Developers cautious but developing

Once appraisal values catch up more development on the way

Real Estate development

Although the Great Recession is behind us, many businesses and individuals are still feeling the effects. Local developers were some of the hardest-hit, and for a few years now have been consistently saying that they’re still digging their way out. As building season for 2014 gets underway, we checked in with a few local developers to see how business is looking for this year and beyond. Are we finally back on track?

Ryan Hurley says that he is cautiously optimistic. His company, Hurley Development, has been a major player in redevelopment in downtown Vancouver, and he feels that the landscape is finally starting to change.

“I would say we’re still definitely in climb-out mode,” Hurley said, “but we’re making good ground. It’s been a stronger marketplace from at least the last year, as residential construction has bolstered. Typically, commercial follows a year behind, and we’re seeing those results now as a company.”

Gary Bock, Executive Director of the Southwest Washington Contractors’ Association, echoed that impression. “I think we’re getting there,” he said. “I feel more positivity from my contractors. Also, we maintain a plan center of construction plans for bid. “I’m seeing more and better-quality, relatively high-dollar plans coming in. Which we weren’t before. I also think the banks are lending more. But are we on top of the world? No.”

For Hurley, one of the biggest positive indicators is occupancy rate on new projects. “The Sparks project is our latest and greatest in Vancouver,” he said. That project, a redevelopment of the longtime site of Sparks Furniture, will be a multitenant facility with a total of about 40,000 square feet. “It’s a pretty substantial remodel,” Hurley said. “We’ll be closing in mid-June, and we’re already about 80-85% occupied. That’s a pretty significant turnaround from two or three years ago.” At that time, he said, “it was pretty much an owner-occupied world.” There wasn’t strong development for rental tenants.

“But,” Hurley continued, we’re starting to see credit loosen up, which is going to allow investors to go out and secure and develop new product. That will allow for companies that don’t want to own but do want to lease have a broader selection than they’ve been able to have for the last four or five years.”

Ron Frederiksen of RSV Construction is also seeing more activity, but feels that because appraisal values are still lagging, the market won’t fully catch up until that changes.

“Here’s how I’d describe it,” he said. “There is more interest and activity. There is definitely a lot more interest and inquiries, and that’s a good thing. Banks are willing to loan money, and that’s a good thing.” But, he said, limited available land, limited usable existing inventory, and a lagging appraisal process, make it challenging to build a cost-effective project.

“We have a client,” Frederiksen said, “who is relocating a 55,000 square foot manufacturing facility from Portland to Vancouver because they live here and they’re tired of the commute.” By the time they were able to scout an adequate property, they had two choices. “One of them,” Frederiksen said, “wasn’t even on the market. Their choices were extremely limited.” The next step was appraisal. Said Frederiksen, “Even though rates right now are low, there’s still a high vacancy because no one can get the appraisals they need to get the loans.”

The difficulty with appraisals, Frederiksen said, is that the appraised values don’t always match with the projects costs. “From the appraiser’s perspective,” he said, “they’ve been doing nothing but appraising distressed properties for six years. It’s a new world now. Banks are willing, but the appraisers haven’t changed their frame of reference from disaster.” This means that in order to get project costs in line with appraised value, every penny needs to be watched much more closely, to keep costs under control.

This more rigid approach to budgeting and project management probably isn’t a bad thing for most of our local developers, who pride themselves on keeping quality high and costs reasonable. “There’s no room for any wasted motion at all,” said Frederiksen. “It will eventually self-correct,” he contiunued, “but it will probably take another three years of improved sales data for appraisers to have better information to work from.”

In the meantime, local developers are digging in and continuing to see their business improve, slowly and cautiously. “2013 was our largest amount of volume since 2007,” said Frederiksen. “But instead of a couple of $5 million projects, we’re seeing a whole bunch of “$500,000 projects. It’s a different world.”

Hurley agrees. “We are cautiously growing and making efforts to find good locations,” he said. “I don’t feel we’ve yet reached the delta, if you will, between low vacancy rates, low building cost, and client appetite for new product. But we’re definitely heading in that direction and we’re trying to plan accordingly. For 2014, I’m hopeful we will continue to stay in the strong recovery mode, and strengthen. I don’t believe 2014 will be some banner year, but that’s certainly not to discredit the positive strengthening we’re having. It’s important to climb in the direction we’re going.”