Navigating Second-Order Economic Impacts on Construction: Strategic Legal Insights for 2024

Real Estate, Land Use & Construction Law

Navigating Second-Order Economic Impacts on Construction: Strategic Legal Insights for 2024

Apr 30, 2024 | Real Estate, Land Use & Construction Law

We recently discussed the general construction market in 2024 by sector and the specific economic impacts at play in the construction market. We now turn to discussing some of the second order effects that these economic factors are having in the Washington, DC construction market here in April 2024. We will then raise some specific areas of legal concern implicated by current conditions.

Major Commercial Property Owners Are Hurting Right Now

Major commercial property owners are experiencing significant challenges. Vacancy rates have increased substantially over the last several years. Vacancy rates plus large interest rate increases have translated into significant drops in some commercial real estate property values, particularly in office buildings and even more particularly in office buildings which are not Class A+ or Class A space. Beyond pointing to a need to hoard cash and meticulously manage renewals, rentals, and defaults, the baseline is a huge drop in the value of commercial portfolios. This has broad market implications beyond just the office context.

Financial Constraints: Rising Interest Rates and Expensive Capital

With interest rates on the rise, the cost of borrowing has increased substantially. This means not only a drop in real estate value, but also an increase in construction project costs. This double bind translates to fewer projects, higher project financing costs, tighter margins for owners, and fewer feasible projects. At the same time, banks are facing increased regulatory scrutiny which further tightens capital.

Aggressive Cash Flow Management

These economic realities have filtered down to a dramatic increase in aggressive cash flow management. In practice, this means things are tight financially up and down the food chain of development and construction. Weaker players will fail. Managing cash flow becomes mission critical. All parties need to stay on top of timing of billings, enforcement of payment terms, and the use of mechanisms like escrow accounts to secure funds. Moreover, legal counsel should assist in optimizing tax strategies and other financial obligations to improve cash liquidity.

Everyone Is Rediscovering Their Lien and Bond Rights

In the free cash period since the last major downturn, there has been little need to assert mechanic’s liens or payment bond claims. That has changed. We have seen a dramatic uptick in such claims in our practice and this is no surprise.

To protect financial interests in a volatile market, it is vital to enforce lien and bond rights aggressively. You cannot sit on your rights and let your claims evaporate. These claims have tight deadlines, and you should not rely on past relationships in this environment without at least considering your legal rights.

Stay tuned for our next entry, where we will focus on some additional critical contract terms that construction industry professionals should prioritize in the current economic environment, ensuring robust protections and project viability.

If you have questions about any DMV construction issues, please feel free to reach out Timothy Hughes at Bean, Kinney & Korman, P.C. at (703) 526-5582, Our firm practices in Virginia, Maryland, and the District of Columbia in addition to various other jurisdictions.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the author and are not necessarily the views of any client.


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