Vertical Integration seems to be a big topic these days, at least in many of our conversations. Investors want to know how we handle the varying aspects of our business, and whether or not we own/employ the different roles required to operate a portfolio of over 3,000 mostly value-add multifamily units.
These include property management, asset management, construction management, and even things like investor management and acquisitions/underwriting. We recently wrote an article about our solution to property management, where we highlight the fact we don’t ever plan to build out our own internal property management company. We think we have a really good hybrid solution that provides us (and our investors) with the best of both worlds. Keeping property management somewhat separate allows us to focus our energy on the other aspects of the business–elements where we are (and intend to remain) vertically integrated.
As a predominately value-add group, our business plan on each asset includes an element of renovations and cap ex spending to boost the NOI and improve the property. Executing those renovations on time and on budget is an extremely important part of our business. It’s also something we take great pride in–and think we do a really good job with.
Like every other part of our business, we operate this very lean. One of the partners (Reed) manages our construction projects. As a structural engineer with a development background, he’s uniquely qualified to run this and has built an incredibly efficient machine. To help him, we have a General Contractor that runs the construction teams onsite and they work together to coordinate the execution of the improvements, and to ensure the materials are onsite and ready when the team is (more on that below).
Today’s article is going to touch on the importance of Construction Management and why we spend so much time and energy building those muscles in house. There are three main benefits and areas we focus on in keeping our Construction Management practice busy.
Having an in-house team complete with a General Contractor gives us very accurate budgets. This is extremely important and helpful on the acquisitions side of things, as we aren’t guessing about what our costs might be. For every new asset that we’re really digging in on, our construction team has walked and inspected it. We’ve identified deferred maintenance, defined a scope of work for our planned renovations and worked out a detailed budget. We have very few “swags” or guesses in our final underwriting from a cap ex standpoint. Just as important–we can trust these numbers. They aren’t fluffed up with some crazy third party profit margin, or too thin from a group hoping to win our business. They’re based on what we’re seeing with these same teams on existing assets.
Once we own an asset, the same rules apply in our annual budgeting for ongoing capex. Our team is walking each asset and we’re defining our capital projects for the year. As we tweak and evolve the business plan on each asset, our Construction team works hand in hand with our Asset Manager to give an accurate budget for the coming year.
In both scenarios, budgets are coming from actual numbers we’re seeing in the market on our portfolio. We know our labor costs. We know our material costs. We’ve eliminated guessing and have folks in house that we can trust.
We talk so much about our focus in Austin and San Antonio, and why our whole business is focused here. This may be one of the big reasons why we stay so geographically focused. With a concentrated effort, we are able to keep a handle on and control our construction staffing. Our construction team looks out 90-days across our portfolio to see what the workload looks like. How many units will be renovated? What capital projects are coming up? Is there a new acquisition coming online that will require more resources at the beginning? From there, they plan and allocate headcount to the various assets. Overall, the portfolio keeps several dedicated crews busy full time–it’s just a matter of planning where they’ll be.
Having dedicated construction teams was never more important than during the winter storm. As things thawed out and we got a handle on which assets had the most damage, we quickly deployed our construction resources to those sites. They were shutting off water, cutting out sheetrock, getting rid of wet carpet etc etc. With the help of those team members, we were able to have all our affected units back online within 30 days; many other groups we know were dealing with down units for months (and a few still are). When a crisis happens, it’s all hands on deck. If you don’t have your own resources, it can be a challenge getting help as you wait on hold, get stuck in line or decide you’ll pay a premium to get things fixed first. Luckily, we didn’t have to make any of those decisions and were able to handle it all in house quickly and efficiently.
Labor is one half of the solution. Materials is the other. And just as we’ve solved the labor portion, we think we have a great solution in place for our materials–better than almost anyone else, and certainly any group of our size.
At a corporate level, we buy the majority of our renovation materials overseas. They are warehoused locally and then allocated to assets as needed–when the asset pays for them at no mark-up.
This system has taken us years to architect and certainly doesn’t exist without a lot of planning. We buy all of our flooring, lighting, hardware, fixtures and even granite countertops ahead of time–months before they’ll wind up being used. We typically make 3-4 orders per year, always with an eye towards how much product we have on site, how much we anticipate we’ll use, and what delivery time is looking like. It’s a pretty sophisticated global supply chain game that we play on a very small and local basis.
The result is fantastic pricing for our assets, and again gives us nearly perfect information from a budgeting standpoint. We know the exact costs for renovations because in most cases we already own the product. Our cost efficiencies have been highlighted a few times recently, as folks can’t believe our numbers. In a couple of discussions with potential big investors, we’ve showed our planned budget for renovations and have had questions (and even some push back) over what we plan to spend.
A good example is our solid surface countertops. We have a granite countertop that we’re able to have measured and installed for under $1100. Most bigger groups budget over $2000 for this line item, as that’s where they see their costs. We’ve had to show them our costs and explain how we’re able to deliver this. It’s a validating moment for our business when we know (and can prove) our costs. And we know it’s helping our asset performance as we keep the costs low.
For any value-add group, Construction Management is a key cog to the machine. By building that infrastructure in-house, we are able to manage our timelines and costs better than just about anyone. It’s a piece of the business that we are very happy to tell people that we have vertically integrated, and think it’s a big part of our continued success.