Developers are Keeping Their Powder Dry

When Altus Group asked the development community early this year about strategic investments and decision-making in a downturn, “a significant majority of executive respondents saw opportunities—not risks—in acquisitions, asset repositioning and joint ventures,” according to the firm’s newly issued report on property trends.

That was the consensus in early 2020. Then the COVID-19 pandemic created “a domino effect” of slowdowns and shutdowns, Altus says. The effect was so widespread that the firm followed up its original survey of 400 respondents globally with a series of in-depth interviews with senior development executives.

These follow-up conversations revealed that although the desire to make acquisitions hasn’t changed, “macro uncertainty due to the pandemic has resulted in ‘lots of dry powder,’ or cash reserves, waiting on the sidelines,” says Altus.

“Developers expressed surprise that significant distressed asset opportunities have not yet emerged. They are focusing on continuously evaluating conditions, being prepared – and waiting attentively for more opportunities to emerge.”

Sixty-eight percent of respondents to the original survey said the risk of a cycle downturn has a significant impact on their decisions regarding new construction investments, with distressed asset acquisitions (57%) and change in asset/portfolio mix (66%) viewed as “more of a risk than an opportunity during a cycle downturn,” Altus reports. “These factors are all contributing to many development leaders taking a wait-and-see approach.”

The pandemic and the economic impact have intensified the challenges facing developers, according to Altus’ report. Seventy-three percent of development executives said project cost escalation is a significant challenge facing development firms, followed by environmental regulations (70%), government policies and processes (65%), and trade and labor shortages (65%).

The current environment has also brought developers to the realization that the adoption of technology can help them navigate through what lies ahead. Fifty-two percent of development executives surveyed are considering or planning to use digital transformation strategies to mitigate business challenges, and 37% are already doing so.

An observation from Oxford Properties president Michael Turner sums up the outlook: “Our assumptions have changed,” he told Altus Group. “But has decision-making changed? The framework by which we consider trade-offs and choices and think about risk and reward? Not principally as it relates to development.

“If changing assumptions and inputs pre-COVID, during COVID or post-COVID produce results in analysis that cause us to pause, we will,” he continued. “But all the key data inputs and trends underlying our decision-making are being accentuated under COVID, and they are giving us conviction in our prior aims.”
 

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