Video Time: 2 minutes
Everyone is out there hunting for a good discount. There has been a lot of activity in the private client space of around $25 million and under. Those type of transactions are still happening and less discounted than expected. There has been a big pickup in refinancing activity.
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Video Time: 5 minutes
What is going on as far as people putting properties on the market? There is no broad trend and it’s really a case by case basis. There is no large discount for getting into multifamily If consumers preferred renting to begin with and we are in a recession, the outlook for multifamily looks strong 3-5 years out. In the pandemic-driven recession people have been eating through resources and it makes it harder for people to buy single-family houses. Bibby: “multifamily has one of the strongest outlooks of any property sector aside from industrial.”
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Video Time: 5 minutes
Those that started projects in 2019 are proceeding but there has been a crunching halt on new construction at least for the next 60 days as of May. There are still plenty of questions out there as of May Most developers are holding back to see how this shakes out. Before we entered this pandemic we were seeing softness in the class A space with class B and C apartments seeing high demand. So there are a lot of questions surrounding the A space right now. We are seeing private investors step up right now because they can acquire properties they couldn’t before.
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Video Time: 2 minutes
Forbearance seems to have slowed down
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Video Time: 1:26 Minutes
Anyone that has a longer hold period is taking advantage of lower rates. On the flip side, some buyers are looking for flexibility. There’s not a lot of new loan products yet.
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Video Time: 6:30 minutes
Certain markets like Texas and others in the south are primed for quicker rebound. However, rental demand has still gone down even in markets that are reopened.
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Video Time: 3 Minutes
In May there were no reliable metrics. The physical restraints of not being able to meet face to face with clients is affecting transaction volume. The amount of capital on the sidelines is immense. There is a lot of interest in acquiring assets.
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Video Time: 3 minutes
Things were better than anticipated in April and May. Concern for the months ahead abounds. How long will it take for the jobs to come back?
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Video Time: 2 minutes
David Schwartz’s Waterton Multifamily Portfolio has seen similar numbers to NMHC. Enhanced unemployment benefits have allowed people to stay in their homes. If it is not renewed in July it could send ripples through the industry.
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Video Time: 1:50 minutes
Most of the discord has been coming from non-professionally managed rental properties.
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Video Time: 1:21
Many of the transactions that were in the pipeline and got delayed in March have come back. There has only been a moderate price reduction as of May in multifamily properties. Transaction volume has been way down from a typical market environment. There is a lot of concern for what will happen in August/September once unemployment benefits run out.
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Video Time: 2:28
Just under 81% of residents paid full or partial rent through the first 6 days of June. That compares with 81.6% in June of 2019 but ahead of May, which came in at 80.2% We have seen a slight erosion in asking rents in the class A space. There is a further separation between the class A space and the class B and C space. There will be continued stress in the class C properties, according to Doug Bibby. In April and May around 95% of rents were collected by the end of the month
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Video Time: 3 minutes
Doug Bibby discusses April through May rent tracking. Owner-operators reported that May numbers looked better than April. Many in the industry expected rent collections to be around 60% in May but they were around 80% at the recording of the webinar. (Compared to 81.7% in the first six days of May 2019).
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Key Points
Construction costs are rising, and there doesn’t appear to be any slowdown given the high development demand and shrinking labor pool. The U.S. unemployment rate dipped to 3.9% in July, a condition that is causing companies to search harder to fill positions.
When combined with rising demand for multifamily projects, the situation can be challenging for developers and contractors, alike. Mike Rovner, observes that construction costs have increased approximately 10% to 15% over the last year, depending on the trades involved in a project, and
35% over the past five years.
The commercial construction veteran for more than 26 years notes, “During this time, there has been a drastic increase in the amount of work available for certain trades, such as drywall and stucco contractors, and that has in turn created a supply and demand scenario where labor costs, as well as material costs, have gone up significantly.”
Rovner says the biggest factor driving up costs is the quantity of work. “The labor pool gets diluted and then the costs for these trades go up, providing tradesmen the opportunity to charge more,” he said. “In the past, there wasn’t a lot of work for these trades, so it has come full circle during the past few years, where these tradesmen can now demand higher pay and pick and choose jobs they prefer.”
Other factors contributing to the rising cost equation are technology and regulatory codes. As a result of changes in those areas, it has ushered in a need for workers with higher levels of skills as well as experience, both of which increases costs on projects.
While Rovner says both labor and material costs have gone up, the majority of the increase to project budgets is the labor component. “The dilution of qualified tradesmen has made a significant impact on overall costs of construction,” he said. “I do not see this abating for quite some time, as long as the quantity of work continues to increase.”
In the interim, Rovner has some advice for developers. He suggests a way to help mitigate rising costs is by instilling values and strategies to keep employees long-term and to provide them with more than just a job. “We have built a culture around our people to cultivate teamwork, support, recognition and appreciation,” he said. “This provides our people with the feeling they are working with our company collaboratively as a team rather than just collecting a paycheck, which in turn increases employee retention.”
Those same values should be radiated through vendor and subcontractor relationships, as well. “We have made it a top priority to pay faster than most companies, which makes our subcontractors and vendors have a loyalty to us they may not have to other companies that take longer to pay.”
Rovner notes these best-practices allow the company to mitigate the costs of labor increases by building long-term relationships with vendors and contractors, rather than continually having to start over and pay higher costs for new options.
An overarching approach Rovner applies is to create a collaborative atmosphere, which in turn, generates a teamwork environment with everyone who is a part of the project – from the owner to the subcontractors to the employees working on the job. He says, this allows the team as a whole to creatively problem-solve any issues that may arise, and encourages a long-term relationship built on trust.
Additionally, don’t discount the value of spending more time upfront on the pre-construction stage, and finding ways to do things more cost-effectively. “The more time that is spent upfront before the construction costs begin, the more ways we can work together to save more money on the front end, as well as the back end,” says Rovner. “Teamwork at all stages that is beneficial for all parties involved is the best advice for a successful project.”
Key Points
A smaller owner may choose a product that is on sale today and buy only what they need for one unit and a year later go with a different product, notes Rovner. “Down the line, that makes it more complicated for maintenance teams to repair things and if they haven’t gone with a product that lasts it could cost more to replace it because it wears out sooner,” he says. “Savvy owners know even though it may be more expensive upfront, it could save significant money later.” Conversely, Rovner points out small owners may spend $100,000 a year on maintenance if they take a short-sighted approach, but if they’d spent $500 dollars more initially, they could have eliminated maintenance costs for 20 years.
Small owners are also likely to hire contractors that have less experience and qualifications. They may not carry all the necessary insurance, or may cut corners, or not pull all the required permits for a job. “When property owners go with the lowest-priced contractor, they may actually expose themselves to larger risks,” Rovner says. “Larger owners know a reputable and experienced contractor may cost a bit more, but they have more comfort with that decision since they understand the higher cost can be as a result of that contractor all the right insurance, licenses, and quality people, thus their risk is reduced by going with them.”
An established contractor with a strong track record often brings comfort to an owner because it conveys stability and shows they likely will still be in business in the future, points out Rovner.”
Another area small owners typically won’t explore is sustainability or how long something will last. “They figure if they do it now and it lasts a year that is okay,” Rovner says. Large owners have come to adopt an approach based on longevity. They favor products that protect the property better over a 10- to 30-year timeframe. “We have some owners we work for who strive to build projects that last 50 years,” he says. “They know spending more now to achieve that is simply smart business.”
Smart owners may spend more now because it pays off later, Rovner notes. A key area of focus is investing in water proofing products that save the asset over the long term basis. Those owners understand over a 20 year period they will make more money because they are not to replace or fix things because of water proofing issues.
Large owners are also focused on executing and timing of projects. They seek to complete projects faster, and they may even issue a performance bonus for completing the project quicker. Rovner says, “We received a $125,000 bonus for finishing a project 30 days early. The owner knew if the 100 units were finished early, they could rent them out sooner and it would result in a $400,000 increase in revenue.”
Rovner says, “Small owners are often cost-adverse leading to decisions that are ill advised. They won’t do things quickly, and they may leave a unit vacant three or four months simply because they don’t want to spend money right then. They think it saves money.”
Ultimately, those short-sighted decisions may actually cost an owner more in the long-term. That’s why Rovner advises both large and small apartment property owners to adopt practices that support long-term value-creation investment objectives, rather than short-term choices.
Key Points
Large apartment property owners who have assembled a sizable portfolio typically haven’t achieved success by mistake or luck. The degree of performance is likely tied directly to some savvy investment decisions that are supported by well-conceived improvement strategies.
Those same best practices can be adopted by smaller multifamily property owners, too. Mike Rovner points out smart investment decisions can be enhanced through long-term planning and a big picture perspective, regardless of the asset or portfolio size.
Rovner says, “One of the main habits a small multifamily property owner will do is step over a dollar to get to a dime. They try to be so cost-effective that they often miss opportunities that are there to increase ROI. Big owners usually have long-term vision of a 10 to 15-year period, yet small owners tend to look at 12 months.”
A reason large owners may take a different view about property improvements is they tend to hold properties and don’t usually sell them, so they are seeking long term hold and value and they base their decisions on that.
Small owners often try to hire repair people or execute remodeling contracts that they think are most cost-effective as possible. What happens is the project tends to take longer because the contractor doesn’t have the capacity or motivation to complete quickly, notes Rovner. He says, “Those types of owners don’t understand that completing the work faster will result in getting heads on beds sooner. Large owners are laser focused on the fastest course to getting heads in beds. Small owners don’t think that way and they are very cost focused.”
Large owners know that a higher quality contractor will produce a better result in the long run. They likely will be able to generate higher rents and that will lead to higher ROI’s for a large owner who pushes the envelope and is more aggressive based on their long-term strategy, Rovner notes.
On the other hand, he says, small owners are typically less aggressive. “They tend to be worried more about the perceived risk or exposure of spending too much. They steer clear away from that, while large owners take more risk,” Rovner says.
Another way large and small apartment owners often differ is in how they procure and bid out projects. “Small owners will typically shop everything out and piecemeal a project together without a long-term strategy,” Rovner says. For instance, large owners know unit consistency is important down the road, even though it will take more time planning, estimating and buying all materials needed to complete the work up front. Additionally, it will require a larger investment upfront. They know selecting one plumbing or lighting fixture at the start of a project will result in uniformity, and they will save money over time if they go with a product that has a five-or 10-year lifespan.
Key Points
Another component of a successful project is frequent in-person meetings. The coronavirus guidelines make that more challenging, albeit no less important. Job issues must be discussed openly and with candor, notes Rovner, who advises getting issues out in the open and advocates for an atmosphere where there’s less worrying about “stepping on toes.”
Rovner says, “Once people start focusing on the issue or situation rather than who is to blame for whatever may come up, it sets up a condition that actually fosters collaboration. That’s when a willingness to compromise in the best interests of others and the overall project finds its way onto the job site. It can completely change the atmosphere of a project to where everyone works together from the top on down.”
Among the other hindrances to collaboration are when people stop talking and rely on other forms of communication to connect. Rovner says, “When people primarily communicate via email, non-verbal cues get lost and it is difficult to read body language.” That can be when finger pointing and blaming emerges leading to a derailed project, he notes.
Experienced owners understand collaboration is more productive, allows projects to succeed and helps build fun, long-lasting relationships among the team. Short-sighted developers tend to lose sight of the big picture, whether they see a project as a one-off assignment or aren’t interested in investing in the long-term vision.
“I’ve come to understand the long-term benefits of collaboration pays off in many ways, not the least of which are opportunities to work on multiple projects over time with clients who view us as a valuable extension of their development team,” says Rovner, who made a decision six years ago to only work in collaboration atmospheres and relationships, which has positively impacted the company’s net profits.
“On every successful project across the 100’s of jobs we’ve completed, there has been a component of collaboration. Every job that we’ve done that was over budget, or those where the schedule was negatively impacted, had a lack of collaboration,” he says.
“Life is too short not to collaborate,” says Rovner, plus “you don’t go home feeling like crud.” It is a good feeling being able to advise clients from a position of teamwork that places their interests and the job outcome first.
Key Points
Collaboration is a word often used in business settings as a concept teams should aspire to adopt or a way to achieve top performance. Yet, the practice of working together isn’t as easily achieved. Mike Rovner Construction’s Mike Rovner explains how he’s changed the culture of his apartment building business by incorporating best practices that actually foster a true sense of collaboration on job sites.
Collaboration often starts at the first client meeting where it is easy to tell if an owner is looking through a similar lens as the contractor.
“Collaboration is our sweet spot,” says Rovner, noting that for all companies and jobs it has become a critical component for them and the work they do, whether renovating or repositioning multifamily projects or commercial and hospitality properties. He points out the highest level of collaboration requires people to work together toward a common goal and purpose as a team. The end result is worth it, too.
“In my experience, great teams outperform great individuals, always,” says Rovner, who pushes his teams to work in a unified fashion. “When that happens, more gets accomplished. Every successful job has found ways to incorporate teamwork, while all that ran behind, had cost over runs or faced significant challenges were ones that did not work together as a team.”
Examples cited by Rover are two multifamily jobs that were being renovated side-by-side in Marina del Rey, CA. One had 150 units and the other 250 units. The team on the smaller project wasn’t collaborative. Though it started six months before the other, larger job, the project with 250 units got done nine months faster because the team worked together.
“Collaboration allowed us to look at win-win situations and the entire team on the project was willing to compromise and see the long-term vision,” says Rovner, who points out collaboration allowed the larger project to get completed three months ahead of schedule, even though it was 50% bigger.
That also often means starting early on in the pre-construction phase. In the case of the more successful project noted above, Rovner indicates that owner spent 1% of the construction budget on pre-con. That allowed the project team to work out any potential difficulties they saw that may arise during the construction process, while the other job didn’t invest in pre-con planning.
Typically, a main component that fuels success or causes delays is the level of transparency between the developer-owner and the contractor or other members of the project team. When an owner shares what the big picture is it allows the entire team to get behind that goal and work to accomplish it. It also means owners must be open to a wide variety of opinions from architects, consultants, engineers, and the contractor to see what they suggest doing to accomplish what the owner wants. “The key was 100% goal transparency,” notes Rovner on the successful project.
Mock-ups that are done in the pre-con phase with the entire team in place also provide more opportunities to create cohesiveness from top to bottom. A favorite leadership motto Rovner likes to follow is John C. Maxwell’s famous quote “everything rises and falls on leadership.” By getting together the developer and the leaders from the various teams it will work to build cohesiveness, adopt solid planning and create a bond that filters down to the teams on the job site, notes Rovner.
“What doesn’t work is if an owner or their representative aren’t open to others’ opinions,” says Rovner. “Listening to the experts is important and it is easily noticeable when you have that level of collaboration or don’t have it.”
Otherwise it can be a situation where leaders convey a message that they know it all and no one else does. In which case, jobs suffer because workers just follow orders and those with valuable expertise aren’t asked for input on ways to solve challenges that arise. When a team is hired there must be mutual respect and trust among everyone and a key component of that is knowing what each bring to the table, points out Rovner.
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