Demand for Project Studies Increasing Real estate pre-purchase surveys help gauge likelihood of return on investment By Evelyn Lee 12/8/2008 As developers become more cautious about pursuing new projects in a down market and tight lending environment, some New Jersey architecture firms are experiencing increased demand from builders for pre- purchase feasibility studies. These studies help clients assess the rate of return on a property and the likelihood of a project receiving funding from lenders, but they don’t fully mitigate a slowdown in demand for design projects, according to local architects. “In this risk-adverse climate, [developers] want more and more information before buying a site or developing a site,” said Keith Lesser, a partner at Ives, Schier & Lesser Architecture Studio in Fair Lawn. “It takes a lot of time and money for them to negotiate and purchase and get the financing in place, so they want to know they’re making the right choice ahead of time.” The firm has seen a significant increase in client requests for feasibility studies, having done 10 studies each in both 2007 and 2008, compared to two or three in earlier years, Lesser said. Using information from the client and from engineers, feasibility studies analyze the zoning and land-use requirements of a property, considering land limitations, parking and loading, services and utilities, wetlands, and other environmental issues, Lesser said. Based on these findings, the study can establish the best use for the property, the likelihood of a project being approved by a municipality and how the local community will receive it, he said. Previously, feasibility studies often were done after a client had purchased a site, said Lesser, whose firm charges about $5,000 for a study on a small site and as much as $30,000 for a larger site. Now, developers are having architects do studies prior to buying a property. “In the past, when times were better, developers wouldn’t necessarily call,” said Yogesh Mistry, owner of Mistry Design LLC, a four-member architecture firm based in Netcong. “They’d just go ahead and purchase a property.” But amid a slowdown in the real estate market, projects have become riskier to undertake, he said. “Developers either will sell a building or lease out a building, and they are finding that the chances of either of those two happening are not good,” he said. Property owners either must hold onto a building longer or sell it for a lower price. While some developers are taking advantage of good deals in a soft market, they also are showing more caution and using feasibility studies as a means of lowering their risk on a project, Mistry said, whose firm’s feasibility study work has grown by 25 percent to 50 percent since the spring. With a limited pool of buyers and tenants for projects, builders are unlikely to move forward on a deal if a study shows that a site will not yield the project size — and income potential — they had expected. “In this market, the rates of return are less,” he said. “You have to make sure that every square foot is accounted for.” In the current liquidity crisis, feasibility studies can assess whether a potential project has a good shot at getting funding, said Jay Patel, president of Hotel Investors LLC, a Parsippany-based hotel development company. “It’s more important to do a feasibility study because of the financial turmoil,” he said. “The bank does not lend money unless they see there is a viable project.” Tightened credit markets have shrunk the pool of potential lenders, Patel said. While the firm may have previously been one of five developers competing for financing from a lender, Hotel Investors is now vying against three times as many project applications. “For me to compete against 15 other projects, I want to be sure that my project is exceptional, so I will be the first candidate to get funding.” A feasibility study also helps a developer to invest more wisely in projects, Patel said. The company is now also required to fund a greater percentage of the total project cost, he said. “If we have to put 25 percent down, we cannot choose any marginal projects,” Patel said, “because we have a bigger stake.” Rising demand for feasibility studies has benefited architects, as other design work has fallen off in the economic slowdown, according to the firms. Business “is definitely slower,” Mistry said. Some of his company’s projects have been put on hold, while inquiries for new work have dropped, he said. But feasibility studies aren’t a replacement for regular design work, Mistry said. “It’s not a big money-maker for us,” he said, since studies command smaller fees than a design job. “It’s really the long-term relationships that we’re looking for. When the economy gets better, you might have the advantage of getting jobs with those clients.” E-mail to elee@njbiz.com

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