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Tough calls: Making decisions in real estate and construction amid an uncertain economy

Tough calls: Making decisions in real estate and construction amid an uncertain economy

Synopsis
3 Minute Read

With a rising interest rate environment and an uncertain economy ahead, real estate and construction companies are considering the impacts on new construction project. When it comes to making the choice to slow operations or continue, full steam ahead, there are some things to consider to ensure you’re making an informed decision. From assessing your tax strategy to examining your internal processes and the state of the market, there are steps to take ahead of changing course.

Partner, Real Estate and Construction

Knowing what to consider when thinking of pausing or powering ahead can make all the difference.

Rising interest rates, the potential for a recession, and sustained labour shortages have all had significant impacts on Canada’s real estate and construction industry.

Trying to make decisions about the business when you’re not sure what the economy will look like next month let alone next year can be a very daunting task.

Whether you choose to slow down operations or stay optimistic and push forward, there is some information you should take the time to review before making any big decisions.

Things to consider

In the real estate and construction industry, you are constantly having to adjust plans depending on the state of the market. But right now, the stakes may seem higher.

Coming out of the COVID-19 pandemic, the industry faced significant challenges and enormous opportunity. Now, as the market cools off a bit, returning to more normal or historic levels, it may be time to reassess your business and approach the future from a different perspective.

Before you decide to slow operations or embark on a big new project, there are a few things to consider.

  • Staffing: Do you have the right number of staff needed to adapt to the changing economic environment? If business slows further, will you have to lay people off? If business picks up, will you need to hire more staff and are people with the skill set you need available? These are just a few of the big questions to ask yourself before moving forward. Knowing your team and their capabilities, skills, and strengths will help you determine if you have what you need to make a profitable decision.
  • Internal business processes: Are you using the right systems, and do you have the proper information available to you to make the right choice for your business? Without valuable data outlining detailed revenue and expense information, it’ll be difficult to make an informed choice.
  • Benchmarking: How are other businesses in the region doing? What types of projects are they undertaking? Have they changed the scope of their work to adapt and is their approach working? Having this kind of comparison to other businesses similar in size and scope to yours, you’ll be able to see how various decisions have panned out to help paint a picture of which option is the most viable for you.
  • Canvassing your internal environment: What does your cost structure look like? What will it cost you to hold off on a project or continue, full steam ahead? Engage with your financial team to look at the market and assess the opportunities and hindrances present.
  • Pro forma statements: What does the forecast look like and is there variability there? If you’re a homebuilder or condo developer, purchaser default risk is likely higher than in recent years. With rising interest rates and purchased made at the peak of the market, many buyers committed to a purchase that they may no longer be able to close on. Assess your risks and keep it a focus for your internal team, regardless of which direction you choose to go.

What’s next?

Regardless of whether you’ve made the difficult decision to slow operations or move forward, the fact remains: the market has changed and will keep changing.

The last three years have illustrated that no industry is immune from economic uncertainty. It’s those that can adapt to adversity and plan for the unpredictable that continue to succeed.

Taking steps to get a better understanding of your business and the environment it operates in will enable you to be more prepared, whatever may come next.

Here are a few things to keep in mind when planning for your future:

  • Timing: What is the market doing right now? How might that change and what would an extreme situation mean if you go down a certain path? These may be the most important questions you’ll ask when at this crossroads. While you can’t predict the future, you can assess the benefits and pitfalls to waiting or staying the course.
  • Organizational structure: Do you have the right people involved in making these decisions? Are your teams’ goals and strategies aligned? Now may be the time to look at your organizational structure and make any changes needed to ensure long-term success.
  • Compensation strategies: Do you have the right compensation strategy in place to help retain and/or attract new talent? Given the shortage of labour in the industry, it’s vital that you have what you need to get you to the finish line. If you’re looking to hire, there may be opportunities if other businesses are letting people go.
  • Tax strategies: Does the business have proper tax strategies in place? Where is income generated and what does the business look like, overall? Financial advisors can help you assess your tax strategies and determine if they’re working for you.

No one wants to sit still and not act if it could mean unrealized profits but there may be a higher cost of acting from being overly optimistic.

It’s not an easy time to have to make difficult and long-term business decisions in construction and real estate, that much is clear. But with the help of an MNP advisor, you can work towards painting a detailed picture of your operations, what needs to be improved, and map out your goals for the future.

Stepping back and taking a critical look at the overall facets of your business will benefit you, whatever path you choose to take and MNP is here to support you in that process.

Contact us

For more information, contact Alex Levin, Partner, Real Estate and Construction.

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