Civil Engineering Reference
In-Depth Information
political changes; wars; and natural and man-made disasters. Some of the fluctua-
tions can be predicted fairly accurately, such as those induced by seasonal and climatic
changes. Other effects are less predictable, such as from wars, natural disasters, politi-
cal turbulence, economic recessions, and other local and global events, although some
of them have “warning signs” that experts can sense.
Naturally, many developers and investors react to the market conditions and follow
the trends. However, the reaction in the construction industry needs a relatively long
lead time to deliver the product to the market. By that time, the market conditions
may have changed. Let's assume that the market demand is represented by the curve
in Figure 8.13.
It took some time to convince an investor that market conditions are encouraging
to build a project (say, a housing development) and then to get ready to start the
project. The investor started at point “A,” when the market was moving favorably (for
investors) and demand exceeded supply. It took the investor 2 years to finance, acquire
the land, obtain the permits, design and build the houses, and make them ready for
sale. Even though, in most cases, the developer may start selling before construction
work has finished, he still has to complete and secure a certain portion of the project
before he can sell anything. This portion can take 1 year or more. By the time the
developer can start selling houses (completed or not), the market has hit a saturation
point and started to slow down (point B). At this point, the developer's options are
limited. He is “damned if he continues and damned if he does not.” He may have
huge financial obligations to banks or financiers, and he has to make payments for
contracts already signed with the designer, contractor, and other parties. A few houses
have been sold, and even for those houses sold, he has received only a small down
payment that buyers in such situations may simply forfeit in order to escape a worse
financial loss. The survival of the developer depends on his financial strength and
resilience (mostly how much cash and other liquid assets he has on hand) and how
long he can hold on. The developer may scope down the project or pause it. For
example, he can complete a portion of the entire development and hold the rest until
the market starts improving. Another option is to continue but slow down the work
progress, using fewer resources and delaying the delivery of the product. If he cannot
Market
Index
Project
Duration
A
B
2004
2006
2008
2010
Year
2002
Figure 8.13 Market conditions. This curve does not accurately reflect past market index,
nor does it accurately forecast conditions. It is for illustrative purposes only
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