Photo courtesy of: Greg Land

When Next Week is a Question Mark, Why Think Years Ahead?

April 29, 2020  |  Chris Dunlavey, FAIA Bill Mykins, LEED® AP

On the perennial necessity of capital improvement planning

To say these are times with big unknowns would be an understatement. It can feel hard to know what tomorrow will bring, never mind next week or even next month. Nonetheless, we cannot let our focus shift too far from the necessary improvements our sports and entertainment facilities continue to need. But how do you do capital planning in this environment? This Q&A with president of B&D Chris Dunlavey, FAIA, and vice president Bill Mykins, LEED® AP, explores this seeming paradox.

From your experience, why do we need to talk about long-term plans when right now all we can think about is what are we doing next week?

Mykins: Put simply, the need doesn’t go away. Certainly things are changing right now, but our buildings keep aging. The key now is to focus on critical components. We have to go back to our priorities—assuming they’ve been established. And if not, we need to immediately establish them. What’s most important for meeting our goals and objectives? That must be our focus.

Dunlavey: The helpful news is that we can anticipate that the construction market will exhibit slowed inflation or even deflation, meaning we’ll at least be entering a period of more affordable construction costs. At the same time, we are already seeing historically low rates of financing. For buildings that are at a later point in their life, when systems and equipment are other approaching a point of failure or are in need of an upgrade for continued performance, that means there would be no time like the next year to affordably address these items. So this would be the opportunity to finance and build affordably and efficiently, and address those larger-ticket items as economically as we’re ever going to be able to.

What does this mean for universities and municipalities?

Dunlavey: Universities’ and municipalities’ cost of capital in the coming year is likely going to continue at an historic low. The Fed has taken interest rates to zero; that’s never happened before in my professional life. Any entity that remains credit-worthy, which will include most public and institutional entities, will have access to money at historically affordable rates. This will mean project feasibility is optimized. And since a project is a project, this applies to both renovations and new construction.

Mykins: We’ve already seen universities and municipalities act with this logic in mind. For example, the Lincoln Journal Star newspaper just published an article on University of Nebraska-Lincoln moving forward with projects because the “costs associated with construction, including interest rates, are low and advantageous to public entities.” So we expect to see more and more of this.

What about teams and developers?

Dunlavey: Professional sports teams and real estate developers, on the other hand, may very well have a harder time accessing capital. Their sources of equity and debt will likely be more constrained; if consumer confidence is shaky, equity investors tend to have a lower appetite. With that said, everything depends on how quickly consumer confidence returns—and it will return—and how quickly liquidity returns to the real estate finance markets.

What should we be thinking about in terms of improving the venue to fit the market?

Mykins: Well, the necessary improvements you just have to address, because things break. You have a good understanding of the future, and you can plan for it. Upgrade improvements or changing the venue to fit the market—that’s a big unknown right now. What will the market be like when the economy comes back? We just won’t know until it actually starts to come back. So there’s no point to speculating on that in the near term. However, one thing that is currently being considered is how venue design and operations might be adapted to address ongoing COVID-19 concerns.

Dunlavey: Agreed. I think the focus right now is right where our conversation started—accomplishing the big items that will advance the organization’s goals and objectives. Whether the aftermath of our current situation is extreme or minor, addressing capital improvements is a smart move.

"The leadership and information from B&D, and the clarity with which they provide it, brings added credibility to the process and ensures that a range of university stakeholders, including senior leadership and our board, are fully informed for – and confident in – their required decision making.”

B.J. Crain, Former Interim Vice President for Finance and Administration
Texas Woman’s University

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