“What happens to you guys in a down-turn?”
A contractor with whom we do a LOT of business asked us this question yesterday. He’s concerned, because he’s basically given up working with anyone else in order to handle the volume we’re sending his way. (Incidentally, he’s not the only one: We have three contractors now who just work on our deals.)
It’s a reasonable question. Any time your business is entirely dependent on one customer, you have to worry about how that customer will behave as you move through the business cycle.
But I don’t think he has much cause to worry, and here’s why:
- Our projects generally take 9-12 months and the funding for them is in place from the beginning. In the event of a downturn, we’d still finish whatever we have in the pipeline, because it doesn’t do anyone any good to sit around with vacant buildings;
- Unlike most developers, we use very little debt, so a downturn is not going to force us to spend years negotiating work-outs;
- Instead, we will spend the first 6-12 months of a downturn finishing and leasing projects already in the pipeline and raising fresh capital;
- Simultaneously, we will begin developing and repositioning a portfolio of properties that we purchased in 2012-13 but have not yet touched, because construction prices are currently too high for the rents the neighborhood can support;
- Finally, we will start buying as quickly as we can, initially developable land in interesting neighborhoods and then apartment projects for repositioning
We’re not looking forward to a downturn. But we believe we have positioned our business to take advantage of one, whenever it comes.