Managing the construction schedule

Construction schedules and timing for occupancy has been an issue that we’ve seen arise quite a bit in the past few months. As our clients are growing and taking more space, we are encouraging them to understand timelines for building out their space and moving their operation.

It’s tempting to assume that everything will happen quickly and all the stars will align, but that’s not always the case. There are some significant lead-time items that need to be considered and planned for well in advance.

1. The architectural, mechanical, electrical, and plumbing (MEP) drawings. An architect has to create a full set of plans that show all of the construction that needs to be done to the space. The architect may need a few weeks to create the drawings and there may be a number of revisions based on feedback from the tenant.

2. Permits. The reason to create MEP drawings isn’t just so the contractor knows where to start building. The township also has to review the plans and issue permits. While they try to turn it around faster, town inspectors typically have the right to take six or eight weeks to review the plans.

3. Construction. Building the space takes time… There is no avoiding it. Demolition, construction, and finishes will take 60 days even for a simple project. Complicated or large-scale jobs will take longer. And that assumes there are no delays, holidays, etc.

4. Furniture. The office furniture you specify may be sitting in a warehouse waiting for you, or it may take two or three months for it to be fabricated. And specialty items may take even longer.

5. Telephone/Internet. Telephone companies and Internet Service Providers have gotten faster, but getting set up with connectivity will also take a few weeks.

Some of the above items can be managed in conjunction with one another. For example, the furniture can be ordered while construction is taking place, but I have rarely seen this process take less than four months from start to finish. We encourage our clients to start planning from the desired occupancy date and work backwards. This helps create project milestones and defines responsibilities from the outset to avoid problems at the end.

Experience is something you get right after you need it.

“He just doesn’t have enough experience to draw upon.  He’s never been in a moment like this before.”

That was the quote from one of the analysts talking about Rory McIlroy’s collapse during the final round of the 2011 Masters.  They were talking about how in his first big spot in a major championship, there wasn’t a previous experience that Rory could tap to calm down and provide the confidence needed to finish strong and close for the win.

As with golf, work, or anything else, there are two types of skills that come from experience. The first is simply the technical knowledge necessary to accomplish the task in front of you.  Once you have a few projects under your belt, skills like negotiating a lease or managing the construction process are pretty straightforward.  You can go back and draw upon those experiences to guide the next project.  There are plenty of service providers out there with the technical experience to work through a deal and get it done.

The other skill is a little less tangible and a lot harder to find.  That’s the ability to keep calm as the stakes get higher.  As deals get more complex, timing gets tight, and valuations climb, there are fewer and fewer people that can remain calm, keep counter-parties under control, and get the deal closed.  Staying calm and controlling the situation requires experience with complicated deals, the ability to think creatively and confidence in the technical skills referenced above.

It’s not easy to identify at the outset, but finding a service provider that can remain calm and execute as the pressure mounts is a valuable asset and a worthwhile addition to your team.

And as for Rory, clearly that experience was helpful. He won the US Open a month later and another three Major tournaments after that.

Searching for Fools

I read Eduardo Porter’s The Price of Everything a few years ago. One of the sections that really rang true was titled “Searching for Fools.”  It was about how auctions are an effective way to identify who will pay the highest price for a particular item.

I love the idea of an auction and encourage my clients to employ this tactic during negotiations whenever possible.  The best deals I’ve ever negotiated have involved getting multiple landlords to bid for my client’s tenancy.  Whether it’s a desire to beat the other guy, secure a tenant to shore up their building, or just do a deal, when landlords feel they are under competitive pressure, they will respond with more aggressive proposals, faster response times, and more accommodation during the negotiation process (access to architects, contractor bids, etc.)

But the real estate process differs from most auctions in that long lead times are necessary to effectively employ this strategy.  Landlords understand that in the tenant’s case, the less time the tenant has before the lease expires, the more leverage shifts in favor of the landlord.  As the calendar moves closer to expiration, tenants have less time to deal with logistical issues, moving, and tele/data communications.

If having landlords bid for your tenancy seems appealing, I suggest employing an aggressive broker that isn’t afraid to wade into the middle of tough negotiations, starting the process early, and keeping an open mind regarding your options.  You’ll be surprised what a great deal you get.

The future of #CRE brokerage

As technology has created clarity in these markets, a lot of broker functions have disappeared. Nobody uses travel agents anymore and there are plenty of investors trading electronically. Real estate has managed to hold out for a long time thanks to protective licensing laws and the multiple listing services.

Now there are technology companies trying to erode that advantage as well. Compstak in particular is making it easier to seek price discovery and allow landlords and tenants to reach price equilibrium when leasing commercial office space.

A recent blog post from the CEO of Compstak puts this point in stark relief. He points out that because everybody had pricing information, the deal got struck that much faster, and everyone was a winner. The landlord secured a tenant quickly and the tenant secured the space at a fair price. While this is certainly a win for all involved, I have just as many deals that don’t turn on the price, but rather on some other business terms that are much less straightforward.

I am currently working on a deal and the hang up has nothing to do with the rent, but rather who is responsible for the HVAC maintenance costs. Another deal involves accommodating a tenant that needs a creative pricing structure due to a change in their business strategy during the lease term. A third involves an early give-back of space. None of these can easily be quantified with a lease comparable sheet. They all require strategic thought, constant dialogue between parties, and brokers to help shepherd the conversations to the finish line.

Brokers that are dependent upon holding market information hostage will become less and less relevant into the future as companies like compstak remove opacity from the market. But there will be a place for brokers to provide additional services, strategic advice, and transaction guidance beyond quantifiable terms like rent and square footage.