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Beware the Contract You Never Signed
Beyond the Ballot Box
Buy, Sell or Hold
Food for Thought
From Concept to Production
On the Job
Seeing is Believing
The College of Hard Knocks
The Right Financing
Banking and finance are keys to the success of development construction. Is the banking/finance industry changing to more favorable terms?
BEECHER: I’m certainly not a banker but we see more traction, more deals out there that are taking place. It’s still a tough situation, where there is pent-up demand and there are deals to be done but no bank is willing to put that money up for the initial financing. And so that is an area that is getting better, but still at the same level that it’s been for the last year or so.
MOORE: For the first time in a long time, I’ve seen some of the local banks say, “Yeah, we are interested in that,” and some of the terms are pretty favorable.
I’ve been a little hard on the banking industry, but for the first time I’m seeing a change in their attitude a little bit on things like offices and multifamily. Certain things like condos they are not very interested in, maybe in resort communities.
WILLIAMS: What we’ve noticed is that the banks are willing to lend to owners. If it’s going to be owner-occupied, then they are eager to lend the money. But if it’s anything dealing with speculation or a developer, they don’t want anything to do with it. We have a lot of people that want to develop but just cannot get the funding. So they are turning to private investors for some of that.
BUSWELL: As far as banking, they still have a long ways to go to open up the doors. The private folks, they don’t have the equity to put into it. So they are knocking on the door for private investors, but that is demanding when the private investor can still pick up a lot of properties for 20 cents on the dollar.
D. CAMPBELL: What is happening is the requirement of additional equities in these projects and so they are not penciling out. They are not getting the leverage that you could four or five years ago. But we have developer clients that always put in large equity, and so they are still making it work and they are still developing.
ZIMMERMAN: Developers are taking more time digging into their clients’ business and into the ultimate source of whatever is going to make the project go long term. Developers tell me that the money is there, but they are working a lot harder to understand everything about the project, making sure that the whole thing is going to go. That may be a trend that we see in the future—funding sources digging farther and farther into where the ultimate funds are going to come from to pay that back.
BUCKNER: There is a lot of conservatism out there. People are not sure what to expect coming down. They are not sure what their taxes are going to be doing. They are not sure what their requirements for healthcare are going to be. So with a lot of developers, funders are taking a very conservative approach and saying, “I’m going to keep a lot of cash on hand and it’s going to have to be a good deal before I do a deal,” where in prior times, they’d take a risk and jump into a deal earlier.
What are the trends that you are seeing in material costs?
PARSON: We anticipate fairly modest price increases next year. The cement companies have all announced increases after several years of not having any. They are kind of facing the same things all of us face in our businesses. There are some underlying cost increases that continue to go up, and after not recapturing some of that for a few years, everyone is to the point where there has got to be something.
We’re also seeing challenges for labor as well. Even with relatively high unemployment in Utah, we are struggling to hire quality people. This is not an attractive industry. You’ve got these great, highly skilled people, and we are in a tough industry for somebody to enter it and think it will provide a sustainable career path. There are going to have to be some aggressive wage adjustments in order to keep our company fully staffed with the caliber of people we expect.
CLYDE: Because prices are tight, we’re trying to figure out how to compete. Everybody is skinnying down their health and benefit packages. Everybody is holding off on raises and cutting wages. Traditionally, construction has been attractive because it’s been high wage with good benefits, and we are starting to erode that. And that’s back to the issue of compressed margins, and if our competition is not doing it, we can’t do it.
JOHNSON: We’ve struggled through the last three years trying to survive in this market. From the labor side, you are dealing with a couple of issues, and one of them is all the young kids growing up that have no desire to work in the kind of conditions that construction brings. And then you also have the Hispanic market that you cannot hire that want to work, and then the games that were played out with the contractors as independent contractors. They drove wages down huge at the expense of guys that cannot do much about it other than the desire to live and feed somebody.