Protecting Development Projects Now From the Next Economic Downturn

With many economists and industry publications discussing a potential downturn in the coming months, it is worth considering how you can protect your project from a declining economy and ensure that it stays on track for a successful completion.

How do we know we are headed for a downturn? In short, we don’t — not with full certainty. It could well be the case that the economy continues to chug along for the rest of 2020 and beyond, despite expert predictions. However, those expert predictions are based on a number of historically reliable indicators, two of which are becoming more and more evident in the NYC market.

“There is an increasing number of foundation subcontractors seeking work, and we are seeing better-than-expected responses to check pricing requests across all trades,” explains Gavin Middleton, chief operating officer at NYC-based Lehrer Cumming. “These are reliable indicators that the market is slowing.”

Based on these and other recent trends, more and more economists and industry-watchers agree that a downturn is likely in the near term. According to Cumming Insights, a quarterly economic report focused on the construction industry, the NYC area should expect to see a slight slowdown in building activity during the next six to 18 months, with the residential market in particular experiencing a notable contraction.

“If you are a project owner or stakeholder,” added Middleton, “this environment can create opportunities during a downturn.” According to him, strategies to employ include:

1. Manage the buy process while trades are hungrier. There is an art to how much one can reasonably push a subcontractor award during a very competitive process. Subcontractors have to make a profit, so the art is to leave some meat on the bone to make your project a win-win for everyone involved.
2. Upgrade your workforce. For business and projects that can keep going through a downturn or recession, there is a silver lining: Top talent becomes more available as workers compete for fewer jobs.
3. Adjust your contract language. If possible, modify your contracts to include a right to cancel. This clause enables you to rebid in a downturn, thereby enhancing your financial flexibility and keeping your long-term commitments to a minimum.
4. Be aware of changes in financing availability. Without proper homework and foresight, you may find yourself with unnecessarily expensive financing, or perhaps no financing at all. Stay abreast of the market and understand your short-, medium-, and long-term financing options.

Middleton is careful to note that these strategies are not the end-all, be-all for how to capitalize on an economic downturn.

“But,” he says, “they will help increase your project’s opportunities to succeed, thereby maximizing the likelihood that it is delivered successfully no matter the market conditions.”