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After record-breaking private equity buyout totals in 2020 and 2021, the second half of 2022 heralded a slowdown in new deals fueled by interest rate hikes, inflation and geopolitical unrest. As a result, lenders fearing market uncertainty and recession tightened their grip on capital, making it difficult for private owners and developers to secure funding for new construction projects. This trend has continued in 2023. In addition, the construction industry is still experiencing material and labor price escalation as well as shortages and supply chain delays.

These market conditions are having profound ripple effects throughout the entire construction lifecycle. As �ձ����� works to identify the right solutions for our clients, projects often remain in preconstruction an estimated 25 to 50 percent longer as they undergo multiple, lengthy pricing and bid cycles.

From napkin sketch to grand opening, �ձ����� teams apply our expertise to help our private sector clients design and construct a product that is attractive to lenders and ultimately achieves their pro forma goals.

Sophisticated Preconstruction Solutions Enable Earlier, More Precise Project Decision-Making

Every project has a unique set of challenges and opportunities, and this rings especially true for active private developments that are experiencing unprecedented impacts to nearly every facet of the design and construction process. Across our operations, we have observed:

• Georgia and Florida: Owners have been hit with an estimated 20 to 25 percent escalation in concrete pricing over the past nine months.
• Carolinas: Developers are redesigning projects to make financing more palatable to lenders.
• Texas: Developers whose financing has been stalled on new commercial office buildings are pivoting to high-demand multifamily housing projects.
  

Understanding the obstacles owners and developers are facing is the first step in �ձ�����’s industry-leading approach to preconstruction. Tom Booth, director of project solutions in Raleigh, North Carolina, captures our client-first mentality: “I tell our clients, ‘We are only successful if you are successful.’”

To maximize value, �ձ����� drives early engagement with all project partners. By aligning with the owner, design team, suppliers and major trade partners early in the design process, our teams are able to provide more accurate pricing as well as alternative material and procurement solutions that give designers and owners more viable options—a critical advantage in today’s marketplace.

Historically, �ձ����� has always provided lists of alternatives to develop accurate budgets and comprehensive contingencies; however, during periods of volatile market conditions, these lists become ever more critical.

To mitigate the concrete cost escalation in Georgia and Florida, for example, �ձ����� is working with suppliers to provide more load-bearing metal structures and concrete mixture alternatives. During the recent design of a 31-story high-rise residential in Dallas, Texas, �ձ����� worked with the client, design team and trade partners to revise the façade system of field set exterior metal studs, EFS and punched windows to a prefabricated assembly. Fabricated in an off-site, factory-like environment, the assembly is then shipped to the project site and set in place with a tower crane. The solution preserves the original design intent but has reduced cost and schedule duration. 

Early material procurement is another effective method to protect the project budget and schedule. Early procurement allows �ձ����� to incentivize suppliers to identify better pricing. Typically, the procured materials are stored off-site in secure locations such as bonded warehouses until installation. Locking in pricing through early procurement removes the guesswork out of material availability for long lead items, provides greater cost certainty and keeps contingencies streamlined.

“Adding value through early engagement and early procurement requires a sophisticated preconstruction process,” says John Harris, executive vice president and business unit leader for our Florida operations. “�ձ����� has invested in top preconstruction experts and technologies such as DESTINI Estimator to ensure our clients receive accurate information and analysis to help them make informed decisions for their projects.”

Building Security Through Early Buyout

During the design phase, our teams analyze the estimate and budget, lead times for trades and the escalation risk. This requires owners to be involved in the preparation for buyout much earlier in the design process. In turn, some owners are making strategic multi-deal agreements with trades and paying for certain materials directly to protect budgets and schedules. In these cases, �ձ����� builds custom bid packages to accommodate such agreements.

Some owners want “shovel ready” projects so they can capitalize on the dip in construction that is projected to occur once subcontractors burn through their backlogs and interest rates stabilize. When a project is ready to bid, �ձ�����’s buyout strategy targets closing the gap between collecting pricing and contracting as fast as possible. By protecting our current numbers, we insulate our clients’ budgets from uncertain market risks.

Unlike many contractors, �ձ�����’s industry-leading preconstruction process is led by operations personnel. This means that leaders from our construction team are always fully integrated within the preconstruction process. Because there is never a handoff between departments, our teams drive a continuous flow of information that achieves greater value for the client.  

Serving as a Trusted Advisor for Private Developers That are Pivoting, Redefining and Expanding Into New Markets

As private equity owners and developers seek new avenues to fund projects and insulate their businesses from unpredictable market conditions, many are turning to �ձ�����’s experts to help reconfigure their projects in a way that is more attractive to lenders, pivot to other project types within their existing portfolios or even expand into new markets. With �ձ�����’s diverse portfolio and extensive trade and supplier networks across our U.S. operations, we are uniquely positioned to advise our clients regarding the full spectrum of development options.

A frequent concern that lenders express is a project’s anticipated worth upon completion. The fear that often goes unexpressed, however, is that the development may ultimately be worth less than the lender’s upfront investment.

In many instances, merchant developers that once routinely sold their properties upon completion have been forced to carry their loans while waiting for more favorable market conditions. This is yet another factor shaking lender confidence in financing new construction.

Our teams have witnessed these scenarios firsthand and been honored to serve as a trusted advisor to help our clients achieve their goals.

Despite favorable demographics and profitability studies, a lender recently elected not to finance a 36-story high-rise residential project in North Carolina. To make the project more desirable, the owner asked our team to re-engineer the design to maximize the rent per square foot base price while eliminating more luxury amenities. The reconfiguration included eliminating a floor and reducing the amenity deck square footage by almost half. In service to our client, �ձ����� continues to value engineer the project, identify new avenues to achieve cost savings and has created an escalation allowance fund to prepare the project for future buyout.

In Texas, many commercial office developers are struggling to obtain financing for new construction, but the multifamily sector remains strong. As a result, developers that engage with both product types are pivoting their businesses and investing more resources in the multifamily sector.

With �ձ�����’s extensive national portfolio in multifamily housing and mixed-used facilities that encompasses more than 65 million square feet and 30,000 units, owners interested in breaking into this expanding market can depend on our teams to provide a signature construction experience to clients whose business success depends on the timely delivery of high-quality residential units.

"More and more, developers are shifting to multifamily projects because of their more reliable long-term profitability," says Eric Krueger, executive vice president and business unit leader in Dallas, Texas. "Commercial office developers may not have prior experience in the sector, but �ձ����� has both the experience and the established processes to ease the transition, advise design and construction choices and ensure success."

Market conditions that were once thought to be unprecedented are now commonplace. Among countless variables and volatilities, one factor remains constant: �ձ�����’s relentless advocacy for our clients. From start to finish, that’s a competitive advantage our clients can bank on.