Step I: The Needs Assessment - Creating the Right Renovation Plan

Prior to developing the renovation plan it is important to understand the goal of the renovation, which for the typical owner or management company is to:

        Maintain or increase market share

        Increase rents

        Determine whether to reposition or redevelop

        Increase NOI

        Increase ROI for

Having performed hundreds of millions of dollars worth of renovations over the years both as a contractor and as an owner; I have yet to find a company that has a rock solid development planning process in place. I have found, that in most instances, the plan is developed by the operations, asset management or rehab group or left to the discretion of the general contractor, being told, “Do it like the last renovation you did for us”. The absence of proper planning due to lack of relevant information often leads to implementing the wrong strategy, higher costs, frustration and unmet expectations of owners, residents and investors.

So what is the formula for a successful renovation? 

1. Understand the needs and desires of the current and target resident.
2. Build a plan to reach the goals of the company. It’s not about a faster and cheaper renovation. It is about increasing the NOI or ROI or simply delivering the right product to the right market.
3. Create a detailed scope of work and relevant bid documents to get accurate estimates. Therefore, is there an understanding what your contractor needs from you to provide the most competitive bid to meet your expectations?
4. Provide training to the onsite staff about the renovation process, i.e., how to manage turnovers, residence, walk throughs, punch lists, pay applications, etc..
5. Actively value-engineer your project to save money during the renovation.
6. Develop a sound and comprehensive capital planning budget.
7. Incorporate construction closeout documentation that provides operations and maintenance with valuable information about warranties, part numbers/specifications for ordering replacement parts.

Whether you are a small or large owner or management company, developing the correct plan is the most important phase of the redevelopment strategy and is often the most overlooked. The industry lives and breathes NOI & ROI which is usually backed in sound logic, however when it comes to renovations the logic does not follow through. Your renovation may come down to your local manager making decisions based on limited information or personal preferences or your renovation decisions are made by committee not backed by sound data.

 

I am a big advocate of a Needs Assessment. The Needs Assessment is the first phase of obtaining critical information and will answer the following questions:

•  Who is the target market?
• What does the target market desire?
• Should you reposition or renovate.
• How should renovation funds be prioritized to achieve maximum NOI and ROI?
• What is the maximum achievable rent based on renovation or repositioning?
• What is the best time table for implementation?
• How can you gain a competitive edge by designing the space and the amenities to appeal to your target market? 

The ultimate goal of the needs assessment, aside from gaining valuable information about your property, your resident, your competition is the development of a relevant and accurate Scope of Work (SOW). A good SOW will clearly outline the project, allow for better competition, result in clear expectations, accurate pricing, time savings and starts the project off on the right foot. It is typical to receive bids lower bids and reduce the project cost by as much as 10-15% by providing the contractor a clear and complete scope of work.

 

So look for the next blog; The Scope of Work.

 

Redefining the Renovation Process – The dawn of a new industry

As renovations have slowed due to the current state of the economy and the reduction or elimination of the renovation departments in REITs and property management companies have ensued, the time is prime to start strategizing on how the industry should approach renovations when they do come back…… and they will……, probably even stronger than before.

Although the past year or so has been very painful within the industry, the slowdown offers a unique opportunity to reflect on the past, evaluate and modify the renovation process. The owner or management company that does not take the time to do this will find themselves being left behind using yesterday’s more expensive methods and technologies, resulting in being less competitive and experiencing lower revenue than is possible because of not performing the renovations in a strategic manner.

Over the past 5 years or so, companies like HD Supply, Wilmar, GE and a multitude of contractors have been desperately attempting to determine and meet the needs of their multifamily clients during the renovation process. The main challenges these vendors have had are trying to get their arms around an industry that demands immediate execution and a high quality product. When a company performs new constructiontheywill spend months or even years in the planning process prior to the start of a project. Their planning usually includes demographic studies, engineering, architecture and design. Now let’s compare that to the renovation process, wherein companies will often begin a renovation project costing millions of dollars within months or even weeks after seeing a property for the first time. I have seen a $15M dollar renovation project start on a midrise only 10 days after closing! The company met the contractors for the first time at the property the day after closing, asked them to produce a bid by week’s end and asked them to create the scope of work.Amazingly, 4 out of the 5 contractors submitted bids on as little as one page, meeting the timeline. But it is important to note that there was NO scope of work- This would not be unlike wanting to remodel you home, meeting the contactor, handing him your keys and saying “see you in a month; we’ll be in Florida on vacation”. This example is extreme, but is a lot more common than people would imagine.

Traditional wisdom would tell you that the above example would represent an unsophisticated owner or management company and that most REITS have a more sophisticated and effective approach. I disagree. Although many of these companies may have some seasoned project managers, superintendants, design, procurement and asset management departments. The problem is, their approach takes its lead from new construction methods which, as presented above, is used to months or years of preparation to develop a complete set of construction documents and specifications and is based on using subcontractors to perform the tasks. Outlining a timeline of 1 week for a complete interior unit renovation using this approach just does not work and the overhead to support these departments is not cost effective. The “sophisticated “ model while usually thorough, often represents the slow, bogged-down and inflexible corporate structure that is not conducive in the multifamily world requiring an immediate and accurate plan that can deliver the highest NOI laid out over a 5 year Proforma.

Redefining and creating a new process will leave behind the inefficiencies of how the multifamily industry approached and implemented past renovations. The new industry will resemble the automobile repair or body shop approach by incorporating standard unit pricing for interior and exterior pricing to include material and labor costs while using Turnkey contractors that have the ability to manage and execute a complete renovation. This approach will required sophisticated software to manage this information. We are seeing companies like Ops Technology leading the way in these technologies. The benefits of using this technology will include accurate pricing and options during acquisitions, information sharing between departments (i.e. acquisitions, operations, asset management and redevelopment) The most significant benefits realized both immediately and over the hold of the property will be creating and implementing the right strategy and reducing the cost of the renovation. Most owners or managers do not realize that they are paying the contractor a premium to either develop a scope of work for the owner (guessing at what their expectations are, only to have to re-due the work until they get it right) or in the case that the owner/manager has a sophisticated redevelopment department that in most cases would requiremultiple “mock-up” approvals and implement expensive and redundant micro management levels.

We are seeing many REITS, management companies, mid and small owners looking to outsource or work with third party consultants and turnkey contactors that can provide the complete package for present and anticipated renovations rather than rebuilding a redevelopment division. It will be interesting to see what the renovation process will look like over the next few years.