Despite the pandemic, there is still interest in new buildings, especially in the warehouse / logistics sector.
As the construction industry recovers from the initial effects of the pandemic, project volume tends to increase. There is still a market for new builds, particularly in the warehouse / logistics sector, as well as a demand for major renovations when investors look for value-adding or opportunistic adaptive reuse projects.
If you have your sights on a newly built or recently renovated building, don't be fooled by the fresh exterior, updated finishes, and new systems. You can assume that new builds mean less risk and even skip the risk Assessment of the property condition (PCA) – What Could Go Wrong With a Brand New Building?
Unfortunately, many problems can arise in recent construction work – especially now when home builders face material and labor shortages and delays related to COVID. From an investment point of view, investors in new buildings do not expect any significant capital expenditure (CapEx) at the beginning of the building's life. A PCA can help you identify potential problems and correct any deficiencies prior to acquisition. That extra level of control can mean the difference between a profitable investment and a loss.
Think of it this way: Seasoned buyers spend time analyzing the historical performance of a building and its systems before purchasing them. In the case of new buildings, there is no story to analyze. You are essentially buying an untested machine. Hence, acquiring new buildings, especially those “built for sale”, requires more care, not less. Often times, defects in the building system occur for several years and are undetectable when the building is brand new. Your due diligence advisor will deal with the construction documents: Were high quality materials used? Have qualified subcontractors been selected? How high was the building supervision? Was the design very detailed? If there is insufficient historical data, you need a highly developed PCA team that can inspect, document and characterize the building for you.
Our PCA teams evaluate projects around the world. Here are some of the issues we recently encountered evaluating newly constructed or renovated buildings.
COST CUT / INSUFFICIENT MATERIALS
In the rush to get a project to market, builders can compromise to save time or money. In the event of material or delivery bottlenecks, alternative materials can be used instead of the materials specified in the plan. These shortcuts can appear several years later, resulting in increased operating budgets or premature CapEx events. For example, consider your MEP systems. The normal expected useful life for many of these systems is 15 years or more. However, if your contractor provides a heating unit that also provides hot water to save construction costs, it may need to be replaced sooner. The life cycle cost of this system is now increased and your CapEx projections must reflect this. Cheaper systems may also be less efficient, resulting in higher operating expenses (OpEx) and lower operating income (NOI). While an increase in OpEx costs in a building could be seen with years of financial data experience, this data is not available for a new building. Every dollar saved building means more profit for the seller and potentially more commitment for the buyer.
Lack of quality control
The recent construction can also be adversely affected by the lack of skilled labor. Skilled construction workers have been in short supply since the Great Recession. If there are insufficient resources, builders may rely on less skilled labor or have fewer manpower per project, resulting in poor finish and limited quality control. Our PCA teams routinely find evidence of inadequate quality assurance / QC in new builds: problems as fundamental as upside-down windows or backward-installed weather barriers. If this option is not checked, facade issues like these will affect the watertightness of the building envelope and allow moisture to penetrate, potentially causing significant damage over time.
Even qualified builders occasionally have compliance errors simply because there are so many codes to follow when building a commercial building. Local building and fire regulations, regional ordinances to combat flood or earthquake risk, federal guidelines for housing or government tenants – the list goes on and on. Failure to comply with these various codes can expose an owner to life safety risk, financial and legal liability, loss of warranty coverage, or insurance coverage. We see violations of accessibility laws most often. In addition to the Americans with Disabilities Act, there is the Fair Housing Change Act, Architectural Barriers Act, Section 504 of the Rehabilitation Act, and state and local regulations. Each of these regulations is applied differently depending on factors such as the use of the building. whether the building was federally funded, whether its residents receive federal services, etc. In addition, the accessibility codes are extremely precise; Slight deviations from a compliant plan can result in a non-compliant building. For these reasons, it is important to have a qualified accessibility specialist screen your buildings for accessibility.
Although we did not see any significant changes to the building design due to COVID-19, adjustments are being made to reduce tenant safety / trust, CDC guidelines and the risk of transmission. New buildings in the market today were almost certainly designed before the pandemic broke out. Some of these buildings may include measures such as bipolar ionizing bars, improved air filtration, and UV lighting, but many may not. Buyers should consider whether the project can support changes necessary for safe occupancy while the pandemic continues. These changes can include indoor air quality (IAQ), spatial planning, pedestrian traffic, or touchless amenities.
With so much uncertainty in the market and tighter operating margins than ever before, proper due diligence is vital – even with newly constructed properties. A PCA by a qualified team of experts identifies and quantifies building defects before closing so you can make informed decisions and achieve your investment goals.