Developers Prepare For Lengthening Project Timelines
As Houston’s commercial real estate industry grapples with the twofold ramifications of the coronavirus pandemic and plummeting oil prices, development pipelines could be severely disrupted this year.
Developers are facing longer project timelines for both planned and current construction amid growing issues with permitting and inspections, as well as personnel shortages.
“Right now, if I were to plan any new projects, I would delay it for at least another six months from whatever stage I am at, because of all the uncertainties,” Satya Inc. CEO Sunny Bathija told Bisnow.
The Houston Permitting Center, which falls under the umbrella of Houston Public Works, moved most of its services online on March 23. The change allowed the office to maintain operations and reduce the number of customers in waiting areas. Operations are continuing as normal, a Houston Public Works spokesperson told Bisnow.
But some companies are saying that typical permitting and inspection processes have slowed, since everybody is working from home.
“The one thing that's kind of nipped me in the bud on two projects right now is, the cities aren't responding. They're telling us that development's a non-necessary component,” Rockspring President Michael Ross said.
Real estate investment firm Rockspring is a recent entrant into the development game, and has three development projects underway in Houston, Austin and San Antonio.
“I've got people I'm selling property to in a couple of other various areas of Texas, and they've given me a litany of responses so far. It seems to be, some places are business as usual, and some places have decided to take this as a time to sit back and pause,” Ross added.
Bathija said while it is a good thing that permits can be applied for online, there are still a limited number of city inspectors, and permits are being issued more slowly. Houston-based Satya owns a number of different asset types, including retail centers, hotels and condominiums.
“Previously, we had to do submissions in person, meet with people. Now we can make submissions online. We get our review comments online,” Bathija said. “Their response has been slow because they are also working on a skeleton staff.”
Stream Realty Partners Managing Partner Justin Robinson said things are still on schedule for its industrial segment. The company has infrastructure work underway for its Empire West Business Park in Brookshire, with groundbreaking on three buildings still slated for May.
"We're still full steam ahead on that particular project, despite the current stay-home, work-safe order and overall COVID [situation],” Robinson said.
“Fortunately, construction and development has been deemed an essential business so things have been progressing nicely. The level of difficulty has increased, just with trying to navigate what is already a difficult situation with permitting.”
The number of coronavirus cases across the country is rising, and some developers have seen this reflected in the decreasing number of available personnel for their work sites.
“It's definitely coronavirus-driven,” Campo said. “If we had no coronavirus, I'd have 300 people on that job today.”
Construction is underway on Satya’s The Sophie, a luxury condominium project near Memorial Park in Houston. Bathija said fewer people from its 230-person crew are coming to work. Some people are experiencing symptoms, while others had returned to their hometowns to be with family.
“They're trying their best to come. But if the workers don't turn up, or they are sick, if they have some symptoms, we don't want to push them to come also,” Bathija said.
The combination of slow inspections and permitting, coupled with a dwindling workforce and the need for extra sanitizing and social distancing on work sites, means that most developers are expecting timelines to be pushed as far out as six months, depending on when the pressures of the pandemic begin to ease.
“We're not as productive, we're not moving as fast as we could in a normal situation,” Campo said. “I definitely expect project delays as a result of that, and I don't think that's any different to anybody else who's building in this environment today.”
Camden has two multifamily projects slated to break ground in the summer: one in Phoenix, and the other in Charlotte, North Carolina. Campo said that depending on how the situation evolves, the starting dates could be pushed back.
Bathija said he expects a minimum of 30-day delays on his projects, which could extend out as far as six months. He noted that the company doesn’t want to start any new projects right now because of the slow inspections and permitting and reduced workforce.
Satya, which owns 15 retail centers in the Houston area, has also seen issues with lease negotiations falling through.
“We had 15 leases under negotiation when this coronavirus thing happened, and right now, I think only two of them are alive,” Bathija said.
The company’s existing retail tenants have also expressed difficulty in paying rent. Bathija said somewhere between 60% and 70% of its tenants are having trouble. Satya is working with them to find solutions, such as deferring the payments for a few months.
“We are trying to be creative with them,” Bathija added.
For Robinson, the impact of the coronavirus on the industrial market has been less severe.
“A lot of times, industrial projects can be years in the making,” he said. “Some of those timelines have been pushed out, but we've actually been pretty fortunate on Empire West to, for the most part, hit the deadlines that we expected to and been able to push things forward.”
Robinson also said that because many retailers have been forced to move to an online model, Stream Realty Partners has actually seen an uptick in inquiries from people looking for industrial warehouse space to lease.
“We've had some grocers approach us needing expansion space, and some of the consumer-related goods companies have approached us as well, looking for more space,” Robinson said.
The other side effect of lengthening timelines is that they cost more money.
“It for sure costs us money, because at some level or another, we own the dirt, and every day that goes by, I've got an interest carry on my dirt,” Ross said.
Ross said he did the math for a single-family development project in Dickinson: It’s costing him about $1K per day to stare at that dirt, as he awaits an inspection.
Bathija noted that if he has closed on a piece of land, he still has to pay the bank interest on the loan, in addition to paying engineers and architects, as well as for permits. As timelines extend, he expects his project costs to increase.
“At the end of the day, our carrying costs are still going to remain, the costs of our projects are going to be much higher than what we anticipated,” Bathija said.