Economic Cycles in the Development Business

We have been a developer’s contractor since we opened over 40 years ago.  As everyone knows, our economy goes through cycles, positive and negative.  And the development economy has significantly greater swings than the general business economy.   2008-2010 had dramatic negative swings, but we have been on an upswing now for almost 10 years.  When the economy trends down, construction costs decrease, as do interest rates.  But more importantly, the rank of developers thins.  Those with limited experience and capital can’t get deals done so exit the market, while the strong take advantage of lower prices and interest rates, but also a distressed inventory, and get stronger.

The uptick in the economy creates the opportunity to be active for these people, but also the perception of opportunity for new entrants to the market.  Some are well capitalized, but with limited experience and expertise, and they can get deals done with the right structure and resources.  But in the latter stages, we see a number of entrants who think that senior living development is easy money, which it’s not, trying to get projects done.

What’s really interesting and unusual about this cycle is the amount of equity chasing senior living and other real estate development projects.  Institutional investors are having difficulty getting reasonable returns and some are allocating significant funds to real estate.  It’s the same for family offices and high net worth investors.  But also significantly for international investors looking for returns and a safe haven in the United States.  All of these equity investors are smart, conservative, and tend to chase developers with expertise and a track record, which makes sense.  The banks do the same.  And though interest rates and costs are up, we are not seeing a slow down at this point for experienced, capable developers who recognize that over the long term they are still pretty reasonable.  And with all of the equity chasing real estate, sale prices at stabilization still make investing prudent.

Peter Douglas, P.E.
The Douglas Company




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