2 min read September 2022 — As TDK Construction is approaching $2 billion in stabilized, under-construction and lease-up units, the company has not yet seen a slowdown in the construction markets, but Tim Keach, chairman and CEO of the company, is preparing for a recession by “having a favorable leverage and fixed rate debt on our portfolio”, he told Invest:.
What have been the highlights for TDK Construction during the last 12 months?
It has been a large mixed bag for us. We started around 2,600 units this year and I think we have approximately 2,000 in our development pipeline. We can’t necessarily say “one year pipeline” because it’s difficult to break ground after identifying markets in design, permitting, etc. in 12 months anymore. We are very active in the market primarily due to aggressive land acquisitions. We’ve been buying land outside of the start of projects because, if you don’t, it’s just not going to work, given short-fused land contracts, design approvals, municipalities, materials and labor shortages.
Some people think the market may slow down but I have not seen that yet. We have somewhere between 10 and 12 active projects for a total of around $600 million. Projects under construction stabilized and projects starting keeps our scorecard busier than the guys on the green wall at Fenway. We have another 10 projects slated for 2023 and some out to 2024, given design and approval conditions.
What are the biggest challenges for your business?
The biggest change is on the capital side. I won’t say banks are skittish. I think the good customers with good banks are going to get what they need, although they might not get the leverage they need. The cost of capital is going up as bank interest rates are increasing, which requires more equity in the capital stack. The issue is how frothy the markets have been with yields on cost. That’s going to change. Those high-percentage yields and IRR projects were started at lower construction prices and that is going to change due to increasing construction costs. Construction costs are going up. I don’t believe we will see much decrease in construction cost, but I think most developers would be content just to see them stop rising and the supply chain backfill a huge gap.
Do you think construction markets are going to slow down?
That is what the banks think. I think they’re wrong, but they’re bankers. They think demand is going to slow down. I don’t think demand is going to slow one bit because single-family homes are going to take it on the chin first. The next sector that we’re going to see take it on the chin is industrial, which is approximately 80% warehousing and logistics. I believe multifamily will see strong occupancy and possibly slower rent increases than in the past.
Are you preparing for a recession?
We are always bracing for conditions that are potentially harmful to our portfolio. I’m risk averse every day of my life. That’s why we’ve got close to 8,000 units stabilized, plus we’re well capitalized and liquid.
What is your investment approach?
Our investors are friends and family, and they depend on us to select the most risk-averse market and maintain a reasonable yield. We try not to be overly aggressive with our investments. Most of our friends and family probably make up 20-30% of the capital stack. Everybody wants to take their money and roll it over into the next deal. They don’t want the cash back, but want to redeploy.
Is the labor shortage issue improving in the construction sector?
No, it’s just as bad as it was last year. I don’t know what will correct the labor shortage problem. I’m all for controlling the borders and all for stepping up the ability to take people in legally.
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