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Sunday, 22 December 2013 21:31

Real estate development roundtable: ‘Uneven’ recovery, talent shortage, struggle for financing weigh on builders and developers

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In a recent MiBiz roundtable discussion on development and construction, Kalamazoo-based executives maintained optimism about the new year, they said firms must be flexible and creative to keep the work pipeline flowing. Participating were, from left, Rick Wordell of Eckert Wordell, Miller-Davis’ Rex Bell and Rick DeKam of Midwest Realty Group. In a recent MiBiz roundtable discussion on development and construction, Kalamazoo-based executives maintained optimism about the new year, they said firms must be flexible and creative to keep the work pipeline flowing. Participating were, from left, Rick Wordell of Eckert Wordell, Miller-Davis’ Rex Bell and Rick DeKam of Midwest Realty Group. PHOTO: Erik Holladay

The real estate and development industry along with the related construction and design sectors continue to claw their way back to recovery.

For a segment of the economy that was one of the hardest hit in the recession, real estate and development companies are now facing concerns over financing, labor and competition for work — all while uncertainty still runs through client ranks.

As industry leaders prepare for 2014, many look to capitalize on the growth the regional market is experiencing. To that end, executives say one way to raise all ships is more collaboration.

MiBiz sat down recently with a group of leaders to discuss what’s ahead in the new year.

Participating in the roundtable conversation on real estate and development were:

  • Rex Bell, president of Miller-Davis Co.
  • Rick DeKam, owner principal at Midwest Realty Group
  • Rick Wordell, co-founder of Eckert Wordell LLC

Here are some highlights from the discussion.

How did 2013 shape up for your firms and what was the narrative of the year as you see it for your industries?

Bell: We have not gotten back to true sustainable, meaningful growth at all as far as we’re concerned. It’s still an anemic economy. Now we’ve bounced back pretty quickly because of our backlog of work after 2009. The couple of years after that, we were able to get back to a volume that was pre-2008 and an income that was pre-2008. But then it’s just uneven and really tough to have any kind of consistent revenue. It’s just up and down. I don’t think our recovery was typical. It just had to do with the work that was in pipeline. 2013 was a flat year and not a lot of growth, but we had a couple of positive signs. One, our backlog continued to grow year-over-year, and the other thing is opportunities seemed to be out there and growing. Right now, we have projects that go out for two years, and that helped us because we already had large projects in the pipeline.

Wordell: We don’t have the backlog like construction companies do. Our projects are fairly quick-in, quick-out. … Trying to set the table to get the projects is a focus for us. There is a lot of action and a lot of projects but often the projects just take so long to develop. We do a lot of health care, so you can understand that because a lot of people in that industry are apprehensive about what the future is. They want to do it, and everything is telling them to, but they’re still holding back.

DeKam: It’s unbelievable how long the financing component is taking these days and I’ve got to believe your work in health care is further impacted just because nobody knows what’s going to happen after January 1st.

Wordell: With hospitals and medical offices, there is still a lot there, but they’re all just questioning.

Have your firms shifted focus on either the building markets you target or the types of deals you put together?

Wordell: As a 20-person firm, we’re trying to focus on what we’re good at and not spread out so we can command that market. We seem to get more projects being specialists than being a generalist. We tried spreading out and really didn’t come up with any significant gains. We’re trying to focus rather than spread out or change emphasis.

Bell: We’re not spreading so much in terms of identifying completely new markets or new types of buildings or new types of construction, but we are spreading out geographically simply to put more projects in the hopper. … It’s just a pretty simple idea and we’re not alone in that. … But in a sense, specializing in the things we’ve done well at and have expertise with — that’s what we are doing.

DeKam: We started a new construction division about three years ago because we were having such a difficult time getting tenant fits out done quickly and reasonably priced. … We don’t anticipate growing any bigger to do full construction. We just want to be able to turn our fits out over efficiently because some of tenants that came to us, especially when the recession ended, needed the space in a week.

One thing we keep hearing is that the financing market continues to be a challenge. How are your firms finding ways around that with clients?

DeKam: In my 30 years of business, I’ve never hired an architect to do preliminary drawings (but now we are). … If we have somebody who even looks like they’re ready to go, we just put the money in because no one else will and it just gives them a foot up. I’ve never lost a deal that way.

Bell: I think that’s part of the message — that you have to be creative. There has to be innovation. That’s the name of the game. I hate that phrase, ‘the new normal.’ It’s just changed. It’s the just the evolution of the business. It just is what it is. You either have to stay in it or get out.

What are some other ways firms are getting creative to get projects?

Wordell: One thing kind of like this is the new (People’s Food Co-op in downtown Kalamazoo). Miller Davis was the project design/builder, but we came in together at the beginning of the project.

Bell: It was collaboration.

How are your firms dealing with the talent shortage, particularly in the construction sector? 

Bell: This issue is going to be huge for the construction industry. We’ve already run into it about a year and half ago in the trades when we were working on (Sangren Hall at Western Michigan University). We couldn’t get enough people out there from some of the trades and that’s a year and half ago. Basically, in round numbers in construction, we lost half the workforce in the last few years, and those folks have retired or left for other parts of the country or gotten into other industries. They are just not waiting to come back into this. As things continue to build back up as the economy strengthens, I really believe that it’s going to be a huge issue. The problem is we just don’t have that continuity of work to where you can bring more people on and keep them employed. So how do you sell that to a young person? From the engineering side, there seems to be an adequate supply.

Wordell: In our sector, many of the same people that had to go to other firms or those that went unemployed for a while, we were able to hire them back. We haven’t seen much consolidation in Kalamazoo.

What is the level of competition like in the marketplace given the volatile workflow?

Wordell: It’s interesting. Our firm teamed with TowerPinkster to position ourselves so instead of competing against each other (in the request for proposal) process, we actually got a job together. So that was an interesting twist, and although I think it was good, I’m not sure we want to tell everyone how to do it. (Laughs.) It was just a different way of looking at competition.

Bell: For us, it’s kind of the opposite. We’ve been so competitive and I think that’s just an outcome of the last couple of years. Competition is just off the charts. … I think all the old clichés still apply. Competition makes you stronger and helps you keep your edge and be progressive and do all the good things you need to do to keep your company strong. So we shouldn’t complain about it too much, but it’s pretty cutthroat.

Bell: In 2009 and 2010, there were some fees that just seemed so unbelievable. I don’t know how some firms survived. We were in competitive bids for various projects and we found out how much the successful firms were proposing for their fee and they were way under ours — and we were low. We were wondering how we were going to be successful with the project if we got it.

DeKam: We’ve seen the same thing when we do an RFP for a client, and we tagged a few firms out of Grand Rapids and as a matter of practice. We always tag a few guys there because we consistently see the fees on nearly everything to be lower with similar quality.

Wordell: But now, (fees) are starting to get back to normal where people have enough work that firms don’t have to do that. And people aren’t trying to undercut each other. It just seems healthier.

Bell: It’s just fact that those quotes were unsustainable.

As the industry continues to debate the merits of programs like LEED, how is sustainability affecting the marketplace?

Wordell: Where does sustainability land in all this? I think it’s all great, but a few years ago it was just ‘the thing,’ but now it’s just a part of what we do. While it’s kind of always been a part of what we do, it just got advertised.

Bell: The benefit from our perspective is that it has raised awareness and elevated the idea of sustainability. We’re doing a lot better job as a construction community. The things we should have been doing all along, it has just made us kind of more conscious about the things we incorporate in our business. Also, a second benefit of this is the commissioning that goes on in these buildings prior to turning them over.

Wordell: Yeah, that’s huge.

DeKam: That is a really positive thing.

Bell: The point is that the owner is happier. And when you multiply that on projects that are tens of millions of dollars, that’s just a huge benefit for the owners. Anything you can do to eliminate those fallbacks or grief is just money in the bank for those guys. So I think that is another good thing that has come out of the focus on sustainability.

Wordell: And right now, a lot of owners don’t even understand the commissioning yet.

DeKam: I’d say that a good portion of our industry doesn’t understand that yet. I’d say that of commercial brokers out there, maybe 10 percent of them get it and some of them might not even care.

Looking ahead, what does 2014 hold in opportunities and challenges for your companies?

Bell: We believe that the opportunities and growth are going to continue. We don’t see that dying off. That’s going to continue well into 2014, so we think that’s good. We think that some of those challenges like the Affordable Care Act will die down and we’re seeing unemployment continue to go down, so hopefully that continues. And to be honest, I’ve kind of gotten tired of that phrase of ‘cautious optimism.’ It’s a confidence thing and I think that confidence is coming back. I do think that at some point in the not-too-distant future, we will see more headlines about labor and the lack there of. And more to that end, any company that doesn’t have business development as a core competency is not going to make it.

Wordell: We’ve been working on that over the last couple of years and are more mindful of that than anything.

DeKam: We would love to spec some stuff, but the lenders haven’t come that far back to the market yet. I’m not trying to throw the lenders under the bus, but you know they are looking for things that are pretty sure deals. We’ve turned in a couple of projects where we thought we had pretty solid tenants and a property under option or contract, and it’s like the lenders are waiting for you to pull the trigger. They want to see you completely committed. ...They’re that conservative right now, and we’re just talking about the lenders that claim to have a pulse that are actually turning the dirt over. At the same time, where loans are available, rates and terms are really attractive.

Read 3296 times Last modified on Sunday, 22 December 2013 21:28

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