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Trying new things: Stuck in a downturn, commercial real estate sector works to diversify
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There was a time when the commercial real estate business was, if not easy, at least somewhat straightforward. Develop a niche, promote your expertise and win your share of work in an expanding market.
Those were the days. Nearly two years into a real estate recession that many fear may have the worst still in store for the commercial sector, Triad engineers, contractors and brokers are working to develop new skill sets and tap into new markets to help compensate for the overall lack of demand.
“It’s really out of necessity,” said Steve Cavanaugh of Winston-Salem engineering firm Cavanaugh & Associates PA of his firm’s recent focus on helping municipal water systems identify and stop leaks that can waste hundreds of thousands of dollars. “The large site work with plans of a million square feet, those just aren’t happening. They’re vaporized.”
In many cases, including Cavanaugh’s, firms don’t have to start a new line of business from scratch; instead, they expand an existing sideline into a bigger source of revenue. The trick is having a sideline to work with that plays well in the current economy.
Cavanaugh & Associates has been using acoustic monitoring technology to identify water leaks since 2000, but he’s given it a lot more focus since the drop-off in bigger contracts forced him to lay off 18 staffers in early 2008. Cavanaugh currently has 10 employees.
Leak detection is a good niche for the recession, Cavanaugh said, because it’s aimed at boosting crunched local government budgets. Depending on a variety of factors, an audit of a water system might cost between $20,000 and $50,000 and identify an average of $150,000 worth of needed repairs. But once that work is done, water systems can save hundreds of thousands of dollars per year.
Cavanaugh has done such audits in places like Burlington, Myrtle Beach and Morganton recently, but the challenge he’s finding is public sector inertia: Even the prospect of big savings sometimes isn’t enough to overcome hesitation at the initial expense.
There’s been so much deferred maintenance in so many places that “we know what we’re going to find when we look” at a water system, Cavanaugh said. “We know we can find things that can help communities with what they’re facing right now. We just haven’t found the right way to get all of them to pull the trigger.”
Building up a smaller division has also been helpful for Greensboro commercial real estate broker Triad Commercial Properties during the market downturn. Triad Commercial’s property management unit has grown from handling about 500,000 square feet of space in the spring of 2008 to more than 2.1 million now, according to Bill Hansen, who supervises that business, including the Wachovia Center tower in downtown Winston-Salem.
Triad Commercial’s diversification was well-timed to help balance out the decline in brokerage activity, Hansen said, but it was done more directly in response to an opportunity than a threat.
Hansen was previously the property management director at Greensboro powerhouse Starmount Co., handling such major portfolio holdings as the Friendly Center shopping center. Triad Commercial snapped him up after Starmount sold off its portfolio and closed down last year. Hansen’s Starmount experience and connections allowed Triad Commercial to go up against bigger property management rivals for plum contracts, he said.
Property management isn’t immune from the downturn, but he said it has different dynamics than commercial brokerage and so does have more upside potential when the overall market is down.
“When things have gotten slow on the leasing and brokerage side, that’s typically when managers can shine,” Hansen said. “Owners are looking for every possible way to cut costs and keep tenants and increase revenues, so we really get a chance to show what we can do.”
A new set of clients
Perhaps the ideal diversification strategy is to keep doing exactly what you’ve been doing, but for a different set of customers. That’s been the plan over the past year for Winston-Salem general contractor Frank L. Blum Construction.
Blum has done work almost exclusively for the private sector since its founding 86 years ago, according to Preconstruction Services Manager Mark Dunnagan, with most of its projects concentrated in areas such as health care, retirement communities, religious buildings, nonprofits and higher education.
That’s still the bulk of Blum’s business now, Dunnagan said, but projects that were planned or under way before the recession started are running out, and there’s very little backlog to replace them. When the company surveyed the market and found that about one-third of the available jobs were in the public sector even before the downturn began, they decided it would be “kind of foolish to ignore” such a major segment, he said.
Since then, Blum has won jobs for a public housing project in Winston-Salem and construction and renovation work for the Winston-Salem/Forsyth County Schools. From zero percent most years, Dunnagan said public sector contracts are now probably 10 percent of Blum’s active projects.
The difference is the hot competition for every job, since lots of contractors have made the same shift to the public sector that Blum has. Dunnagan has seen as many as 20 contractors going after jobs that might have attracted only three or four bids a few years ago.
Blum has won some so-called “hard bid” public sector jobs where the lowest reasonable bid automatically wins, but the pressure on margins is challenging to say the least in those situations. Dunnagan said he prefers the “construction manager at risk” process where the bidder guarantees a maximum price but more weight is given to experience and qualification.
That kind of bid is still relatively rare outside the University of North Carolina system, Dunnagan said, but overall he still considers the firm’s move into more public sector work worthwhile. He’s looking forward to the return of activity in Blum’s traditional markets, but he expects Blum’s current efforts to diversify will have at least some lasting impact on the firm.
“It may not turn into one of our big sectors, but (public sector work) is definitely something we’ll continue to monitor” even after the recession subsides, he said.
The Business Journal, Commercial Real Estate, August 1, 2009