, 2008)
Posted by jstoltz Contributed by jstoltz

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