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.
