With many major business aviation destinations in the U.S. short on hangar space, and hundreds more aircraft entering the market every year, the FBO industry has been hard-pressed to keep up with demand.
“The day [the customer] puts the money down for the deposit to buy the airplane, I really wish they would call their local FBO and say, 'I need a hangar right on the day the plane comes,'” said Milo Zonka, Sheltair’s v-p of strategic growth. “What usually happens is they wait until they have a delivery date and it's 90 days away, and that’s when they start looking for hangar space. You’re too late if you are looking for hangar space 90 days out because we need lead time; everything is full.”
Yet the construction of new hangars is typically a multi-year, multi-million-dollar commitment and one that is facing several hurdles, according to industry experts.
Coming out of the Covid pandemic, the construction industry, like many, is still facing some supply chain shortages. While some materials have come down in price and are now less constricted, others remain tight.
“Metal buildings we can get, and the turn time is definitely reduced from almost a year at its worst to probably half that now,” said Zonka. He described that as a longer lead than historically seen, but still a time frame he could work with, unlike the shortage of electric meters. “We’ve had to redesign a couple of projects that were individually metered into a group meter because we could get one meter; we couldn’t get 30,” he told AIN, adding that he was told there was a year backlog on orders. “We would have had a built project sitting there waiting to open because we couldn’t find electrical meters.”
Chuck Suma, COO of Million Air, encountered similar difficulties in acquiring electrical transformers for his company’s development projects. “They were like an 80-week lead time, and here over the last three months we’ve gone from 80 weeks down to 12,” he explained.
On a macroeconomic scale, Suma noted that rising mortgage rates have slowed housing starts and reduced competition for materials and contractors. This will allow material costs to continue to decrease. “I’m not saying it’s because they have fixed the supply chain issues, as much as there is more inventory available at the moment, and that may change over time.”
Additionally, labor availability remains a concern in some areas. “There are contractors out there, but it's still very difficult to get seven or eight bids [on a project],” said Zonka. “You are really struggling to get three at a lot of our projects. We want to see multiple numbers just to really get as much competition as we can.”
Possibly the major concern among FBO operators is now the climbing interest rates, which have topped five percent. “The federal funds rate since 2008, coming out of the global financial crisis, had been below one percent until April 2022 with one brief exception, and that was in 2018/2019, pre-Covid,” explained Douglas Wilson, president and senior partner of industry consultancy FBO Partners. He added that the effects of the pandemic quickly drove the rising rates down again. “So what that meant is almost 13 years of near-zero interest rates that was rocket fuel for development.”
That burden on financing and increased cost of money now has to be baked into the costs for any hangar development and threatens the pace of continued development. “These projects that are being built right now were on the books three years ago,” said Wilson. "They are being constructed now in a time of much higher interest rates than what was anticipated at the time the projects were put on the books.”
“Now you’ve got to figure out how you can make money when your cost of money has doubled in some cases, and that’s a whole other challenge,” said Zonka, adding that soaring interest rates combined with increased construction costs have muddled the price of hangar rental. “If you’ve got something that has been in the ground a long time, it could have cost $40 a square foot [to build] 15 years ago, when you are trying to build rents around that versus trying to build rents around new construction that cost you $325 a square foot.”
Those costs must be rationalized and passed along to the end user, and Zonka admits they may inhibit development in some markets that cannot support the rents required for new construction.
Yet, Suma noted, in high-traffic markets the need is still there. For example, Million Air is developing a new hangar complex in Texas. “If I could snap my fingers in Austin, I would have a facility there with 120,000 sq ft of hangar space and it would be completely sold out,” he told AIN. “I feel very comfortable it will be 100 to 125 percent utilization on the hangars once they are built.”
And the rents justified by the new developments at these locations are not proving to be a deterrent. “I’m astonished at what people are paying per square foot for some of the bigger airplanes,” said Suma, adding that there are only so many hangars that can handle the high tail heights and big wingspans of the ultra-long-range jets. “Because somebody just dropped $70 million to $90 million on an airplane, they are not going to leave it outside. There are stories of operators paying double what they paid pre-Covid just so they have a place to put their airplanes.”
In addition to that, another factor FBOs and hangar keepers must now account for is sustainability. While aviation in general is facing increasing scrutiny over its environmental impact, airports are no exception. “In pretty much any [request for proposals] that’s been released in the last two or three years, one of the scoring metrics is sustainability,” Wilson told AIN. “I’ve seen RFPs where sustainability is 25 percent of the score, meaning you can win or lose an RFP based on how sustainably you design your facilities.”
Wilson noted that the costs associated with constructing sustainable hangars are generally more than standard structures, and therefore offer lower returns on investment, because customers will weigh whether they are concerned enough about sustainability to want to pay more to house their aircraft in an environmentally friendly hangar.