The Future of Local CRE: Is a Construction Slowdown Coming?

One of the few constants in commercial real estate and construction is that business trends are somewhat cyclical. That's not to say there's consensus or predictability concerning the timing or the duration of market ups and downs, but rather a sense of inevitability that, after several years, a slowdown is looming.

Many companies figure periodic slowdowns into long-term business projections, and they have contingency plans in place to compensate for possible negatives. In terms of planning for the future economy, forecasts include a guarded warning that there is, at present, no way to predict exactly when or for how long the effects of the economic downturn will appear.

The plan, at present, at least for major players, is to continue with projects that were booked at the beginning of the year. For some local developers, there are ambitious plans underway, both in the Twin Cities and in other areas.

Bidding, Layoffs and Furloughs

Bob Gardner, owner of Gardner Builders based in Minneapolis, believes the next three to six months will be pivotal ones for local construction, with the forecast for the next two or three years becoming clear during that interval. Other business leaders note that there are likely to be substantial differences between public and private sectors.

Economic issues in construction-related fields can be expected to have a serious effect on the industry, according to Geoff Glueckstein, JE Dunn Construction senior vice president of operations for Minnesota and North Dakota. Recent layoffs and furloughs of architects and designers, engineers and other support services, he notes, could point to "worse news to come" for the construction industry. However, others interviewed by Minneapolis-St. Paul Business Journal reported more bidders on recent projects, signalling that contractors want to line up jobs for the future.

Job site changes may also contribute to a slowdown, both in volume and lower profits, according to some observers, because of the need for additional safety equipment, distancing, and the need to adapt to safer new ways to perform job site duties. Glueckstein notes that none of his company's projects have been placed on hold, that at least a couple are scheduled for starts in the coming year, and that JE Dunn was the winning bidder on three projects recently during a single eight-week period. So, while not overly confident about the future, he is hopeful that a slowdown will be manageable.

Another cautiously optimistic voice is that of Andy Hoffman, co-owner of H+U Construction in Edina. He notes that there are currently a higher number of RFPs, and that his company is trying to build a backlog of jobs so that they will have work available to start during the coming year. His strategy is that even lower-paying work is better than no work.

Gardner comments, "It's clearly a moving target," adding that while most of his firm's jobs are on track for the immediate future, some have already been postponed or pushed to 2021. He adds, though, that Gardner Builders is still receiving RFPs and "still securing work."

Looking Beyond the Immediate

Ryan Cos. US Inc. may not be a phenomenon, but its success story cannot be overlooked. Based on projects currently planned for the Twin Cities, the company is in a position to survive whatever potential slowdown visits local commercial real estate and construction. That, in itself, may be good news for the local scene, with the following just a sampling of what's underway:

• Eleven, the 41-story high-rise that will contain 118 luxury condominiums with starting prices of $900,000. Ryan Cos. and Edina-based Arcadia broke ground on the tower last fall. Reportedly, more than half the units have already been sold. The building, situated near the Guthrie Theater on the banks of the Mississippi in downtown Minneapolis, is expected to be complete in late 2021, and is not only the most expensive, but the tallest residential tower in the city's history.
• Former Ford Site: Ryan Cos. is also involved in the highest-priced local land deal in history in conjunction with Weidner Apartment Homes, headquartered in Kirkland, WA. The partners closed on a 122-acre tract in December 2019 at a price of $61 million. The current master plan proposes 3,800 housing units, a 50,000-square-foot facility for use as institutional or civic space, and 150,000 square feet of retail space. Two smaller parcels have been sold to other affordable housing developers, and Ryan noted that design work has begun on the first buildings. Located in St. Paul's Highland Park, the build out will be completed over 10 years, with grading and utility work expected to span approximately 18 months.
• 10 West End, in St. Louis Park, is planned as an 11-story building with nearly 350,000 square feet of office space. However, it may be a more difficult project to lease, because if there's a continued requirement for social distancing and remote working, lease space will almost certainly be impacted. The project's co-developer is Excelsior Group, and CEO Chris Culp reports that there are currently some active prospects. He adds that the business leaders he has contacted may have short-term concerns, but "they are optimistic it will be business as usual in the long term."
• Ryan Cos. is also the developer for two new towers in downtown Austin, TX. Hunter Barrier, South Central president for the Minneapolis-based developer, believes that despite the pandemic, the timing is right for this type of development in Austin. Even though demand for office space in the Texas capital has slowed recently, Barrier expects the market to rebound by the first quarter of 2021. He notes that the project was already well in to the design and approval process when the pandemic hit, but that the Texas economy is still strong, and that expected population and employment growth make the planned development viable.

While a close-up snapshot of any specific locale might point to a short-term downturn, the prevailing outlook—wherever one looks—is that commercial real estate and construction will not suffer lasting damage from the effects of the pandemic. Some, like Jeff Wellman, president of Rochon Corp., believe that the time to take another look at the situation will come in late summer or early fall. He, too, has noticed an uptick in bidders for available projects, and he notes increased competition typically is a sign of reduced margins. Like almost everyone surveyed, Wellman is playing a waiting game right now, waiting for clearer signs of what might lie ahead.