Staying in the Black in the Aftermath of COVID-19: A Land Developer’s Perspective
The COVID-19 pandemic has swept across the country and had a widespread impact on the economy. In Texas, and especially in Houston, we are experiencing the painful compounded effect of the virus and a decline in oil prices, which have resulted in significant jobs losses, facilities closures, and bankruptcies. Yet to be determined are the long-term effects – how do we do business going forward?
It’s easy to feel very concerned – especially if this is your first time through a major downturn. Houston has been through more than its fair share of economic disruptions over the years, from the savings and loan crisis in the 1980s to the 2014 oil bust to the current global pandemic.
As a land developer, I’ve been particularly tuned in to the concerns of my fellow developers and real estate professionals. While the crisis is painful in its own way for everyone, the fact remains that disruptions create opportunity in industries across the board, including in this one. Here are a few concepts for developers and real estate professionals to keep in mind as we navigate this new normal.
Become a Master of One Trade
For the younger generation, this will be a good, albeit challenging, experience. Many younger people thrive during periods of change and have the needed energy and perseverance to succeed. There are fewer lessons to be learned in a good market, where opportunities are plenty. A downturn makes us more disciplined and focused. So, use this slowdown to figure out what business you are really in and what areas you think have the most future opportunity. Become an expert in those areas. This knowledge will set you apart when the market starts to turn.
A Low Price Doesn’t Always Mean a Good Investment
As companies liquidate assets to strengthen their cash flows and eliminate debt during a downturn, more properties will come onto the market with the potential to drive valuations downward. But you shouldn’t make a land investment based solely on price—look at the whole picture ahead. Is the property in a premium or growth location? How is the access? Does it have utilities? Are the any hindrances to development such as easements or environmental issues? Can this property accommodate just one or many uses? Land development is a long-term business; prices will change, but many aspects of a real estate asset are permanent. Make sure that the enduring qualities of your investment are working in your favor and will allow you to pivot and adapt to changing market conditions now and in the future.
Patience Pays Off
Land development requires patience, as it is a long-term, high-risk proposition with the potential for high reward. Developers need to have the patience to allow a parcel to transact at the most opportune time – whether six months or 20 years from now. Making careful, strategic investments in quality parcels is only the first step. In slow periods, use the time to create additional value for your existing assets, such as building roads or utilities. Infrastructure improvements can take a long time but working on these projects during down cycles will leave you well positioned when the market returns.
Pay Attention to the Basics
Having navigated many crises over the past 50 years, another lesson rings true for me: Pay attention to the basics. As Warren Buffett once said, “When the tide goes out, you can see who has been swimming without a bathing suit.” Developers who overleveraged projects or didn’t perform adequate due diligence on investments will be in more trouble than those who were careful with their commitments.
Do your best to preserve liquidity; review your obligations and make sure you can manage them. You may have to consider going to your lenders and renegotiating your position. Think about it from their point of view, figure out what is important to them and consider what you have to offer. Show a cooperative attitude before renegotiating your debt. Most lenders won’t want the land or assets back but they will want to see a firm commitment to completing your projects, which may be more difficult than in a strong market, and to making partial payments.
Disruptions Create Opportunities
The coronavirus pandemic has underscored the need for American companies to have a long hard look at their supply chains and rethink their dependence on China and other foreign countries. This will likely result in domestic manufacturing sector growth, and Houston is ideally positioned to fill that void, thanks to the availability of large land parcels, strong engineering talent, and a skilled workforce as well as housing affordability absent in most major metros in the United States.
Now is also the time for Houston and Texas to strengthen other “economic engines” outside of oil and gas, like manufacturing and technology, to keep growing and limit vulnerability to the energy market’s volatility. The oil and gas business may never recover to the profitability levels that it has enjoyed in the past.
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The coronavirus pandemic, combined with the sharp decline in oil prices, has disrupted all aspects of our economy. But in Houston’s commercial real estate market, crisis can lead to opportunity. Make the most of the downtime to decide what business you’re really in and work to learn about it as much as you can. The most successful performers make strategic use of downturns. It can be hard to predict when the next opportunity will present itself, so the time to prepare yourself for future investments is now.