A multimillion-dollar balancing act Builders must weigh short- and long-term concerns when assuming risk.

Byline: Martin Daks

When New York City-based Hugo Neu Corp. began the $1 billion, multiyear Kearny Point project in 2014 - redeveloping the 130-acre former Kearny shipyard as a center for office, co-working and retail space - "the common wisdom was that there was already too much office space in New Jersey and no need for office space in Kearny," according to Steve Nislick, the company's CFO. "So, the idea of attracting new office tenants to Kearny was inherently very risky."When New York City-based Hugo Neu Corp. began the $1 billion, multiyear Kearny Point project in 2014 redeveloping the 130-acre former Kearny shipyard as a center for office, co-working and retail space "the common wisdom was that there was already too much office space in New Jersey and no need for office space in Kearny," according to Steve Nislick, the company's CFO. "So, the idea of attracting new office tenants to Kearny was inherently very risky."

Real estate developers routinely invest millions of dollars or more in their developments and constantly weigh short- and long-term issues, from the cost of borrowing money to shifts in market demand. Careful market studies, supplemented by sound planning and execution, can reduce the risks and increase the chances of a profitable project, according to experts."Our investment strategy is very long term, but we're unique in that we take on long-term risk as real estate owners in order to allow our tenants maximum flexibility through short-term lease options at Kearny Point," said Nislick.

"Essentially, we take on the market risk in exchange for having more control over rent prices in the near term," he added. "Additionally, we borrow a very limited amount of capital. We limit our borrowings to less than 30 percent of total construction costs so that any short-term risk is mitigated by the lack of debt."

The company further reduces market risk at Kearny Point by leasing "primarily to short-term tenants, mainly entrepreneurs and small businesses that have short-term office-flex space needs and are unable to commit to the cost or terms associated with a traditional office lease," he said. "Therefore, we're closely and continuously tracking how deep the demand is from tenants in the 25-mile concentric circle around Kearny Point that are looking for an office space of 3,000 square feet or less."

Hugo Neu Corp. executives also keep a close eye on the broader office and industrial market. "What we understood from the beginning...