What the Future of the Maryland Construction and Real Estate Industry Looks Like
There’s a lot of uncertainty in the Maryland construction and real estate industry right now. With a presidential election a few weeks away, a worldwide pandemic and an unpredictable economy, we asked four seasoned industry veterans to tell us what they thought the future of the industry holds. At a virtual panel, hosted in partnership with Maryland Construction Network, on September 2, 2020, I moderated a discussion of the following panel:
- Stephanie Freeman, McGriff Insurance Services
- Jeff Jacobson, Solstice Partners
- Kenny Mallick, Mallick Mechanical
- Steve Porter, Porter Construction
Below are some of the highlights from the panel. If you’d like to watch the full recording of the panel, click here.
The Future of the Construction Industry is Uncertain
Steve Porter thinks the construction industry will continue strong throughout the rest of the 2020, but after the first quarter of 2021, he’s not so sure. “I think we might eventually see a downturn here,” he said. “But there are so many factors that can contribute to that.” With the upcoming presidential election and the unknown state of the virus, panelists agreed it’s hard to see what exactly the future holds.
Kenny Mallick said he uses the Architecture Billings Index to help project what the future of the industry will look like. “If the architects aren’t drawing, we’re not going to have anything to bid on,” Kenny said, noting a 30% drop in architectural services since the pandemic began.
Sureties Are Taking a “Wait and See” Approach
Stephanie Freeman said prior to the pandemic, the surety market was a “soft market,” meaning credit was flowing freely, with great terms for credit, backlogs were full, and there was a lot of capacity in the marketplace.
While the surety industry hasn’t seen any uptick in claims or frequency of claims, there is a fear that it could be coming. “I would categorize the surety industry right now as uncertain,” Stephanie said. From an underwriting standpoint, uncertainty is creating more underwriting questions and tightening up terms from a surety perspective.
The other big topic in sureties is the Paycheck Protection Program (PPP) and how to treat PPP funds on a company’s balance sheet. “Sureties are taking a ‘wait and see’ approach in terms of forgiveness,” Stephanie said. For now, PPP funds are being treated as long-term debt, but it’s possible that those funds will be converted to equity once the funds are forgiven.
Stephanie recommended that contractors reach out to their CPA, banker, surety, agent or underwriter if they are looking for advice. “These advisors are living in the market just like you are, and they deal with a lot of clients…We’re always happy to talk and let you know what we’re seeing.”
Commercial Real Estate is Going to Look Different
“People talk about the modern office being ‘dead’ and the pendulum swinging,” Jeff Jacobson said, “but I don’t believe that.” Jeff’s prediction? Businesses will start turning to a more hybrid work model as the economy starts to recover. Instead of a business leasing one large office for their headquarters, he predicts we’ll see smaller main offices with additional satellite offices throughout the region.
Overall, Jeff is seeing businesses hitting the pause button on new projects. “Getting customer confidence up is going to be pinnacle for recovery,” he said.
Pricing Changes Are Dependent on the Type of Work
Pricing changes are going to be widely dependent on the type of project and clients that a company serves. Short-term tenant work, for example, is at risk for being the most volatile as architecture and engineering firms slow down.
Kenny Mallick’s biggest piece of advice for subcontractors is to pay attention to their competition. As bid lists start to increase, contractors should know what their competitor’s backlog looks like. “You might have to make some decisions about whether or not it makes sense for you to burn profits to pay for a job,” Kenny said.
There Are Some Silver Linings in a Pandemic
One of the first silver linings that Steve Porter noticed during the pandemic was an uptick in renovation work. These renovations have included adapting existing commercial and retail spaces to accommodate COVID safety precautions.
Companies have also adapted technology in a brand new way. “It’s helped from a project coordination standpoint,” Steve said. “It lets everybody connect quicker and discuss things, which cuts down on having to drag people out to meetings.”
Kenny Mallick said he’s definitely been seeing some quality of life improvements as people spend more time at home with family. “Plus,” he said, “Traffic has never been better!”
Redevelopment is the New Development Opportunity
While there is a lot of uncertainty in real estate, Jeff Jacobson thinks the next big opportunity is redeveloping existing spaces, like malls, big box stores and maybe even underutilized parking lots. Jeff thinks opportunity is waiting when it comes to drive-thrus and outdoor spaces for food and entertainment, and finding ways to winterize those spaces for year-round use.
“I don’t have a crystal ball to say where to go and what to do next,” Jeff said, “but all these shakeups create opportunity for us.” While consumer and business activity looks different than it did just a few months ago, redevelopment might become the next big opportunity.
Recent Spikes in Commercial Mortgage-Backed Securities (CMBS) Defaults Point to the Necessity of Good Lender Relationships
Stephanie Freeman said the lesson learned with the recent spike in CMBS defaults is that a borrower or developer needs to evaluate whether or not they want to have a relationship with a relationship lender or a transactional lender. With a relationship lender like your bank, you are able to go back to the lender and potentially renegotiate the terms if your company has a downturn, like with the pandemic.
A transactional lender is different. Transactional lenders sell off as much of the loan risk as possible to other parties in the market. That means, if your company experiences a downturn, it’s not as easy to go back to your lender and renegotiate the terms. In fact, it can be much more time consuming and costly than with a relationship lender.
These defaults weren’t caused by poor underwriting or accounting, but by the underlying asset classes, like hotels and restaurants, that are struggling because there’s less revenue to be made.
Jeff Jacobson said the importance of a company’s relationship with their bank cannot be underestimated, especially at times like these. “We as owners and developers have our hands tied in a lot of cases,” he said, pointing out that many multifamily developers aren’t able to evict tenants or raise rents in their properties during the pandemic. “We’re stuck, and if our banks aren’t willing to work with us, it hammers everyone and it trickles down to even the contractor level.”
Transparency Can Help with Recruitment
Communication from leadership has been vital during the pandemic. Kenny Mallick said it’s important to let employees know that you have a plan. “Being in the dark and getting surprised isn’t good for anyone,” he said.
Letting employees know they have a future at your company is important when it comes to attracting new employees. The promise of stability is paramount in recruiting and retention. “If you’re a stable firm from an employment perspective, get some employee testimonials out there,” he said.
Steve Porter said that being transparent with employees has been an important part of his company’s recruitment. “When employees are happy and positively talking about your company, that word of mouth gets people to your door.”
Find New Business in Your Existing Relationships
Kenny Mallick said his advice to contractors is to target the firms your company wants to do business with and then find a friend or colleague that currently works with that target business. “Ask for an introduction,” he said. “It’s hard to get in, but they’ll take a phone call, especially with an introduction from a trusted advisor.”
When you do get the meeting, Kenny said it’s important to spend more time asking the prospect questions about their business than talking about your own. When you do talk about your company, think about how you can best communicate what you sell and what makes your approach different.
“You should focus on your existing relationships more than ever right now,” Kenny said. “Stay in touch with them and get a better understanding about what they have to offer.”
Stephanie Freeman said that contractors should look at their advisors, like their sureties, CPA firm or their bank, and ask if they can make an introduction. “You may have to get a little more creative these days because we’re not doing traditional networking,” she said. “Use your contacts within the industry to dig up some new relationships.”
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Published on September 10, 2020