Why Holding off Could Hurt More than Help
Financial institutions are scrambling to re-evaluate their facilities expansion plans as the economy stumbles, but putting plans on hold may mean missing out on big opportunities as building prices are falling.
"Now is a great time to do it because you've got contractors that are cutting their overhead; they are doing all sorts of things to cut their costs," said Ralph LaMacchia, founder and president of LaMacchia Group.
"It's probably the best cycle we've seen in the last five to 10 years for pricing and we haven't seen them bottom out; it's still dropping," added Kevin Blair, CEO of St. Louis-based NewGround.
Many credit unions are putting the brakes on their projects a number of design-build firms told CU Journal. But they argued credit unions should move forward with their plans if it makes long-term sense and the institutions can afford it, because inflationary pressures are bound to make construction costs far more expensive than long before the recovery is in full swing.
"We are seeing a lot of credit unions that are in a hold mode, waiting until there is a clear direction. But the quicker you can get on to the bid market, the better it is right now," explained Tom Lombardo, national director of business development for St. Louis-based Clayco. "Once things do begin to improve on a nationwide basis, we think we are going to see some price increases."
What Goes Down, Must Come Up
That inflation may come sooner than many believe, as LaMacchia Group clients have been expressing a more positive attitude than they did at the end of last year. Ralph believes that the industry has gotten its arms around the problems plaguing it right now and even those that may yet be left to deal with and are moving beyond the "freaking out" stage to figure out how they can get business done in this environment.
"Most of the people we are talking to aren't having a bad year; it's manageable," he said. "Once you have the worst-case scenario out there, you've got the monster out from under the bed and you live your life."
Commercial real estate has not fallen as apart as precipitously as the residential market, but weakness in that sector is beginning to emerge. In metropolitan areas with overleveraged developers and heavy reliance on the financial sector, buying up existing properties and converting them may make the most sense for credit unions. But they must be active in the marketplace to find good value, Ben LaMacchia, vice president of planning and real estate for LaMacchia Group explained, as selling pressures in the commercial market are greatly different from those in the residential market. In most cases developers and other commercial real estate owners are able to hold their properties long enough to avoid selling into a buyer's market.
"The situation that causes someone to sell is that they are overleveraged-they aren't getting any equity on the property," he said. "If you just sit there and wait for a property to go into receivership and it goes to a fire sale, those opportunities are few and far between."
When making the decision to be more or less aggressive in this economy, many times credit union execs find their biggest challenge is not figuring out how they are going to pay for the capital projects, but convincing their boards that hunkering down and veering off plan is not way to go. CEOs and their staffers need to convince their boards that they can handle the day-to-day problems and the short-term upheaval while the directors stick to plotting out the long term vision.
One Way to Hedge
One way of hedging against downside risk is: exercising the option of delaying the site work. After the designing and permitting phases are complete, the new facility is six weeks away from construction beginning and just two weeks away from bid numbers being locked in compared to being eight months' delay if the designing phases are delayed.
"Credit unions can't let the short-term losses that everybody is incurring cloud their long term vision of what they need to serve their membership," Blair said. "Those institutions that show strength, stability vision, and that promise of the future are going to thrive in these very difficult times."
This article appeared at www.cujournal.com and is reprinted with permission.
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